The Kansas City and Chicago Boards of Trade yesterday announced plans to initiate future contracts based on the Dow Jones average of 30 industrial issues.
The Kansas City exchange filed its contract market proposal with the Commodity Futures Trading Commissions yesterday. Officials of the Chicago exchange said its proposal for trading in the Dow average or the Standard & Poor's index of 500 stocks would not be ready submission to the federal agency until early next year.
The CBOT had planned a similar contract a few years ago before the CFTC came into existence. At that time the Securities and Exchange Commission rejected the proposal.
The Kansas plan calls for a contract size 50 times the Dow average.If it were 825 and the contract was trading even with the average its value would be $41.250.
Minimum margins, the earnest money deposits put up by customers, would be $1,500 for speculators and $1,000 for hedgers, a statement teleased by the exchange said.
CFTC officials would not comment on the outlook for approval of the plan, although a high level staff member expressed reservations privately about the economic benefits of the idea.
One of the initial problems with the contract the Kansas statement said, was the development of a delivery system.
Futures trading involves two types of contracts: "longs," which permit the holder of the contract to buy a certain quantity of a commodity at which require the contract holder to deliver a stated quantity of goods in the future.
Trading in the level of the Dow average would permit individuals bullish on the stock market to bet that the value of the index will rise in the future by purchasing a contract or "going long," Market bears could sell a contract or "go short" in the futures market with the expectation that the average would tumble in upcoming months.
The delivery plan of the Kansas contract committee would involve ownership - generally by the purchase by shorts who want to deliver in order to liquidate their positions - of an odd number of shares of each of the 30 stocks which make up the average.
The stocks are to be held by a stock "warehouse" - probably a broker dealer, who would issue a receipt to the short which can be delivered to the clearing association, the Kansas statement said. The clearing association would in turn deliver the receipt to the holder of the oldest long contract, who would pay for the stock and either take possession of it or order the sale of the warehoused stock certificates of his account.
Leslie Rosenthal, chairman of CBOT financial instruments committee said of that exchange's plan "We're very enthusiastic about it . . . This contract would be readily identifiable to the public, and I think it will be even better received than the futures we're trading now in Ginnie Maes mortgage interest rates, U.S. Treasury bonds and commercial paper."