CME Announces Start-Up For Exchange-Traded Weather Temperature Futures

The Chicago Mercantile Exchange has announced a launch date of Wednesday, Sept. 22, for the world's first exchange traded temperature-related weather derivatives. At startup, the CME will offer Heating Degree Day (HDD) index futures for four U.S. cities: Atlanta, Chicago, Cincinnati and New York. The contracts are designed to provide a risk management tool to help businesses protect their revenue during times of depressed demand or excessive costs resulting from unexpected or unfavorable weather conditions. Weather affects an estimated 20 percent of the $9 trillion U.S. economy, and the over-the-counter market in managing weather-related risk has grown significantly over the past few years. To date, four firms which are very active in the over-the-counter weather markets have agreed to serve as market makers in order to provide liquidity to the new CME futures contracts: Aquila Energy, Castlebridge Weather Markets, Koch Energy Trading and Southern Energy. "Risk management will enter a new realm with the launch of CME temperature-related futures," CME Chairman Scott Gordon said. "Soon, participants in the growing over-the-counter weather derivatives market, such as energy firms, insurance and reinsurance companies, will be able to turn to the Chicago Mercantile Exchange to manage their weather-related financial risks." CME HDD futures will be sized at $100 times the CME HDD Index , and the exchange will initially list monthly contract expirations from October 1999 through March 2000. Later, the Merc plans to add an additional four cities as well as listing Cooling Degree Day (CDD) index futures contracts for all eight cities. The additional four cities will be Dallas, Philadelphia, Portland,OR, and Tucson. At the same time, the Merc will extend monthly contract expirations on HDD and CDD indexes for a full 12 months through December 2000. The minimum tick size of 1.00 HDD or CDD index point will equal $100. The CME will settle the contracts to the CME HDD or CDD index as calculated by Earth Satellite Corporation, a world leader in value-added weather services for agriculture and energy markets. CME HDD and CDD futures and options will trade electronically on the GLOBEX®2 system, virtually 24 hours a day, from 3:45 p.m. to 3:15 p.m. the following day. CME HDD and CDD index futures will provide a market for these and other OTC market participants to lay off the weather-related risk arising from their trading activities. HDD and CDD futures and options will provide the weather derivatives market additional price transparency and will virtually eliminate counterparty risk through the guarantees of the CME's Clearing House. A Heating Degree Day occurs when the average temperature is below 65 degrees Fahrenheit. More specifically, HDD is 65 degrees F. minus the daily average temperature. Conversely, a Cooling Degree Day occurs when the average temperature of the day is above 65 degrees. CDD is the average temperature minus 65 degrees F. The CME contracts will be based on cumulative monthly HDDs and CDDs. The Merc has established a weather futures resource center on its web site at www.cme.com/weather/.