CME Plans First Exchange Traded Weather Temperature Futures, Options

The Chicago Mercantile Exchange has announced that it intends to file for regulatory approval to offer the world's first exchange-traded, temperature-related weather derivatives designed to provide a risk-management tool to help businesses protect their revenue during times of depressed demand or excessive costs due to unfavourable weather conditions. "For the first time, energy firms, insurance and reinsurance companies, market-makers in the growing over-the-counter weather derivatives market and a host of other businesses will be able to turn to the Chicago Mercantile Exchange to manage their weather-related financial risks," CME Chairman Scott Gordon said. "CME Heating Degree Day and Cooling Degree Day futures and options contracts will attract new participants to a growing market, where weather affects an estimated $2 trillion of the $9 trillion U.S. economy." The CME's innovative product will be indexes of Heating Degree Days and Cooling Degree Days (HDD and CDD) for selected cities, including Atlanta, Chicago, Cincinnati, Dallas, New York, Philadelphia, Portland, Ore., Tucson, Ariz., and other population centres with significant weather-related risks. HDD and CDD futures will be sized at $100 times the CME HDD Index and $100 times the CME CDD Index. The contract months to be listed will include all 12 consecutive calendar months, and the minimum tick size of one HDD or CDD index point will equal $100. The CME contracts will be based on cumulative monthly HDDs and CDDs. 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 from 3:30 p.m. to 3:15 p.m. the following business day. A Heating Degree Day occurs when the average temperature is below 65 degrees Fahrenheit. To be specific, HDD is 65 degrees Fahrenheit 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 Fahrenheit. A launch date will be set pending regulatory approval by the Commodity Futures Trading Commission. Weather derivatives such as HDD and CDD swaps and options already trade actively on the over-the-counter (OTC) market. CME HDD and CDD futures and options contracts would provide an exchange-traded product similar to those products, as well as an opportunity for market makers in the OTC markets to manage the risk of their outstanding contracts.