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CME Group Weather Derivatives Felix Carabello December 5, 2007.

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Presentation on theme: "CME Group Weather Derivatives Felix Carabello December 5, 2007."— Presentation transcript:

1 CME Group Weather Derivatives Felix Carabello December 5, 2007

2 2 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 All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT and CME Group rules.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.

3 3 The Chicago Board of Trade (CBOT) was established in 1848, and the Chicago Mercantile Exchange (CME) in 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 Intro to CME Group

4 4 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 –Interest rate –Equities –Foreign exchange –Agricultural commodities –Alternative investments –Energy and metals a broad customer base CME Group provides an open-access model with instantaneous access to deep liquidity with low transaction cost. CME Group Market Environment

5 5 CME provides access to highly liquid markets across all major asset classes on an industry leading technology platform. 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

6 6 CME Group ADV by Year (contracts in thousands) Ex-Pit Open Outcry Electronic (CME Globex and e-CBOT) 11,135 8, ,837 5,484 4,265 77% Q1 07 Q1 06 Q2 06 Q ,000 8,530 to date Q3 06 Q4 06 Q2 07 CME Group ADV by Quarter (contracts in thousands) 4-Yr CAGR: 27% up 52% Sep 07 up 35% vs. Sep 06 Q3 volume has not exceeded Q2 volume since 2002

7 Alternative Investments at CME Group

8 8 Alternative Investments Product Line Standardized Weather: U.S. Weekly Monthly & Seasonal Weather (18 cities) European Monthly & Seasonal Weather (9 cities) Asian-Pacific Monthly & Seasonal Weather (2 cities) Canadian Monthly & Seasonal Weather (6 cities) Frost Day Monthly & Seasonal Snowfall & Seasonal Snowfall (2cities) Hurricane Seasonal, Seasonal Maximum based on Carvill Hurricane Index Real Estate: Residential Housing, based on S&P/Case-Schiller Home Price Indices Dow Jones U.S. Real Estate Index Futures Energy: Ethanol Ethanol Forward Month Swaps (OTC) Ethanol Basis Swaps (OTC)

9 CME Group Weather - A Developing Market Summer CME launches first exchange weather derivatives March 8 th /April 12 th October 3 rd Launch five monthly and seasonal European cities July 26 th August 22, 2002 Announce the LMM (Wolverine) Expand the Option strike range September 23th June 20th June 14 th Launch of additional 5 US seasonal cities Total is 15 US Monthly/Seasonal cities Change contract size from $100 to $20 September 26 th Launch 10 new US seasonal cities & 12 new US monthly cities. 24,094 ( ) 122,094 Volume 867,681 Launch CME Weather Seasonal Strips/ Frost contracts Add 3 new US cities and 4 new European cities 801, February 27 Launch Snowfall Contacts for New York And Boston October 16 th Launch 6 Canadian Monthly and Seasonal Strip Contracts Launched Hurricane/Weeklies YTD ADV 4,800 (April 6,400)

10 10 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 Re-Insurance, Hedge funds, Utilities, Power, Gas and other energy.

11 11 Benefits of CME Group Weather Derivatives Standardized contract specifications or flexible options (bespoke) Anonymous central counterparty clearing Frees up valuable counterparty credit lines Secured by CME Financial Safeguards system Centralized price discovery & universal price dissemination Streamlined processing and allocations Daily mark to market minimizes financial risks Positions are automatically netted No ISDA documentation required No bilateral collaterals Offer a standard, transparent reference point for marking and valuing OTC positions Electronic trading platform & other trading venues Immediate execution, Increased transparency, Enhanced liquidity Broaden Products Broaden Participants Link to CME Clearing

12 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

13 Accurate Weather Data is Vitally Important Historical Margins Contract Settlements Market Confidence 4

14 14 Contact Us John Harangody Director, Commodity Products Felix Carabello Director, Alternative Investments Products Christina Hanson Associate Director, Alternative Investments Products Tony Zaccaria Associate Director, Alternative Investments Products

15 CME Group Weather Derivatives Felix Carabello December 5, 2007


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