Federal commodity regulators yesterday created a new way to make money from changes in interest rates by authorizing trading in futures contracts for bank certificates of deposits.
The new investment vehicle will be bought and sold beginning July 9 on the New York Futures Exchange, the fledgling commodity market started by the New York Stock Exchange.
The Commodity Futures Trading Commission yesterday unanimously approved NYFE's CD futures contract over objections from two rival markets that are seeking authority to trade their own certificates of deposit contract. t
Executives of the Chicago Board of Trade and Chicago Mercantile Exchange complained that the CFTC was showing favoritism to NYFE by approving its contracts before acting on their applications.
The marketing of CD futures contracts is the latest extension of traditional commodity futures trading authorized by federal regulators. A futures contract is the right to buy or sell a specified amount of some commodity at a future date at a fixed price.
Just as with corn, soybeans or silver, a CD futures contract will authorize the buyer to get a certificate of deposit from a bank at a predetermined price or interest rate.
The CD contract is for $1 million worth of 90-day certificates of deposit from 10 of the nation's biggest banks.
Prices of CD futures will be quoted as a discount from the face value, explained Dr. Frank Jones, senior vice president and chief economist of NYFE; thus if banks are offering CD's bearing 11.8 percent interest, CD futures will be quoted at 88.32.
If interest rates go up, the price of the futures contract will go down. A person who buys a CD futures contract will lose money when rates go up, because the purchased CD will carry a lower interest rate than currently paid. If interest rates go down, the buyer will profit by getting a CD that pays more interest than current rates.
In practice the overwhelming majority of CD futures traders will not actually acquire a bank certificate of deposit, but will make their money trading the futures contracts.
Big denomination certificates of deposit are issued by banks to raise money for short-term use. There is already active over-the-counter trading in bank CD's.
Jones said banks themselves are expected to be major users of the new CD futures markets. The banks can protect themselves against changes in interest rates by selling CD futures several months in advance.
Individual investors also are expected to speculate on interest rates by buying CD futures when they expect rates to go up or selling them when they think rates will go down.
Yesterday's decision by the CFTC made the New York Futures Exchange the winner in a three-way race to launch the potentially lucrative CD futures business.