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 CHICAGO, May 10 /PRNewswire/ -- The board of governors at the Chicago Mercantile Exchange (CME) has approved a June 15 start date for Rolling Spot(TM) British pound futures contracts and options. The new product will link the world's largest financial market -- the $1 trillion-a-day foreign exchange market -- with the CME's Clearinghouse, a financial-market first that industry experts say will increase market efficiency by conserving credit lines, reducing transaction costs and eliminating counter-party risk.
 "In creating the Rolling Spot product, the Chicago Mercantile Exchange has taken what it knows how to do best and applied it to what the spot currency market does best," says Nobel economics prize winner Merton H. Miller of the University of Chicago, who will ring the opening bell for the Rolling Spot contracts. "The end result -- a central clearing facility for the spot currency market -- will reduce transaction costs and counter-party risk."
 The Rolling Spot concept emerged from a Foreign Currency Focus Group formed and chaired by CME Chairman Jack Sandner in mid-1992. The focus group, which consisted of market users, broker-dealers and CME members, was charged with recommending ways to improve the utility of the CME's currency products. The CME, which pioneered currency futures trading in 1972, accounts for about two-thirds of the world share of exchange- traded currency futures and options, but a much smaller percent of the $1 trillion-a-day global FX market.
 "The rolling spot concept changes the paradigm of what a futures market is in relation to the cash market," Sandner said. "It solves the operational problems that banks have in the foreign currency markets. The Federal Reserve and the banks are going to love it.
 "Our focus group looked at everything that was missing from the spot market -- automatic rollover and netting of positions, cheaper and more efficient back-office operations, average pricing for multiple transactions, low capital requirements and zero counter-party risks," Sandner continued. "We concluded: `These are exactly the strengths the CME can provide.'"
 Peter Pfau, senior vice president and trading risk manager at Dean Witter Reynolds Inc., explains, "There's very little market risk in spot transactions but the delivery risk is considerable. The fact is, most transactions don't have to be delivered and, by providing for an automatic roll and settlement through a clearing house, the Rolling Spot contract virtually eliminates delivery risk."
 As recently as April, the Bank for International Settlements had published for public comment a proposal that would permit banks to net for capital purposes, but that proposal would not become effective until next year at the earliest. Other efforts to establish a central clearing service have been undertaken by the North American Clearing House Organization and the European Clearing House Organization. Yet, no centralized clearing organization has been established.
 Miller, in a presentation to the Banking Structure Conference of the Federal Reserve Bank of Chicago May 6, predicted "the extension of futures-style clearing and settlement'' to the off-exchange markets, rather than a government-mandated clearing system for these markets, as some have proposed. Miller, who has been a member of the CME Board of Governors since 1990, is the Robert R. McCormick Distinguished Service Professor of Finance at the Graduate School of Business, University of Chicago. He was awarded the Nobel Memorial Prize in Economic Science in 1990 for his work in the area of corporate finance.
 The new futures contract replicates the activity in the interbank market, where market participants roll forward or swap their current cash positions ahead one business day, so that on the next trading day their position is in "spot" or current terms. Approximately two thirds of the FX market's activity is in spot transactions.
 The CME will first offer rolling spot futures and options on British pounds, with other currencies to follow in short order following the opening of the CME's new Upper Trading Floor for currency and interest products this summer.
 The pound-spot contracts will be quoted in American terms (dollars per sterling), just as in the spot market, while other currencies will be quoted in European terms (units of foreign currency per dollar), also reflecting the spot market. Sized at four times the current BP futures contract, the 250,000 pound sterling Rolling Spot contract will provide a cost-effective means of transacting the larger sizes which are commonplace in the FX market.
 Since most FX traders do not want to receive the actual currency, which would be delivered on the second business day in the spot market, they customarily roll or swap their positions ahead to keep them in "spot" terms, while netting the appropriate cash flow. Although such trades can be customized, each individual transaction and rollover requires considerable operational and transactional expense, along with the risk of costly errors.
 "When you consider ways to simplify these spot transactions and reduce the potential errors, you think immediately of the CME Clearing House," CME President Bill Brodsky says. "Our Clearing House has all the systems in place to handle these kinds of transactions with absolute integrity."
 The CME's Rolling Spot contract will automatically roll over each day until the trader offsets it or makes or accepts delivery of the actual currency with contract expiration. Each day at approximately 11:30 a.m. (Chicago time), the CME will post a cash adjustment, or "roll," rate at which the contract will be netted via a cash debit or credit. The rate is based on a CME survey of the actual spot market that day and forms an element in the daily settlement of rolling spot futures, in addition to the regular mark-to-market. The roll rate also provides traders an additional basis on which to hold or liquidate positions on the exchange.
 In practice, settlement of the roll rate, actually an interest rate differential paid to the buyer or seller of the currency, depending on whether it is trading at a premium or a discount, is simple, according to CME member Jeff Silverman, a member of the focus group. For the British pound contract, if you're long and the U.K. interest rate is higher than the U.S. rate, you get a credit. If you're short, you get a debit," he says.
 "This contract seemed so obvious that, once we had it designed, we couldn't believe we hadn't thought of it sooner," Silverman continued. "It's a better mousetrap."
 -0- 5/10/93
 /CONTACT: Andrew Yemma, 312-930-3434, or Mary Hearn, 312-930-8212, both of CME/

CO: Chicago Mercantile Exchange ST: Illinois IN: FIN SU: PDT

KD -- NY104 -- 6683 05/10/93 17:02 EDT
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Date:May 10, 1993

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