cme cs home price futures product overview

CME Case Shiller Futures Overview

John H Dolan

Market Maker-CME CS Futures

www.homepricefutures.com

[email protected]

Product Overview


• Futures/options traded on the CME– CME is counterparty to all trades

– Reduces gross counterparty exposures

– Common counterparty � Fungible positions �Ease of unwind

(vs. OTC trades)

– Level playing field on contract features

• No ISDA docs

• No one-sided margin

• All participants trade at best prices.

– Public (vendor) pricing (e.g. Bloomberg)

• Reference obligations: 11 Case Shiller indices– Ten regions and one 10-city CUS index.

– See Reports section for CS methodology

http://www.homepricefutures.com/wp-

content/uploads/2010/04/methodology-sp-cs-home-price-indices-revised-Feb-2015.pdf

• Minimum margin levels set by CME. Clearing brokers may

require additional margin– Incremental margin may be required as closing prices change

Case Shiller Index Features


• Repeat-sales index

• Non-Seasonally adjusted. See Oct 1, 2014 blog for discussion

http://www.homepricefutures.com/?p=3318 on SA/NSA.

• Independently calculated by CoreLogic

• Reported by S&P

• Weighted 3-month moving average

• Released monthly with two-month delay on last Tuesday

• Example: Index release in July covers March-May

• Aug index release contains two components of May index

• Predicting Aug : Estimates of V (Value) 1-4, W Weight) 1-4

• Past periods can be revised leading to changes in time series

CME Contract Features


• Contract notional value =$250 * Index

– e.g. WDC index =200, Notional value/ contract = $50,000

• Contracts settle last Tues of expiration month on index value

released that day

• Trading 11 expirations (new ones introduced as current one

expires)– Feb, May, Aug, Nov expiration cycle

– Current expirations: Feb 2017- Nov 2021

– See http://www.homepricefutures.com/?p=3390 for description of

which contract opens after expiration.

• Trading hours 8:15 AM- 3

PM (Chicago) (closing

prices at 2 PM)

• Trading increments

0.20=$50

• Most trading on

expirations < 2 years.

CUS (10-city index) CS Index vs. Futures


• The graph of CUS historical index and CME quotes shows:– Historical CS index (in black) since Nov ‘12 (Sept ‘12 index)

– Mid-market level for current CME contracts (upward sloping)

– Index (*100), Price on left axis, gain over spot on right axis

– Mid-market levels a/o Dec ’11 (red-dash), Dec ‘13 (blue-dash)

show increase in prices between Dec ’11 and Dec ’13.

Convergence of Futures to Index


• Since CME futures settle on

the index value at expiration,

contract prices and index

values must converge– Futures are forward looking,

while index values measure

history

– Index has high auto-

correlation, while HCI

futures seem random

(although not regions) –

useful for trading options on

futures.

– Index and futures values can

move in opposite direction

– Monthly correlation 2015-

16 <10%

Convergence -Historical


• Future settle on the index value released on the last Tuesday

of the expiration month. As such, futures prices and index

levels must converge (or there would be an arbitrage).

• This graph shows the price history of several Nov contracts

over time as they move toward expiration.

Regional Exposure


10 Regions:Boston (BOS)

Chicago (CHI)

Denver (DEN)

Las Vegas (LAV)

Los Angeles (LAX)

Miami (MIA)

New York (NYM)

San Diego (SDG)

San Fran (SFR)

Wash, D.C. (WDC)

CUS (10-City) (CUS or HCI)

• Reference areas tend to be much broader than downtown urban

area. Introduces basis risk for hedging single home. (Regional

reference areas defined in Case Shiller methodology).– http://www.homepricefutures.com/wp-content/uploads/2010/04/methodology-sp-cs-

home-price-indices-revised-Feb-2015.pdf

• Narrower exposure better addressed in OTC trades?

CUS 10-city Index


• Weighted average of ten

regional indices based on 2000

market weightings, that were

updated post 2010 census.

• Quoted as CUS (or HCI) on

different systems

• CUS is typically most active

contract with tightest bid-ask

spread, complete list of quotes.

Region Weight

Boston 6.43%

Chicago 8.13%

Denver 3.45%

Las Vegas 1.53%

Los Angeles 20.99%

Miami 5.79%

New York 29.41%

San Diego 5.26%

San Fran 9.21%

Washington 9.80%

Weighted Avg.

100.0%

Sources of Market Color


• Quotes

– Bloomberg

• CME Web Sites

– http://www.cmegroup.com/trading/real-estate.html

• Commentary

– www. Homepricefutures.com• Blogs on Trading

• Basics section recapping Contract/Index features

– LinkedIn group “CME Case Shiller Home Price Futures”• Forum to promote discussion of forward index values, trading

– Twitter @HomePriceFuture • Posting of trades, best markets

Prices- Regional Contracts


CME Case Shiller Futuresa/o 3 Bid Ask 4 Bid Ask 5 Bid Ask Bid Ask 7 Bid Ask

BOS CHI DEN LAV LAX

BOSG17 190.4 192.0 CHIG17 133.4 135.0 DENG17 187.4 189.0 LAVG17 152.4 153.8 LAXG17 250.6 252.2

BOSK17 188.8 191.8 CHIK17 129.8 132.8 DENK17 187.8 190.8 LAVK17 152.2 155.0 LAXK17 250.0 252.8

BOSQ17 196.2 198.4 CHIQ17 136.8 139.4 DENQ17 193.8 196.4 LAVQ17 156.4 159.4 LAXQ17 256.2 259.0

BOSX17 198.0 199.4 CHIX17 139.2 141.2 DENX17 195.0 198.0 LAVX17 158.8 160.6 LAXX17 257.4 260.4

BOSG18 195.2 198.0 CHIG18 135.4 138.2 DENG18 193.4 196.4 LAVG18 157.8 160.4 LAXG18 255.6 258.4

BOSK18 192.0 197.2 CHIK18 132.0 137.2 DENK18 192.2 198.8 LAVK18 156.2 162.0 LAXK18 253.2 259.8


BOSK19 193.6 201.8 CHIK19 139.6 DENK19 LAVK19 LAXK19

BOSX19 CHIX19 DENX19 LAVX19 LAXX19


BOSX21 CHIX21 DENX21 LAVX21 LAXX21

8 Bid Ask 9 Bid Ask 10 Bid Ask 11 Bid Ask 12 Bid Ask

MIA NYM SDG SFR WDC

MIAG17 217.4 219.0 NYMG17 181.6 183.2 SDGG17 227.2 228.6 SFRG17 228.0 229.6 WDCG17 215.8 217.4

MIAK17 218.2 221.2 NYMK17 179.4 182.2 SDGK17 227.2 230.2 SFRK17 227.4 230.4 WDCK17 213.6 216.6

MIAQ17 222.6 225.2 NYMQ17 185.4 187.8 SDGQ17 232.6 234.8 SFRQ17 235.2 237.0 WDCQ17 221.2 222.8

MIAX17 224.0 226.6 NYMX17 188.0 190.2 SDGX17 234.0 236.6 SFRX17 235.0 237.0 WDCX17 221.8 224.8

MIAG18 223.4 226.4 NYMG18 185.2 188.0 SDGG18 232.2 235.0 SFRG18 233.0 235.0 WDCG18 220.2 223.4

MIAK18 222.2 229.2 NYMK18 182.0 188.2 SDGK18 230.2 237.2 SFRK18 230.0 237.6 WDCK18 216.6 221.8


MIAK19 NYMK19 SDGK19 SFRK19 WDCK19

MIAX19 NYMX19 SDGX19 SFRX19 WDCX19


MIAX21 NYMX21 SDGX21 SFRX21 WDCX21

24-Jan-17


CASE SHILLER HISTORY/ CME HOME PRICE FUTURES MID-MARKET LEVELS A/O 27-Jan

10-CITY INDEX MIAMI

NORTHEAST REGIONS

-12%

-8%

-4%

0%

4%

8%

12%

16%

18000

19000

20000

21000

22000

23000

24000

% v SpotPrice

S&P Case Shiller CUS 10-city Index/

CME Futures a/o Jan 24, 2017

Bid Offers CS Midclose Dec '14 Spot


-12%

-8%

-4%

0%

4%

8%

12%

16%

1900019500200002050021000215002200022500230002350024000245002500025500

% v SpotPrice

MIA CS Index/CME FuturesBids Offers CS Close Dec '14 Spot


-12%

-8%

-4%

0%

4%

8%

12%

16%

1900019500200002050021000215002200022500230002350024000245002500025500

% v SpotPriceWDC CS Index /CME FuturesBids Offers CloseCS Dec '14 Spot


-12%

-8%

-4%

0%

4%

8%

12%

16%

160001650017000175001800018500190001950020000205002100021500

% v SpotPriceNYM CS Index/CME Futures

Bids Offers CS

Close Dec'14 Spot


-12%

-8%

-4%

0%

4%

8%

12%

16%

170001750018000185001900019500200002050021000215002200022500

% v SpotPriceBOS CS Index/CME Futures

Bids Offers CS

Close Dec '14 Spot

www.homepricefutures.co

Graphs- Regional Contracts


WEST COAST REGIONS

MIDDLE AMERICA

-12%

-8%

-4%

0%

4%

8%

12%

16%

165001700017500180001850019000195002000020500210002150022000

% v SpotPrice

DEN CS Index/ CME FuturesBids Offers CS Close Dec '14 Spot


-12%

-8%

-4%

0%

4%

8%

12%

16%

13500140001450015000155001600016500170001750018000

% v SpotPrice

LAV CS Index/ CME FuturesBids Offers CS Close Dec '14 Spot


-12%

-8%

-4%

0%

4%

8%

12%

16%

12000

125001300013500140001450015000

1550016000

% v SpotPrice CHI CS Index / CME Futures

Bids Offers CS


-12%

-8%

-4%

0%

4%

8%

12%

16%

2000020500210002150022000225002300023500240002450025000255002600026500

% v SpotPrice SDG CS Index/ CME Futues

Bids Offers CS Close Dec '14 Spot

www.homepricefutures.comwww.homepricefutures.com

-12%

-8%

-4%

0%

4%

8%

12%

16%

22000225002300023500240002450025000255002600026500270002750028000285002900029500

% v Spot

Price

LAX CS Index/CME FuturesBids Offers CS Close Dec '14 Spot


-12%

-8%

-4%

0%

4%

8%

12%

16%

2000020500210002150022000225002300023500240002450025000255002600026500

% v SpotPriceSFR CS Index/ CME Futures

Bids Offers CS Close Dec '14 Spot


Graphs- Regional Contracts -2

Bid/Ask Spreads


• The chart below show bid/ask spreads a/o Dec 2016.– Front contract ~<2 points � 1 point near expiration

– 1-2 year forwards ~2-4 points

• CUS/HCI typically tightest bid/ask– Wider if higher value (e.g. LAX) or recent higher vol (e.g. SDG, SFR)

– Nov expiration cycle typically trades better that other expirations

• See Aug 29, 2016 blog for prices on expiring contracts

http://www.homepricefutures.com/?p=3827 and Aug 23,

2016 blog for theory of convergence

http://www.homepricefutures.com/?p=3823

Open Interest (OI)• Open Interest for the last few

years has been <100

• OI tends to concentrate in the

Nov expiration cycle– Nov is always longest

contract, garnering interest

from longer-term hedgers

– With early OI, November

tends to have tightest

markets (see bid/ask page)

• CUS typically has the largest OI

(due to broader interest,

tightest markets) but SFR OI

higher today on trades from

California hedger.

• Regional OI varies: at times

DEN, LAV, CHI, NYM, SFR have

all led.


Volume• Volume has been drifting lower since run-up in futures prices in 2012-13.

High volume at contract inception (2006-2007) but then fell off sharply

during 2008-2010 on absence of buyers.

• Volume tends to pick up as markets change direction, as bid/ask spreads

narrow, or when calendar spread trading increases.

• Limited number of options trades.


Calendar Spread Markets


• Calendar spread quoted front contract minus longer contract

– Negative Calendar Spread #’s = Increase Year/Year % difference

• Calendar spread quotes often inside outright bid/ask of individual contracts

• Often useful to compare Calendar spreads vs. Mid/mid-market levels

• Nov expirations shown to eliminate seasonal factors

• Annualized % difference may be used by some for projected HPA (see

qualifiers on Markets Expectations page)

• See March 7, 2014 blog for review of calendar spreads -


Bid Ask Mid Bid Mid Ask Bid Mid Ask Bid Mid Ask Bid Mid Ask

HCI

HCIX17 210.8 211.4 211.1 -4.0 -3.4 -3.4 -8.0 -6.9 -6.4 -10.0 -8.8 -8.0 -10.0 -12.3 -9.6

HCIX18 214.2 214.8 214.5 -4.0 -3.5 -2.4 -6.6 -5.4 -4.2 -11.6 -8.9 -6.2

HCIX19 217.2 218.8 218.0 -3.6 -1.9 -2.0 -8.0 -5.4 -3.0

HCIX20 219.0 220.8 219.9 -5.0 -3.5 -2.0

HCIX21 221.0 225.8 223.4

HCIX17 1.9% 1.6% 1.6% 1.9% 1.6% 1.5% 1.6% 1.4% 1.2% 1.2% 1.4% 1.1%

HCIX18 1.9% 1.6% 1.1% 1.5% 1.3% 1.0% 1.8% 1.4% 1.0%

HCIX19 1.7% 0.9% 0.9% 1.8% 1.2% 0.7%

HCIX20 2.3% 1.6% 0.9%

HCIX21

Calendar Spreads*

Annualized % Change

205.56

Outright Markets

X17 X18 X19 X20

Year-end (2016) “Forecast”


• CME mid-market prices for the Feb ‘17 10-city index contract (which recall

settles on Dec ‘16 index) are consistent with ~3.75% increase over the CUS

Dec ‘15 index.

• DEN, MIA the highest forward prices.

• The colder regions (e.g.) BOS, CHI, NYM and WDC (~51% of CUS 10-index)

remain the laggards

Calendar Spread Markets: Regions


• One-year calendar spread quotes

converted into % change –similar

to prior page

• Longer-term calendar spreads

(e.g. HCIX17_X20, not shown

here) may be more useful for

longer-term “implied HPA” than

linked one-year spreads

• See Oct 4, 2016 blog

http://www.homepricefutures.co

m/?p=3902 for discussion on

Calendar spreads. Also Intro on

Feb 25, 2015

http://www.homepricefutures.co

m/?p=3355

Calendar Spread Markets: HPA


• Forward bids and offers on calendar spreads can be converted into %

gains over prior year’s index or contract to form implied HPA curves.

(e.g. Feb ‘17 futures can be compared against index released in Feb ’16,

or bid and ask on Nov ’18/’19 calendar spreads can be converted into

implied HPA.

• May be useful for seeing trends in implied HPA over time.

• A copy of HPA graphs is available for all regions in monthly recap in

Report section. http://www.homepricefutures.com/?page_id=13

Inter-City Spreads• Limited trading over past year. Typically 10-20 IC quotes posted. Focus

Jan ‘17 is X18 pairs of HCI with each region.

• Expressed as point spreads (e.g. -25.4/-23.0 in CUS_SFR X18 Intercity

Spread, see below) but can be converted into relative % moves

• Very useful for isolating calendar, relative price movements

• Best where one market is very tight (often CUS/”HCI”), or when both

markets are highly correlated (e.g. BOS v NYM, LAX, v SDG)

• Great way to frame the question “Will SFR outperform CUS over the next

4+ years?” (In this example, for the first time in year, no!)

• See Sept 28, 2016 blog http://www.homepricefutures.com/?p=3882 re IC

spreads. Also http://www.homepricefutures.com/?p=3359, and

http://www.homepricefutures.com/?p=3318 (1/6/15) for introductions.


Arb

Price %>Spot HCIX18 SFRX18

%

HCIX18 % SFRX18 % Diff

HCI Index 205.56 Bid Bid* Ask Bid>Spot Ask> Spot

HCIX18 Bid 214.2 4.2% -25.4 214.2 239.6 4.2% 4.3% -0.1% -26.0

Ask 214.8 4.5% or 213.2 238.6 3.7% 3.9% -0.2%

Mid 214.5 4.3%

HCIX18 SFRX18

%

HCIX18 % SFRX18

SFR Index 229.7 Ask Ask Bid** Ask> Bid>Spot

SFRX18 Bid 237.2 3.3% -23.0 214.8 237.8 4.5% 3.5% 0.9% -22.4

Ask 240.2 4.6% or 215.8 238.8 5.0% 4.0% 1.0%

Mid 238.7 3.9%

Outright X18

Markets

Options• Options trading was a large part of 2006-07 trading

• Went dormant after 2008 –”pit-traded” thereafter

• Electronic trading of 4 contracts (CHI, CUS, LAX, NYM) re-introduced in 2012

• Other regions open to electronic trading starting Feb 5, 2017

• May be useful for:– Implied volatility trades

– Delta-neutral hedges

– Covered Call/Put writing

– Straddles/Strangles

– Calendar Spreads

– Bull/Bear Option

– Lower margins on expiring contracts

• Minimum price increment = 0.10, $25

• Few brokers allow clients to post option quotes

• Inquire if any interested in discussing an option strategy

• See: http://www.homepricefutures.com/?page_id=75 for Jan 16, 2017 blog

“More Options are Coming”

• See http://www.homepricefutures.com/?p=3872 for Sept 23, 2016 blog on

Call Options, and Sept 2, 2016 blog on puts


• See http://www.homepricefutures.com/?p=3492 “Any interest in writing

puts? Key need to spur trading.


Options –Put Quotes -example• Options (both puts and calls) can be quoted for any “round” strike, for any

expiration.

• Few trades so only a handful of wider bid/ask spreads.


Nov 2017-19 Contracts- %Gains


• The top bar diagram shows:– Bid/ask/mid bar chart for

each of 11 markets across

3 Nov expirations in %

above spot value.

– Height of bar reflects

bid/ask spread (e.g.

HCIX18 tight, LAVX18

wide)

– Market prices are

consistent with higher CS

#’s for next 3 years (e.g.

HCIX19 ~+7%

– Contrast variety in

forward curves,

smaller implied HPA,

and width of bid/ask

vs. 2013. (Note

different scale on Y-

axis.)

– Graphs may be useful

of IC spread trades.

Trading of Home Price Index Futures


• CME Case Shiller futures settle on the value of an index at

some point in the future. An understanding of the calculation

of the index is critical for trading and analysis.

• Index levels will be impacted by a change in the value of a

subset of the index (“noise”).– e.g. If the percent of distressed houses falls from 30% to 20% over a year,

and if those distressed houses sell at a 25% discount to “normal”, then the

index might rise 2.5% in a year ((30%-20%)*25%) as the asset composition

becomes less distressed, even if all other asset prices remain unchanged.

– If % distressed is correlated with % severity this impact may be larger

• An understanding of such factors is critical to:– Implied cash and carry trades,

– Qualifying any implied forward HPA analysis,

– Appreciation of basis risk when hedging single assets or pools of assets

that don’t exactly mirror the index composition

• Such “noise” likely had a big impact on index values coming

out of the housing crash (particularly in distressed areas).

• The impact to futures contracts may be lower during periods

of less frequent “noise” but still needs to be recognized.

Do Futures = Market Expectations?• Given qualifiers on previous page, and convergence of futures to forward

index levels, futures prices “may” be a useful tool to infer market

expectations of future index values and/or implied HPA (Home Price

Appreciation) –See illustration below from HUD Monthly Housing Scorecard

• Even thinly traded markets (e.g. Iowa Electronic Markets) have show strong

predictive power on larger events (e.g. Presidential Elections)

• That said, traders can buy, sell, hedge for a variety of reasons beyond

expectations of forward values.

• Imbalance between buyers and seller may result in variance from

expectations (typically with futures clearing below “fair value”).


DisclosuresRisk Factors/Disclosure• This report was prepared by an independent market maker of the CME Case

Shiller futures contracts. The views expressed are his own and should not be

construed to represent the views of the CME, S&P , CoreLogic, or any other entity.

• The author makes no representations as to the accuracy or completeness of any

information contained in this report.

• The information gathered was at a point in time. The bids/offers described here

are dated and may not exist in the current market.

• The quotes shown are for a minimum of one lot. There is no guarantee as to the

depth of the market, not is there any guarantee that an on-going bid/ask spread

will be made in every market.

• The observations made herein is for informational purposes and should not be

considered investment advice nor a recommendation to trade futures. Futures

trading may be risky and one should consult a futures broker before trading.

• The indices that these contracts reference may be subject to revision. One should

not trade these futures without a through understanding of factors that might

impact the indices.

• The author will not be liable for any errors or omissions in this information, nor

will the author be liable for any losses, injuries, or damages

• As market-maker the author may have positions, bids or offers in any of the

futures discussed.


cme cs home price futures product overview

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