Prospectus: Federal Reserve Monetary Policy Winner-Takes-All Market B
[FedPolicyB replaces a similar market, FedPolicy, which operated on the IEM from October 1999 through August, 2001. The two markets differ in the following two respects: 1) treatment of inter-meeting changes in the fed-funds target rate, and 2) the set of traders who are allowed access.]
At 1:00 PM (central time), Wednesday, October 3, 2001, the Iowa Electronic Markets (IEM) will open trading in a series of contracts based on the monetary policy decisions of the Federal Reserve's Federal Open Market Committee (FOMC) at their regularly scheduled meetings. This document describes these contracts. Except as specified in this prospectus, trading rules for these contracts are the same as those specified in the Trader's Manual for the Iowa Electronic Markets.
Contracts listed in this market will initially appear in sets of three, with each set referring to a particular time interval from the day after one regularly scheduled FOMC meeting to the end of another.** The three contracts will represent the three possible FOMC decisions made regarding the federal-funds rate target -- to raise it, lower it, or to leave it unchanged. The initial listing will be for the period ending with the FOMC meeting scheduled for November 6, 2001 and will include the following three contracts:
|Code||Contract Description / Liquidation Value|
|FRup1101||$1.00 if the fed-funds rate target is higher on 11/06/01 than it was on 10/03/01; $0 otherwise|
|FRsame1101||$1.00 if the fed-funds rate target remains the same on 11/06/01 as it was on 10/03/01; $0 otherwise|
|FRdown1101||$1.00 if the fed-funds rate target is lower on 11/06/01 than it was on 10/03/01; $0 otherwise|
Listing New Contracts
Similar contracts for subsequent FOMC meetings will be introduced at the discretion of the IEM Board of Governors. Names of new contracts will follow the convention FRupMMYY, FRsameMMYY and FRdownMMYY where MMYY refers the the month and year of the relevant FOMC meeting. The schedule of FOMC meetings can be found at the Federal Reserve System's website: http://www.federalreserve.gov/fomc/#calendars
On May 31, 2012, the IEM began listing contracts covering three month periods. These contracts use the naming convention FRupmmyyQ, FRsamemmyyQ, FRdownmmyyQ, where mmyy refers to the month and year of the relevant FOMC meeting and Q denotes that the beginning of the contract period is the meeting held one quarter (three months) previous to that date. For instance, the contract FRup0912Q will pay $1 if the fed-funds rate target set at the September 2012 FOMC meeting is higher than the rate set at the June 2012 FOMC meeting.
The Directors of the IEM reserve the right to introduce new contracts to the market as spin-offs of existing contracts. When a contract spin-off occurs, an original contract will be replaced by new contracts which divide the payoff range of the original contract into sub-intervals. For example, a contract FRdown1101 might be spun off into two contracts, FR25dn1101 and FR50dn1101, with FR25dn1101 having a payoff of $1.00 if the target rate decrease is by fewer than 50 basis points and FR50dn1101 having a payoff of $1.00 if the target rate decrease is by 50 or more basis points. No holder of the pre-spinoff contracts will be adversely affected. Traders will receive the same number of each of the new contracts as they held in the original, and the sum of the liquidation values of the new contracts will equal the liquidation value which would be paid to the original in the absence of a spinoff. Decisions to spin-off a contract will be announced at least two days in advance of the spin-off. The new contract names, the specifications regarding liquidation values and the timing of the spin-off will be included in the announcement. This announcement will appear as a News Bulletin on the WebEx login screen.
Liquidation values will be set according to the contract descriptions. For example, if, at the close of the regularly scheduled FOMC meeting in month mmyy, the target for the federal-funds rate has risen since the last regularly scheduled meeting, each FRupMMYY contract held by a trader will be redeemed for $1.00, while the FRsameMMYY and FRdownMMYY contracts will expire with a $0.00 redemption value.
Similarly, contract liquidations for "mmyyQ" contracts will be determined by whether rates have changed during the three month period. For example, if, at the close of the regularly scheduled FOMC meeting in month mmyy, the target for the federal-funds rate has risen since the meeting held three months previous, each FRupmmyyQ contract held by a trader will be redeemed for $1.00, while the FRsamemmyyQ and FRdownmmyyQ contracts will expire with a $0.00 redemption value.
Note that liquidation values will depend solely on a comparison of the interest rate target announced at the end of a regularly scheduled FOMC meeting with the target in place on the day after the preceding regularly scheduled FOMC meeting (or three month period if the contracts are "mmyyQ" contracts). Thus, it is the cumulative effect of all changes made to the federal-funds rate target, both during the inter-meeting period and at the period ending FOMC meeting, which determines liquidations values. Decisions regarding other monetary policy issues or instruments will not have any direct bearing on those liquidation values.
If the FOMC specifies an interval as its target rate, we will use the midpoint of that interval to determine liquidation values. For instance, if the target is specified as "0 to 1/4 percent", we will use 1/8 as the value for determining movements in the target rate.
The practice of the FOMC, initiated at the May 18, 1999 meeting, has been to release a public announcement shortly after each regular meeting describing the funds rate target decision. (See http://www.federalreserve.gov/boarddocs/press/General/2001/.) So long as that practice continues, this public announcement will be the official source of FOMC policy decisions for purposes of determining liquidation values. If no such statement is released by the FOMC, the Wall Street Journal will become the official source. Specifically, the most definitive statement of FOMC actions appearing in the three consecutive issues of the WSJ (Central Edition) after the close of the FOMC meeting will be taken as the policy decision. If the decision of the FOMC remains unclear even after three consecutive WSJ issues, the outcome "fed-funds rate target remains unchanged" will be declared the result for purposes of determining liquidation values.
The judgment of the IEM Board of Governors will be final in resolving questions regarding the nature of the FOMC decision, including questions arising from typographical or clerical errors.
Trading in a set of contracts will continue for as much as two days beyond the end of the meeting on which those contracts are based. If an official announcement of the FOMC decision is made at the end of the meeting or within two days thereafter, the market will close and contracts will be liquidated as soon as is possible after the appearance of that announcement. If no official announcement has been made by 5:00 PM Central Time on the second business day after the end of the meeting, the market will close to further trading at that time. The following business day a decision regarding liquidation values will be made by the Board of Governors of the IEM based on reports appearing in the WSJ, with liquidations occurring shortly thereafter.
Bundles consisting of one of each of the three contracts, FRupMMYY, FRsameMMYY and FRdownMMYY (or FRupmmyyQ, FRsamemmyyQ and FRdownmmyyQ), associated with each FOMC meeting can be purchased from or sold to the IEM system at any time at the price of $1.00 per bundle. Note that, regardless of the announced FOMC policy decision, the liquidation values of the three contracts in a bundle will total $1.00, the same as the price at which the bundles can be bought or sold. (Note that if any contracts have been spun off, the bundles will consist of the expanded set of contracts.)
The bundles will be designated FR1$MMYY (or FR1$mmyyQ), where the suffix MMYY identifies the month of the FOMC meeting. To buy bundles at the fixed price of $1.00, select the option "FR1$MMYY (buy at fixed price)" under "Buy Bundles" on the "Market Order" drop down menu of the market trading screen. And to sell bundles at that fixed price, select the option "FR1$MMYY (sell at fixed price)" under "Sell Bundles"
Full bundles may also be purchased and sold as a set at current market prices rather than the fixed price of $1.00. To buy a market bundle at current ASK prices, use the "Market Order" option as above but select the option "FR1$MMYY (buy at market prices)". To sell a bundle at current BID prices, select the option "FR1$MMYY (sell at market prices)".
Current and newly enrolled IEM traders with US$ denominated IEM accounts will automatically be given access rights to the Federal Reserve Monetary Policy Market.
Access to the contracts is achieved by selecting "FedPolicyB" from the "Market Selection" pull down menu.
Funds in a trader's cash account are fungible across markets so new investment deposits are not required. Additional investments up to the maximum of $500 can be made at any time. New traders can open accounts using the IEM OnLine Account Application page at https://iemweb.biz.uiowa.edu/signup. There is a one-time account registration fee of $5.00, and investments are limited to the range of $5.00 to $500.
Requests to withdraw funds may be submitted at any time by completing the IEM's Online Withdrawal Request form or by completing and mailing the paper version of the request form. Additional information about requesting withdrawals is available at tippie.uiowa.edu/iem/accounts/withdrawals.html.
** On May 31, 2012, the IEM began listing a new contract type in addition to its original contracts. These new contracts cover three month periods and include the designation "Q" at the end of the contract name.