The Chicago Mercantile Exchange (CME), commonly referred to as the Chicago Merc, is a prominent trading platform for futures and options. CME caters to diverse sectors including agriculture, energy, stock indices, foreign exchange, interest rates, metals, real estate, and even weather derivatives.
Key Takeaways
- The Chicago Mercantile Exchange, often known as Merc, facilitates organized trading in futures and options.
- Originally known as the Chicago Butter and Egg Board, the CME started by trading agricultural products like wheat and corn.
- In the 1970s, CME expanded into financial futures, followed by precious metals, Treasuries, and other assets.
- The 2007 merger with the Chicago Board of Trade led to the formation of CME Group, one of the largest financial exchange operators globally. CME Group also owns several other exchanges in different cities.
- CME has evolved to trade unique commodities like Bitcoin futures and weather derivatives.
A Comprehensive History of the Chicago Mercantile Exchange (CME)
Founded in 1898, the CME started as the “Chicago Butter and Egg Board” and rebranded in 1919. It became the first financial exchange to demutualize and go public in 2000.
CME launched its first futures contracts in 1961 on frozen pork bellies and added financial futures and currency contracts in 1969. By 1972, the CME introduced the first interest rate, bond, and futures contracts.
Creation of the CME Group
CME innovated further in 2007 by merging with the Chicago Board of Trade to create CME Group, which ranks among the largest financial exchanges in the world. In 2008, CME acquired NYMEX Holdings, Inc., owning the New York Mercantile Exchange (NYMEX) and Commodity Exchange, Inc (COMEX). By 2010, CME had a 90% stake in the Dow Jones stock and financial indexes.
CME expanded again in 2012 by purchasing the Kansas City Board of Trade, renowned for hard red winter wheat trading. In 2017, CME began Bitcoin futures trading.
As of 2021, CME Group manages upwards of 3 billion contracts annually, worth an estimated $1 quadrillion. While it ended open outcry trading for most commodities in 2021, it still facilitates this form of trading in the Eurodollar options pit. Furthermore, CME Clearing serves as a premier counterparty clearing provider.
$1 Quadrillion
The approximate annual value of all CME contracts.
The Importance of CME Futures and Risk Management
In an uncertain world, futures provide essential tools for risk management for money managers and commercial enterprises. These entities hedge risk and lock in prices vital to their businesses through futures contracts. Sellers benefit by ensuring known prices for their future products, while buyers secure known future costs.
Speculators, contrastingly, aim to profit from price fluctuations by taking risks that commercial entities hedge. Large, regulated futures exchanges like CME Group provide liquid and centralized platforms for this activity, alongside avenues for settlement, clearing, and reporting.
CME Regulation
CME operates under the supervision of the Commodity Futures Trading Commission (CFTC), the regulatory body overseeing commodities and derivatives in the US. The CFTC ensures oversight over brokers and merchants, risk surveillance of derivatives trades, and investigates market manipulation or abusive practices. It also regulates trading in virtual assets like Bitcoin.
Comparing Chicago Mercantile Exchange and Chicago Board of Trade
The Chicago Board of Trade (CBOT), founded in 1848, focuses on trading agricultural products such as wheat, corn, and soybeans, and expanding later to financial products like gold, silver, and U.S. Treasury bonds. The 2006 merger between CME and CBOT, approved by their respective shareholders, streamlined these futures markets.
Unique Trading on CME
One commodity uniquely traded on CME is weather derivatives, making it the only exchange to offer derivatives based on weather events. In 2020, CME traded up to 1,000 weather-related contracts daily, with the total notional value of futures and options reaching $750 million and $480 million, respectively.
How Active and Influential Is the Chicago Mercantile Exchange?
CME is the world’s largest futures and options exchange by daily volume. The exchange handles 3 billion contracts annually, accounting for a staggering $1 quadrillion in nominal value.
Size and Workforce of CME
As of March 2022, CME reported nearly $206 billion in total assets and just above $178 billion in liabilities. By the end of 2021, CME had 3,480 employees with offices in over 15 countries.
Financial Performance of CME
In the first quarter of 2022, CME marked a net income of $711 million, up by approximately $136 million from the previous year. For 2021, CME Group announced a net income of $2.6 billion against total revenues of $4.7 billion.
The Bottom Line
CME remains an integral element of America’s financial framework. Evolving from an agricultural futures venue, the CME is now a major trading hub for precious metals, foreign currencies, treasury bonds, cryptocurrencies, and diverse derivatives.
Related Terms: Chicago Board of Trade, futures market, financial exchange, Bitcoin futures, derivatives.
References
- CME Group. “Midwest Grain Trade: History of Futures Exchanges”.
- CME Group. “Timeline of CME Achievements”.
- CME Group. “Friday Fun Fact: The Birth of Stock Index Futures”.
- CME Group. “Weather Products”.
- CME Group. “What are Bitcoin Futures?”
- CME Group. “CME Group Announces Launch of Bitcoin Futures”.
- CME Group. “CME Group Overview: Advance with Confidence”, Page 1.
- CME Group. “CME Group to Permanently Close Most Open Outcry Trading Pits; Eurodollar Options Pit Will Remain Open”.
- CME Group. “Clearing”.
- Commodity Futures Trading Commission. “The Commission”.
- Commodity Futures Trading Commission. “History of the CFTC”.
- CME Group. “Managing Climate Risk with CME Group Weather Futures and Options”.
- CME Group. “Modern Slavery & Human Trafficking Statement”.
- CME Group. “Form 10-Q”.
- CME Group. “CME Group Inc. Reports Fourth-Quarter and Full-Year 2021 Financial Results”.
