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Chicago exchanges face derivatives clash

CME and CBoT adopt separate strategies ahead of merger.

Euromoney Liquid real estate March 2007 

The Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBoT) have embarked on separate and different approaches real estate derivatives and could end up competing with one another in advance of their likely merger.

Together they account for more than 85% of US futures exchange trading. Their $9 billion deal is subject to approval by the antitrust division of the Department of Justice.

The CME was first to enter real estate derivatives in March 2006 with futures and options trading based on S&P/Case-Shiller’s residential indices, which include 10 metropolitan areas and one composite, and offer four quarterly expiration dates a year based on $60,000 one-year contracts. Response to the products has been solid rather than spectacular: from March 2006 to January 2007, a notional $350 million was traded in real estate futures and options on the exchange with an average daily volume of 45 contracts in 2006.

According to Sayee Srinivasan, director of research and product development at CME, buyers include builders who want to limit downside risk while benefiting from any future upside by buying put options and mortgage bank securities traders concerned about default risk.

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