The nation’s largest futures exchange today announced that it plans to build a sophisticated derivates market to protect homeowners from a bursting housing bubble.

Chicago Mercantile Exchange has completed a Letter of Intent with MACRO Securities Research LLC to explore developing derivatives based on the Fiserv, CSW family of Housing Price Indexes. These derivatives would create a market that ultimately will provide homeowners with tools to help them protect the value of their largest asset.

MACRO Securities Research, or MSR for short, is a financial innovations firm dedicated to the creation of instruments designed to unlock liquidity in new asset classes

The CSW Home Price indexes track home price trends and are used by some of the country’s largest lenders for loan originations as well as various types of mortgage analysis. MSR owns the exclusive rights to develop financial products based on the CSW Indexes.

As the largest domestic asset class, U.S. single-family homes represent a $22.3 trillion market, according to the U.S. Census Bureau and the Mortgage Bankers Association’s Mortgage Finance Forecast. Given all of the participants in the U.S. housing sector, including insurance companies, pension funds, hedge funds, home buyers, mortgage banks and insurers as well as developers, construction suppliers and homeowners, this type of product could appeal to a large number of potential market users.

“Given the volatility in home prices, which have advanced more significantly in the past 12 months than they have in the last 10 years, we believe our timing is particularly relevant to fulfill the need to provide risk management tools for this market,” said Rick Redding, CME managing director, Products & Services. “Innovation has been a key to our history and exploring the potential development of a CSW housing price index fits into our ongoing business strategy.”

Sam Masucci, COO of MSR, said, “We are looking forward to working with the CME on these financial innovations in residential home prices. Individuals and institutions alike will benefit greatly from products that will offer better risk management and add liquidity to the largest illiquid asset class in the world, housing.”

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Robert Shiller, chief economist of MSR, said the creation of futures and options markets for owner-occupied homes will be “a truly historic breakthrough.”

“The gains in economic efficiency from hedging real estate risks will benefit all households, industrial and service firms and financial entities,” Shiller said. “The price discovery that will come from new liquid real estate markets will dramatically improve the allocation of resources and lead to a more stable and efficient economy.”

Shiller also is the Stanley B. Resor Professor of Economics at Yale and author of “Irrational Exuberance.”

Chicago Mercantile Exchange is the largest futures exchange in the United States. As an international marketplace, CME brings together buyers and sellers on its trading floors and CME Globex electronic trading platform. CME offers futures and options on futures primarily in four product areas: interest rates, stock indexes, foreign exchange and commodities. The exchange moved approximately $1.5 billion per day in settlement payments in the first nine months of 2004 and managed $39.8 billion in collateral deposits as of Sept. 30, 2004.


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