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CX Futures Exchange, L.P. 

Rule 40.2 New Contract Submission—Daily Aggregate Rainfall Index Swaps Contract

Submission #2019-02

March 19, 2019

CX Futures Exchange, L.P. (“CX” or “Exchange”) hereby certifies its listing of the following 

new contract: Daily Aggregate Rainfall Index (“DARI”) Swaps Contract. This submission is 

being made in accordance with Section 5c(c)(1) of the Commodity Exchange Act, as amended, 7 

U.S.C. §1 et seq. (“Act”) and Commodity Futures Trading Commission (“Commission”) Rule 

40.2 thereunder:

1. The text of the proposed contract terms and conditions is attached. 

2. The proposed listing date of the contract will be within 45 days of the effective 

date of the terms and conditions of the contract, but no less than two days

following receipt by the Commission of this submission.

3. Attached, please find a certification that: (1) the contract complies with the 

Commodity Exchange Act, and the Commission’s regulations thereunder; and (2) 

that CX posted on its website a notice of this pending product certification with 

the Commission and a copy of the submission, concurrent with the filing of this 

submission with the Commission.

4. A concise explanation and analysis of the product and its compliance with 

applicable provisions of the Act, including core principles, and the Commission's 

regulations thereunder, appears below. 

5. Confidentiality for this submission is not requested.

CONCISE EXPLANATION AND ANALYSIS OF THE PRODUCT AND ITS 

COMPLIANCE WITH APPLICABLE PROVISIONS OF THE ACT, INCLUDING 

CORE PRINCIPLES AND THE COMMISSION’S REGULATIONS THEREUNDER

Pursuant to Commission Rule 40.2(a)(3)(v), the following is a concise explanation and analysis 

of the product and its compliance with the Act and Commission rules. 

I. Introduction

CX Futures Exchange, L.P. (“CX” or “Exchange”), is adding a new swaps contract to its 

complex of weather-related contracts. This contract is a swap (cash-settled option) on rainfall. 

Specifically, Daily Aggregate Rainfall Index (“DARI”) Swaps Contracts are swaps (cash-settled 

options) that offer a contingent claim payout dependent upon, and as a function of, the daily 

aggregate rainfall amount measured by the U.S. National Weather Service at various locations 
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(typically airports) near major U.S. metropolitan areas. As with CX’s other weather-related 

contracts, including its named storm and rainfall contracts, the DARI contract will provide an 

opportunity for participants to hedge commercial risks arising from specified weather conditions. 

The contract specifications and trading mechanics of the rainfall contract are identical to CX’s 

Daily Aggregate Snowfall Index (“DASI”) contracts except that the undelying measurement is 

based upon measured rainfall rather than measured snowfall.

Like all other CX contracts, trading is on a principals-only basis, and all participants are selfclearing. Like all CX contracts, the Original Margin amount for the contract always equals the 

maximum at-risk amount. Accordingly, the risk position of all participants is fully margined in 

accordance with the CX Clearinghouse, L.P. (the “Clearinghouse”) Order of Registration and its 

rules.

CX developed the DARI contract in conjunction with meteorological experts at AccuWeather.

CX believes that the DARI contract is in accordance with the standards of the Commission’s 

Guideline 1, now found in Appendix C to Part 38 of the Commission’s rules, including as 

described in greater detail below, the ability to use the rainfall contract on more than an 

occasional basis for mitigating commercial risk.

CX has considered the Core Principles and Commission rules thereunder. Because features of

the DARI contract are identical to contracts previously listed by CX, in accordance with the 

requirements of Commission Rule 40.2, CX notes that: 

II. Core Principle 3 

Core Principle 3 and Rule 38.200 provide that a DCM shall not list for trading contracts that are 

readily susceptible to manipulation. The DARI contract is a cash settled contract based upon the 

objective determination of the daily aggregate rainfall amount occurring at a specific location on 

a specific calendar day.

The cash settlement index of the DARI contract is not readily susceptible to manipulation due to 

its objective nature and its determination by a government agency. The National Weather 

Service is an agency of the U.S. government and the CLI report(s) used as the primary settlement 

source are publicly available, published within 24 hours of the contract’s Final Settlement Date

and based on objective information. No individual can manipulate or distort this information.

Nor is any individual able to affect prices on CX by manipulating these reports. Thus, the cash 

settlement determination is based upon publicly available, timely information that is reliable and 

widely accepted as an authoritative source for this information.

As with its existing weather-related contracts, CX has retained authority to use other sources of 

information for determining the settlement number, i.e., the rainfall amount in its discretion, if 

the best interest of the market so requires. This authority would only be used in the unforeseen 

event that National Weather Service reports were unavailable, or transmission of such report was 

corrupted. Such a secondary source would also be objective and verifiable. CX would document 

any such decision.
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The contract’s design also renders the contract not readily susceptible to manipulation through 

abusive trading strategies. First, the contract is not readily susceptible to spoofing or similar 

forms of trade practice abuse because bids, once submitted may not be withdrawn (although they 

may be modified.) This renders spoofing an ineffective strategy. Similarly, excessively bidding 

one Strike Level in an effort to affect the price is discouraged because the size of the payment 

cannot be unduly influenced by one trader; the relative size of the counter positions taken by 

other market participants primarily determines the Final Settlement Price. Additionally, the 

Final Settlement Price methodology employed removes any possible distortion of Final 

Settlement Prices due to excessively large bids by providing for a minimum .01 DARI

Conversion Factor on all “out-of-the-money” positions; algorithmically this caps payouts at a 

maximum of 250:1 ratio. In light of the low dollar value of the contract, this limitation 

effectively limits the incentive to attempt to manipulate the market in this way.

The DARI contract has specified delivery dates that correspond to the calendar day at the rainfall

measurement reporting station. Each DARI contract will be available for trading until 5:00 PM 

Eastern Time on the Trading Day prior to the Final Settlement Date. 

CX has provided for a position accountability level of 10,000 contracts for all DARI Contracts 

combined.

A. Risk mitigation purpose of the contract

CX designed the DARI contract with the assistance of informed experts in the field and looked at 

the experiences of other weather-related contracts that have been listed on CX and other 

designated contract markets. The design of the terms and conditions is intended to mitigate the

financial risks related to rainfall. The salient features of the contract are designed to enable the 

contract to be used on more than an occasional basis for the mitigation of commercial risks 

relating to rainfall, to reduce basis risk, to increase liquidity, and to ensure that the contract is not 

readily susceptible to manipulation.

CX has previously noted that precipation-based weather contracts enable “energy and tourism 

companies as well as state and local governments to more effectively manage their exposure to 

adverse weather by providing a means to transfer their inherent risk.”1 In addition to those risks, 

other risks that can be hedged by the DARI contract include costs for rainfall related services,

such as flooding, drought, revenue losses due to lower customer traffic, such as retail shopping 

establishments, and losses due to the disruption of the physical transportation and other 

infrastructure.

Specifically, the DARI contract is designed to mitigate economic risk arising from rainfalls in 

both above and below threshold amounts, i.e. the “Strike Level”. Examples include a business 

that has costs associated with flooding if it rains 1 inch or more; a retail store or movie theater 

that has lost revenue due to decreased foot traffic when rainfall exceeds 0.25 inches; or a 

vacation home renter whose vacation is negatively impacted by rainfall. Inversely, by 

 

1 See, CME “Snowfall Futures and Options Fact Card.”
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purchasing options with a zero Strike Level, the farmer with added costs due to irrigation or crop 

loss is able to hedge its risk that rainfall will not occur. 

1. Delivery location

Although each measurement location is analogous to a specific “delivery point,” deliverable 

supplies are not a relevant consideration for this contract nor is location relevant to construction 

of a pricing index. CX will list contracts at locations that have a NWS measuring station and 

that issue the relevant daily rainfall reports. Additional factors that may be considered are: (1) 

whether rainfall is likely to be a meaningful factor in commercial activity for that area; (2) 

metropolitan area population; (3) representative geographical diversity; and (4) market liquidity

limitations. Except for New York’s Central Park reporting location, the DARI contract’s 

measurement locations are major airports located in proximity to the listed city. These locations 

are well defined and almost immediately recognizable for most commercial market users. 

CX intends to list approximately 80 locations at the time of market launch, and may list any 

location that has adequate weather reporting capabilities to calculate the DARI index value. All 

delivery locations will be published on the CX website and made available via the Cantor Direct 

System. This initial list of about 80 locations provides highly localized hedging opportunities

and reduces basis risk both by more precisely capturing the affected area of each rainfall and 

permits individual commercial interests to customize and balance the concentration of 

geographical risk that their business profile might inherently have.

2. Contract pricing

For the DARI contract CX will use the same asynchronous, single-sided call market mechanism

used in the DASI snowfall contract. This market structure is especially efficacious in weather 

markets, where there is no tradeable underlying instrument.As implemented for the DARI

contract, the one-sided call market provides participants an opportunity to place bids into the 

market (and at that time depositing Original Margin equal to the maximum at-risk amount) with 

all bids converted into contract positions upon Termination of Trading. Once placed, bids may 

not be withdrawn and a contract position, once established, can be liquidated only by final cash 

settlement.2 All DARI contract positions open at the time of Final Settlement will be 

automatically exercised through book entry with no action necessary on the part of the holder.

The current value of each Strike Level, based on current bids in the market, will be displayed on 

CX’s web-based trading interface. For bids placed 7 or more days before contract expiration, the 

DARI contract provides that all bid contract premium prices and required Original Margin

deposits are $1.00 per contract, which is also its notional value. Because the forecast accuracy of 

expected rainfall amounts improves significantly as the expiration date draws to within the 7-day

forecast window (unlike for Atlantic Named Storms), to compensate for the accretive value 

contained in this information, the DARI contract provides for an increasing contract premium 

 

2 Because of the asynchronous nature of the single-sided call auction mechanism, once a position is established, it 

may only be exited via the DARI contract’s Final Settlement process. This is designed to mitigate the detrimental 

effects on market information and pricing of traders placing large bids in the market and then cancelling such bids.
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price per contract, and corresponding Original Margin deposit, inside of the 7-day forecast 

window. Table 1 shows this relationship.3

As provided in the DASI contract, after placing a bid, market participants may adjust their 

positions by switching from the current position’s Strike Level to another Strike Level for the 

same delivery day and location by depositing any additional margin that may be required for the 

contract. This will enable participants to fine-tune their hedges after they obtain a position at a 

given Strike Level and shift their positions between Strike Levels as rainfall forecasts or market 

prices change. This includes, if desired, positions switching from a specified rainfall Strike Level

to the zero “no rain” Strike Level. This ability to modify bid Strike Levels will assist the price 

discovery process and further hedging efficacy.

3. Payout for losses

The payout structure for these rainfall options is identical to that used for the DASI snowfall 

contract as shown in Tables 2 and 3. Factors are approximately inversely proportional to the 

difference, measured in one-quarter inch increments, by which the DARI rainfall amount

exceeds the Strike Level.

III. Core Principle 9—Execution of Transactions

As noted above, the trading mechanics for the DARI contract are identical to the DASI snowfall 

contract. Each DARI contract opens at 5:00 PM Eastern Time on the first Trading Day. The 

Final Settlement Date for each contract may be any calendar day that is not more than ninety-one

(91) days and not less than one (1) day from the current Trading Day as made available to 

Participants on the CX Direct System. Termination of Trading for each contract occurs at 5:00 

PM ET on the Trading Day that precedes the Final Settlement Date. The system is available 

continuously (24 hours x 7 days per week) except that CX may reduce its availability for the 

purposes of technology maintenance, abbreviated holiday schedules, and as otherwise required 

by market or environmental considerations. Any such changes shall be posted on the Exchange 

website.

During the open period, market participants may bid for contracts by specifying the Ticker 

Symbol and DARI Strike Level of the contract. All bids will be at the contract premium price per 

contract specified in Table 1 and require Original Margin to be deposited with the Clearinghouse 

equal to the per-contract amount. Any such bids, once accepted by CX, may not be canceled.

However, the Strike Levels of bids received by CX may be modified provided that it is still for 

the same measurement station and Final Settlement Date. The price difference, if any, between 

the original bid price and the contract premium price per contract in effect at the time of the bid 

 

3 The increase in Original Margin deposit is not designed to precisely account for differences in forecast accuracy, 

which is statistically indeterminate and unstable across time, but rather provides a known schedule that market 

participants will utilize to determine the timing of their bid placement. CX will monitor how market participants 

utilize the differentials in Table 1 and, if necessary, modify them in subsequent contract filings. Nevertheless, in all 

cases the amount in Original Margin will be no less than the at-risk amount.
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modification (as specified in Table 1) must also be placed as Original Margin on deposit with the 

Clearinghouse.

The Final Settlement Price of the positions at various Strike Levels is a function of how many 

positions are aggregated at each Strike Level versus the total number of positions. Strike Levels 

that are in-the-money and closer to the DARI will have a higher Final Settlement Price than 

positions that are in-the-money but further from the DARI (as determined by Tables 2 and 3). 

Core Principle 9 and CFTC Rule 38.500 provide that a designated contract market shall provide 

a competitive, open, and efficient market and mechanism for executing transactions that protects 

the price discovery process of trading in the centralized market. The DARI contract provides for 

trading on a centralized, open and competitive market in that all prices are derived from trading 

on CX and not through pre-arrangement or the private negotiation of two parties4on a 

centralized market that is a “trading facility.”5 

IV. Core Principle 11—Financial Integrity of Transactions

Core Principle 11 and Rule 38.601 require that a contract be subject to mandatory clearing. The 

DARI Contracts are subject to mandatory clearing on the same terms as all other contracts

cleared by the Clearinghouse.

V. All Remaining Requirements

All remaining Core Principles are satisfied through operation of CX and the Clearinghouse under 

the Rules, processes and policies applicable to the other contracts traded thereon. Nothing in this 

contract requires any change from current rules, policies, or operational processes. 

* * * * *

Based on the above analysis, CX certifies the Daily Aggregate Rainfall Index Swaps Contract as 

consistent with, and in accordance with the Core Principles of Section 5 of the Commodity 

Exchange Act, and rules thereunder.

 

4 The Commission has always analyzed “competitive markets” as those in which the price is determined through the 

centralized market and not through private negotiations. The Commission has said, “Proposed §38.502 

implemented the core principle’s requirement that DCMs provide a market and mechanism for executing 

transactions that protects the price discovery process of trading in its centralized market. The rule proposed a 

centralized market trading requirement for all contracts listed on a DCM.” “Core Principles and Other Requirements 

for Designated Contract Markets; Final Rule," 77 Fed Reg. 36612 (June 19, 2012)(“DCM Rulemaking”) at 36643.

The price for these contracts, determined at the time of settlement, is determined though the central market and not 

as a result of any non-competitive trading activity.

5

Id. at 36622. 

Transactions in the DARI contract occur as the result of the interaction of multiple bids that are matched (and 

settled) through the operation of a pre-determined, non-discretionary algorithm, clearly meeting prong (ii) of the 

definition “Trading Facility.”. See, section 1a (51) of the Commodity Exchange Act.
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CERTIFICATIONS PURSUANT TO SECTION 5c OF THE 

COMMODITY EXCHANGE ACT, 7 U.S.C. §7A-2 AND 

COMMODITY FUTURES TRADING COMMISSION RULE 

40.2, 17 C.F.R. §40.2

I hereby certify that:

(1) the Daily Aggregate Rainfall Index Swaps Contract complies with the 

Commodity Exchange Act, and the Commodity Futures Trading Commission’s 

regulations thereunder; and

(2) concurrent with this submission, CX Futures Exchange, L.P. posted on its 

website: a notice of this pending product certification with the Commission and a 

copy of this submission, concurrent with the filing of this submission with the 

Commission.

_________________________

By: 

Title: 

Date: 

Nolan Glantz

COO

3/19/2019