Prospectus: Federal Reserve Monetary Policy Market
[FedPolicy closed 9/30/01. Replaced 10/3/01 by FedPolicyB with revised treatment of inter-meeting rate changes and broader trader access.]
At 1:00 PM (central standard time), Monday, October 25, 1999, 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 Contracts listed in this market will initially appear in sets of three, with each set referring to a particular FOMC meeting. The three contracts will represent the three possible FOMC decisions made at that meeting regarding the federal-funds rate target -- to raise the target, to lower it, or to leave it unchanged. The initial listing will be for the FOMC meeting scheduled for November 16, 1999 and will include the following three contracts:
| Code | Contract Description / Liquidation Value |
| FRup1199 | $1.00 if the fed-funds rate target rises; $0 otherwise |
| FRsame1199 | $1.00 if the fed-funds rate target remains unchanged; $0 otherwise |
| FRdown1199 | $1.00 if the fed-funds rate target falls; $0 otherwise |
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. 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.
Contract Liquidation 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 FOMC announces a decision to raise the target for the federal-funds rate, then 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.
Note that liquidation values will depend solely on decisions made at the specific regularly scheduled FOMC meeting to change or not change the federal-funds rate target from its level as of the start of that same meeting. Neither changes in the federal-funds rate target made during the inter-meeting period nor decisions regarding other monetary policy issues or instruments will have any direct bearing on those liquidation values.
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 .
Market Closing 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 CST 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.
Unit Portfolios Bundles, consisting of one of each of the three contracts (FRupMMYY, FRsameMMYY and FRdownMMYY) 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 $1.00, the same as the price at which the bundles can be bought or sold.
The bundles will be designated FR1$MMYY, where the suffix MMYY identifies the month of the FOMC meeting. To buy and sell bundles, select the FR1$MMYY bundle from the "Market Order" drop down menu on the market trading screen.
Access Current and newly enrolled IEM traders with US$ denominated IEM accounts and academic affiliations will automatically be given access rights to the Federal Reserve Monetary Policy Market.
Access to the contracts is achieved via 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 http://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 (www.biz.uiowa.edu/iem/accounts/withdrawalrequestform.html) or by completing and mailing the paper version of the request form. Additional information about requesting withdrawals is available at the IEM website at http://www.biz.uiowa.edu/iem/accounts/withdrawals.html.
Addendum (03/20/01) On this date two web links in the body of the prospectus were updated. The link http://www.bog.frb.fed.us/fomc/ was changed to http://www.federalreserve.gov/fomc/#calendars and the link http://www.federalreserve.gov/boarddocs/press/General/1999/ was changed to http://www.federalreserve.gov/boarddocs/press/General/2001/.
