CME Weather Futures, Options To Begin Trading Sept. 22

The world's first exchange-traded temperature-related weather derivatives will begin trading at 9 a.m. (Central time) tomorrow, Wednesday, Sept. 22, the Chicago Mercantile Exchange announced. The CME will initially list Heating Degree Day (HDD) index futures for four U.S. cities: Atlanta, Chicago, Cincinnati and New York. Houston-based Enron Corp. has joined the list of energy firms which will make markets in the new contracts. Previously, Aquila Energy, Castlebridge Weather Markets, Koch Energy Trading and Southern Energy had signed on as market makers for the CME's weather futures contracts. The firms are active participants in the over-the-counter (OTC) weather markets. "Now, businesses have a new tool for protecting their revenues when weather depresses demand or results in increased costs," CME Chairman Scott Gordon said. "From energy firms to insurance and reinsurance companies, those with weather-related financial risk can turn to CME weather futures for risk management." "We're looking forward to supporting this contract and hope to see additional liquidity in the market as a result," said Jeff Porter, Director of the Weather Derivatives group for Koch Energy Trading, the first company to sign up to be a market maker. Ravi Nathan, Portfolio Manager of Weather Risk Products, at Aquila Energy, said, "Aquila Energy anticipates that the CME's weather contracts will attract new participants and increase liquidity in the weather risk market for the following reasons: first, it allows a small transaction sizes ($100 per tick multiplier); second, it provides price discovery; third, it ensures low frictional and trading costs on the GLOBEX®2 system; and, fourth, it eliminates credit risk for participants." "CME HDD and CDD futures and options will provide both hedgers and dealers-like Southern Company Energy Marketing-the ability to manage their positions more efficiently," said Darren Wilcox, Business Manager of Derivatives for Southern. "Exchange-traded weather derivatives may help to create an entirely new asset class, which we hope will draw money managers and other new participants to this growing market." CME HDD futures will be sized at $100 times the CME HDD Indexes-one for each city-and the exchange will initially list monthly contract expirations from October 1999 through March 2000. The minimum tick size of 1.00 HDD or CDD index point will equal $100. The contracts will settle 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. Later, the Merc plans to add additional cities-including Dallas, Philadelphia, Portland,OR, and Tucson-as well as listing Cooling Degree Day index futures contracts for all cities. At the same time, the Merc will extend monthly contract expirations on HDD and CDD indexes for a full 12 months through December 2000. 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. 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 at a given location 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 in each city. The Merc has established a weather futures resource center on its web site at www.cme.com/weather/.