CME Group Weather
Derivatives
Felix Carabello
December 5, 2007
Disclaimer
•
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a
leveraged investment, and because only a percentage of a contract’s value is required to
trade, it is possible to lose more than the amount of money deposited for a futures position.
Therefore, traders should only use funds that they can afford to lose without affecting their
lifestyles. And only a portion of those funds should be devoted to any one trade because
they cannot expect to profit on every trade.
•
All references to options refer to options on futures.
•
The globe logo, CME®, CME Group™, Chicago Mercantile Exchange® are trademarks of
Chicago Mercantile Exchange Inc. CBOT® and the Chicago Board of Trade® are trademarks
of The Board of Trade of the City of Chicago, Inc. NYMEX® is a registered trademark of the
New York Mercantile Exchange, Inc. All other trademarks are the property of their
respective owners.
•
The information within this presentation has been compiled by CME Group for general
purposes only. Although every attempt has been made to ensure the accuracy of the
information within this presentation, CME Group assumes no responsibility for any errors or
omissions. Additionally, all examples in this presentation are hypothetical situations, used
for explanation purposes only, and should not be considered investment advice or the
results of actual market experience.
•
All matters pertaining to rules and specifications herein are made subject to and are
superseded by official CME, CBOT and CME Group rules. Current rules should be
consulted in all cases concerning contract specifications.
•
Copyright © 2007 CME Group. All rights reserved.
2
Intro to CME Group
The Chicago Board of Trade (CBOT) was established in 1848, and the
Chicago Mercantile Exchange (CME) in 1898.
•
Economic functions
• Hedging and risk management
• Price discovery
• Price dissemination
The world’s largest and most diverse exchange
All transactions cleared, settled, and guaranteed by the CME Clearing
House
• World’s largest
• 100+ years of default free performance
Virtual 24 hour trading on the CME Globex® electronic
trading platform
3
CME Group
Market Environment
•
Especially during periods of market turmoil, customers are concerned
about:
• Liquidity
• Capital efficiency
• Anonymity
• Counterparty risk
•
CME Group has:
• a diverse multi-asset product base
–
–
–
–
–
–
CME Group provides
an open-access model
with instantaneous access
to deep liquidity with low
transaction cost.
Interest rate
Equities
Foreign exchange
Agricultural commodities
Alternative investments
Energy and metals
• a broad customer base
4
Global Presence
CME Globex live
access from more
than 80 countries
6 European/Asian hubs
• Regionally focused
sales, education and
marketing to key targets
• Broadening
relationships in
emerging markets
CME provides access to highly liquid markets
across all major asset classes on an industry
leading technology platform.
5
CME Group ADV by Year
CME Group ADV by Quarter
(contracts in thousands)
(contracts in thousands)
12,000
11,135
Sep 07 up 35%
vs. Sep 06
14,000
4-Yr CAGR: 27%
up 52%
8,476
8,000
13,000
10,500
8,530
6,837
5,484
77%
7,000
4,265
4,000
3,500
0
2003
2004
2005
2006
2007
Ex-Pit
Open Outcry
Electronic (CME Globex and e-CBOT)
0
Q1
06
Q2
06
Q3
06
Q4
06
Q1
07
Q2
07
Q3
07
to date
Q3 volume has not
exceeded Q2 volume
since 2002
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Alternative Investments
at CME Group
Alternative Investments
Product Line
• Standardized Weather:
Real Estate:
• U.S. Weekly Monthly & Seasonal
Weather (18 cities)
• Residential Housing, based on
S&P/Case-Schiller Home Price Indices
• European Monthly & Seasonal
Weather (9 cities)
• Dow Jones U.S. Real Estate Index
Futures
• Asian-Pacific Monthly & Seasonal
Weather (2 cities)
• Canadian Monthly & Seasonal
Weather (6 cities)
• Frost Day Monthly & Seasonal
• Snowfall & Seasonal Snowfall (2cities)
Energy:
• Ethanol
• Ethanol Forward Month Swaps (OTC)
• Ethanol Basis Swaps (OTC)
• Hurricane Seasonal, Seasonal
Maximum based on Carvill Hurricane
Index
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CME Group Weather - A Developing
Market
March 8th/April 12th
September 26th
Summer 1999
CME launches first
exchange weather
derivatives
Change contract
size from $100 to
$20
Launch 10 new US
seasonal cities & 12 new
US monthly cities.
1999
2003
August 22, 2002
Announce the
LMM (Wolverine)
Volume
24,094
February 27
Launch Snowfall
Contacts for
New York
And Boston
Add 3 new US
cities and 4
new
European
cities
Expand the
Option strike
range
2004
October 3rd
Launch five monthly
and seasonal
European cities
June 20th
July 26th
2005
September 23th
June 14th
Launch of additional 5 US
seasonal cities
Total is 15 US
Monthly/Seasonal cities
122,094
(1999-2003)
2007 - Launched Hurricane/Weeklies
YTD ADV 4,800 (April 6,400)
2006
Launch CME Weather
Seasonal Strips/ Frost
contracts
867,681
October 16th
Launch 6 Canadian
Monthly and
Seasonal
Strip Contracts
801,122
CME Group Weather – A Developing
Market
• 2007 Volume
• ADV +21% over 2006; (October ADV is at 7,000)
• Screen trading has increased by 150%
• Increased Summer trading (CDD) by 26%
• Traded over 2.5 Million contracts since 2005
• New market participants up 23%
• Records
• Surpassed open interest in 2007
• Set daily record of over 29,000 in August
• 2007 OI surpassed 490,000
• Increase of 10% over 2006
• Surpassed OI of Live Cattle, Lean Hogs and other “mature” products
• Market Participants
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Re-Insurance, Hedge funds, Utilities, Power, Gas and other energy.
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Benefits of CME Group
Weather Derivatives
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Standardized contract specifications or flexible options (bespoke)
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Anonymous central counterparty clearing
• Frees up valuable counterparty credit lines
• Secured by CME Financial Safeguards system
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Centralized price discovery & universal price dissemination
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Streamlined processing and allocations
Broaden Products
• Daily mark to market minimizes financial risks
• Positions are automatically netted
Broaden Participants
• No ISDA documentation required
• No bilateral collaterals
Link to CME Clearing
• Offer a standard, transparent reference point for marking and valuing OTC
positions
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Electronic trading platform & other trading venues
• Immediate execution, Increased transparency, Enhanced liquidity
11
CME Group Managing
Risk
•
CME Group weather futures and options are used to manage
many risk factors:
• Margin
• Liquidity risk
• Settlement risk
• Market concentration
• Credit (non-performance) risk
• Deal replacement risk
• Contagion risk
Accurate Weather Data is Vitally Important
1
2
3
4
Historical
Margins
Contract Settlements
Market Confidence
Contact Us
•
John Harangody
Director, Commodity Products
John.Harangody@cmegroup.com
312-466-4437
•
Felix Carabello
Director, Alternative Investments Products
Felix.Carabello@cmegroup.com
312-634-1585
•
Christina Hanson
Associate Director, Alternative Investments Products
Christina.Hanson@cmegoup.com
312-930- 1308
•
Tony Zaccaria
Associate Director, Alternative Investments Products
Anthony.Zaccaria@cmegroup.com
312-930-4560
14
CME Group Weather
Derivatives
Felix Carabello
December 5, 2007