CME's open interest is among the highest worldwide. Open interest is the number of contracts outstanding at the close of the trading day and a leading indicator of liquidity. Deep, liquid markets support timely and efficient moves in and out of positions. CME's open interest reached a high of 9.3 million positions in 2000.

What are Futures and Options? How Do They Trade?

"Futures" are a type of contract for the purchase or sale of financial instruments or physical commodities. The contract calls for the future delivery of the item in question, and the contract is traded through a futures exchange, such as CME.

"Options" are contracts that give the right -- but not the obligation -- to sell or buy an underlying futures contract at a specified price within a specified time. Options on futures contracts are similar to the stock options which are often discussed in the newspaper's business section.

A hundred years ago, futures contracts were traded only via "open outcry" on the trading floor. This popular system of trading -- which we still use today -- is like hundreds of auctions going on at the same time. Traders stand in a trading pit and call out prices and quantities that indicate their willingness to buy or sell. They use hand signals to convey the same information. (After all, it can be difficult to hear if everyone shouts at the same time.)

Open outcry is a very efficient means of "price discovery," allowing buyers and sellers to arrive at the best prices given the supply and demand for a given futures or options product. Its speed and efficiency has been enhanced still further by the introduction of a variety of trading floor systems.

These systems also are linked to our popular GLOBEX2 electronic trading system, which allows market participants to buy and sell whether they're sitting at trading booths on our Chicago trading floors, located thousands of miles away from Chicago or working at their offices or homes, making trades during or after regular trading hours.

At CME, there are three ways to trade futures and options. Some traders buy and sell contracts exclusively using computers, some prefer being face-to-face with other traders on our trading floors, and an increasing number trade both ways.

Who Trades at CME?

All over the world, pension funds and investment advisors, portfolio managers, corporate treasurers, commercial and investment banks, broker/dealers and individuals are among those who trade on CME as an integral part of their financial management strategy. The right to trade at CME is conveyed through Class B shares, which are held by CME members. Members include the world's largest banks and brokerage firms, as well as independent traders and brokers. They are divided into the following groups:

• CME members (625 B-1 shares) can execute trades in any contract listed on the exchange. On the trading floor, they wear gold badges that show who they are and what they can trade.
• IMM stands for International Money Market (813 B-2 shares). IMM members can execute trades in currency, interest rate and stock index futures, as well as futures options (i.e., all IMM and IOM futures and futures options). IMM badges are green.
• IOM means Index and Option Market (1,287 B-3 shares). IOM members can execute trades in index futures contracts, random length lumber contracts and all option futures. IOM badges are blue.
• GEM is the Growth and Emerging Markets Division (467 authorized B-4 shares). GEM members may execute trades in a number of products, including those related to emerging market countries. GEM badges are black or brown.

CME as a Public Company

On Nov. 13, 2000, CME finalized its historic transformation from a not-for-profit, membership-owned organization to a for-profit, shareholder-owned corporation. Chicago Mercantile Exchange Inc. is a public company incorporated in Delaware. It also is the first U.S. exchange to demutualize by converting its membership interests into shares of common stock that can trade separately from exchange trading privileges.

In demutualizing, our goals included unbundling members' equity value, providing currency for working with strategic partners, and supporting the exchange's expansion by giving it access to the capital markets. We also believe that demutualization encourages a greater level of fiscal discipline, enables us to more aggressively pursue new business opportunities and helps solidify CME's position as a premier global marketplace.

As a result of CME's demutualization, nearly 26 million shares of Class A common stock were allocated on a 3-2-1 basis to 3,200 members of the CME, IMM and IOM divisions. These Class A shares have the traditional features of common stock and will trade in the over-the-counter market after initial transfer restrictions are lifted in 2001. In addition, about 5,000 shares of Class B common stock were issued to equity members in series corresponding to the former membership divisions. Each CME member received a B-1 share, each IMM member received a B-2 share, each IOM member received a B-3 share and each GEM member received a B-4 share. Each B series share confers the trading privileges associated with the membership interests that are converted into each series, along with the traditional features of common stock. B shares are bought, sold and leased through CME's Membership Department.

A History of Innovation

The Chicago Butter and Egg Board was founded in 1898 and evolved into Chicago Mercantile Exchange in 1919. At that time, futures were offered only on inanimate agricultural products, such as butter and eggs. Since that time, CME has pioneered a number of innovative products, services and systems. These include:

• 1961: CME introduces a frozen pork belly futures contract -- the first futures contract based on frozen, stored meats. (Pork bellies are used to make bacon.)
• 1964: A live cattle futures contract begins trading at CME. This is the first futures contract to be based on a non-storable commodity.
• 1972: CME creates the world's first financial futures contracts by introducing futures on seven foreign currencies.
• 1981: Eurodollar futures begin trading, becoming the first contracts to be settled in cash, rather than the physical delivery of a commodity. The Eurodollar futures contract is now the world's premier short-term interest rate product.
• 1982: CME introduces stock index futures products, including the first successful equity index contract, the Standard & Poor's (S&P) 500 Index futures.
• 1984: The first international link between futures exchanges is established: a mutual offset trading link between CME and Singapore Exchange Derivatives Trading Ltd. (SGX).
• 1992: GLOBEX, the world's first international post-market electronic transaction system, begins live trading on June 25. Its successor, GLOBEX2, is introduced in 1998.
• 1997: E-mini S&P 500 contracts -- electronically traded products that are one-fifth the size of the standard S&P 500 Index futures -- are introduced. They soon become one of CME's most successful products, paving the way for a new E-mini product line.
• 2000: CME becomes the first U.S. financial exchange to demutualize by converting its membership interests into shares of common stock that can trade separately from exchange trading privileges.

Bringing the World to Our Customers

With customers all over the world, a global product line, around-the-clock electronic trading and strategic alliances with other exchanges, CME is truly a global marketplace offering 24-hour access to its products. Our alliances will soon give our customers and members access to products on eight exchanges in all the world's major time zones:

• Under the GLOBEX Alliance, members of CME, ParisBourseSBF SA, Singapore Exchange Derivatives Trading Ltd. (SGX), Brazil's Bolsa de Mercadorias & Futuros, the Montreal Exchange and Spain's MEFF will benefit from trading privileges and direct access to the electronically traded products of all the alliance markets through one single technical access point, along with cross-margining of positions in order to reduce the capital requirements of their customers and members.
• We also have an agreement with the London International Financial Futures and Options Exchange (LIFFE) that provides cross-access to our respective electronically traded products and cross-margining of the world's most actively traded short-term interest rate products.
• Under our mutual offset system with SGX -- in place since 1984 -- market participants can establish a position in certain products at CME and offset it at the SGX, and vice versa.
• In 2000, we announced plans to pursue an alliance with the Tokyo Stock Exchange. Our goal is to further develop our fixed income and equity derivatives markets through various initiatives, such as interconnecting our electronic trading systems.

CME also works with new types of marketplaces, such as the rapidly growing online business to business (B2B) arena. These marketplaces use the Internet to offer a range of services or products, linking companies in a single industry or with an interest in a particular type of product. For example, a B2B marketplace might allow companies to view catalogs, negotiate prices and order supplies online. In 2000, CME announced plans to work with CheMatch.com, Inc. to jointly develop and market a co-branded complex of certain chemical futures and options products. This represents the first joint development project between a futures exchange and a B2B marketplace to create risk management products targeted to a specific industry, as well as the first time futures products will trade on a futures exchange with an electronic link to an online B2B marketplace.

CME's Financial Safeguards

Institutions and individuals turn to CME products to help manage their risk. Through a financial safeguard and "clearing" system unique to futures markets, CME ensures that the counterparties to each trade will make good on the contract. CME's world-class Clearing House guarantees each and every trade on CME -- whether made on the trading floor or through GLOBEX2. The Clearing House does this by acting as a buyer to every sell order and a seller to every buy order. In addition, all CME members are qualified (guaranteed) by a CME clearing member firm.

Before making any trade, members and customers must post a minimum performance bond or margin -- the "good faith" or earnest money that CME requires before traders can take a position in CME's futures and options markets. CME developed the Standard Portfolio Analysis of Risk (SPAN®) system for calculating performance bond requirements for each product based on potential losses that could occur. SPAN is now the margin system of choice in financial capitals worldwide, including Chicago, New York, London, Paris, Oslo, Singapore, Hong Kong, Sydney, Tokyo and Osaka.

CME's Clearing House collects performance bond money to its members and customers twice daily, based on the firm's trades during the day and the positions still outstanding after the market's close. This activity is known as "mark-to-market," and significantly reduces the chance of default. As one measure of the success of CME's financial safeguards, there has never been a clearing member firm default at CME in its more-than-100-year history.

On an average day, CME's Clearing House acts as custodian for $25 billion in performance bond assets that back the market positions taken by customers, members and member firms. To better manage the clearing process, CME developed the CLEARING 21® system with the New York Mercantile Exchange (NYMEX) in 1994. Widely considered the most efficient and powerful clearing system in the derivatives industry, CLEARING 21 is being adopted by exchanges around the world.

Visiting CME

To watch the financial markets in action, more than 100,000 people a year come to our Visitors Center, which is open weekdays from 7:15 a.m. to 3:15 p.m. except for CME holidays. Admission is free.

The Visitors Center consists of two galleries overlooking the trading floors, with the most spectacular views of the thousands of traders and staff members crowding the scene every day. The two trading floors comprise 70,000 square feet and are equipped with state-of-the-art wallboard price display systems, trading booths, and order routing and communications systems.

• The Upper Trading Floor (eighth floor gallery) opened in July 1993, and is the site for trades in foreign currencies and interest rate futures and options. These include the Eurodollar, the world's second most actively traded futures contract. Hanging above the foreign currency complex are the flags of the countries whose currencies trade at CME. Trading Hours: 7:20 a.m. - 2 p.m.
• The Lower Trading Floor (fourth floor gallery) is the location for trades in agricultural commodity and stock index futures and options, including the S&P 500 and Nasdaq 100 Index. Index Trading Hours: 8:30 a.m. - 3:15 p.m. Commodity Trading Hours: 9 a.m. - 1:05 p.m.

The trading floor is fascinating to watch because the traders shout out prices and use animated hand signals -- sometimes even jumping up and down to attract the attention of their fellow traders. It's also very colorful because jackets distinguish the various participants:

• Red jackets -- issued by CME to members. However, members may instead wear their own distinctive jackets in any color(s) to stand out in the trading pit or to distinguish members from the same firm.
• Light or dark blue jackets -- worn by pit observers employed by CME who report and process information, such as prices.
• Green jackets with a black patch on the back -- worn by out-trade clerks who represent member firms in resolving discrepancies in trades.
• Gold jackets -- worn by employees of the various firms. The gold-jacketed employees staff the phones, communicate trading information from the trading pits to the phones by means of hand signals, carry orders to and from the members, etc.

CME Facts & Figures

CME Structure

• Delaware, for-profit stock corporation
• Self-regulatory organization regulated by the Commodity Futures Trading Commission (CFTC)

CME Leadership

• Scott Gordon, Chairman
• James J. McNulty, President and Chief Executive Officer

CME Products and First Day of Trading

Agricultural

Butter (futures 9/5/96, options 9/6/96)

Cheddar Cheese (futures, options 10/3/97)

Dry Whey (futures & options 11/16/98)

Feeder Cattle (futures 11/30/71, options 1/9/87)

E-mini Feeder Cattle (futures 9/19/00)

Frozen Pork Bellies (futures 9/18/61, options 10/3/86)

Live Cattle (futures 11/30/64, options 10/30/84)

Lean Hogs (futures 11/10/95, options 11/13/95)

E-mini Lean Hogs (futures 7/25/00)

Milk (futures & options 5/22/97)

Nonfat Dry Milk (futures & options 11/16/98)

Stocker Cattle (futures & options, 11/30/98)

90% Lean Boneless Beef (futures, options 6/16/97)

50% Lean Boneless Beef Trimmings (futures & options 6/16/97)

Spot Markets Traded on the CME:Butter, Cheese, Nonfat Dry Milk

Currencies

Australian dollar (futures 1/13/87, options 1/11/88)

Brazilian real (futures & options 11/8/95)

British pound (futures 5/16/72, options 2/25/85)

Canadian dollar (futures 5/16/72, options 6/18/86)

Deutsche mark (futures 5/16/72, options 1/24/84)

Euro FX (futures, options, 1/4/99)

Euro FX Cross Rates - Japanese yen, British pound, Swiss franc (futures, options 1/11/99)

E-mini Euro FX futures (10/7/99)

E-mini Japanese yen futures (10/7/99)

French franc (futures & options 9/20/93)

Japanese yen (futures 5/16/72, options 3/5/86)

Mexican peso (futures & options 4/25/95)

New Zealand dollar (futures & options 5/7/97)

South African rand (futures & options 5/7/97)

Swiss franc (futures 5/16/72, options 2/25/85)

British pound/Deutsche mark Cross Rate (futures, options 6/9/97)

Deutsche Mark/Japanese Yen Currency Cross-Rate [yen-settled] (futures & options 6/9/97)

Cross rates: Euro/Pound, Euro/Yen, Euro/Swiss Franc (futures 1/12/99)

Interest Rates

Three-Month Eurodollar (futures 9/9/81, options 3/20/85)

EuroCanada (futures & options 7/14/98)

Euromark (futures & options 4/26/93)

Euroyen (futures 3/6/96)

Euroyen LIBOR (futures 4/1/99)

90-day U.S. Treasury Bill (futures 1/6/76, options 4/10/86)

One-year U.S. Treasury Bill (futures 3/28/94)

One-Month Federal Funds Rate (futures 10/12/95)

One-Month LIBOR (futures 4/5/90, options 6/12/91)

10-year Japanese Government Bond [JGB] (futures 1/21/99)

Indexes

Standard & Poor's 500 (futures 4/21/82, options 1/23/83)

E-mini S&P 500 (futures, options 9/9/97)

S&P 500/BARRA Growth Index (futures & options 11/6/95)

S&P 500/BARRA Value Index (futures & options 11/6/95)

Standard & Poor's MidCap 400 (futures & options 2/13/92)

Nasdaq 100 Index® (futures & options 4/10/96)

E-mini Nasdaq 100 Index® (futures 6/21/99)

Russell 2000 Stock Price Index (futures & options 2/4/93)

FORTUNE e-50 Index™ (futures 9/5/00)

Nikkei 225 (futures & options 9/25/90)

GSCI(TM/SM) (futures & options 7/28/92)

Other

Random Length Lumber (futures 10/1/69, options 5/29/87)

Oriented Strand Board (futures 11/8/96, options 11/11/96)

Quarterly Bankruptcy Index [CME QBI] (futures & options, 11/3/98)

Heating Degree Day Index (futures,9/22/99)

Cooling Degree Day Index (futures, 1/30/00)

SOURCE: Chicago Mercantile Exchange Inc.

WEB SITE: http://www.cme.com/