The record volume of 1,247 contracts in January for CME weather futures and options compares to just 11 contracts traded in January 2002. After trading activity in weather related contracts on the CME rose over the course of the year, the January record was aided by recent frigid temperatures in the middle and eastern portions of the United States last month, according to the two organizations.
"This unprecedented growth in the size and liquidity of the weather risk market on the CME demonstrates that these instruments are playing an increasingly vital role in the financial health of businesses in a variety of industries," said Valerie Cooper, Executive Director of WRMA. "As this past month illustrates, weather-related futures and options contracts are crucial business tools for any enterprise where weather is a factor in its success, from sole proprietorships to Fortune 500 companies. For many, weather risk tools represent the difference between profitability and financial failure."
The worldwide weather risk market totals over $11.8 billion in coverage. Initially focused on the energy industry, the market for weather derivatives has grown to include participants in such diverse sectors as retailing, agriculture, construction, transportation and managed funds.
"Chicago Mercantile Exchange pioneered exchange-traded weather derivatives with the launch of our heating degree day index in 1999 and cooling degree day index in 2000," said CME Chairman Terry Duffy. "During the past several months, there has been a growing interest in the weather-related futures and options traded on CME. Ultimately, as more customers begin to understand the benefits of these products, we believe they have the potential to become an integral tool for anyone in any business or industry that faces risks associated with changing weather conditions."
In the first few years of weather trading, WRMA members and their customers had only two choices for this process: either insurance contracts, or over-the-counter derivative instruments. Nine months ago, when the CME enlisted Wolverine Trading LP as the Lead Market Maker for the weather contracts, customers discovered more accessible pricing and trading opportunities on CME.
"For corporate risk managers in weather sensitive businesses and for institutional commodity investors, this is a market that simply cannot be ignored," said Scott Mathews, who chairs WRMA's Americas Committee. "This rapid expansion on the CME over such a short period sets the stage for new weather products and for new participants to enter the field."
For more than 100 years futures markets have made possible the efficient transfer of ownership and price risks related to tangible commodities such as livestock, grains and metals. Financial futures, first developed by CME in 1972, commoditized currencies and were followed by interest rates and stock indexes-enabling the hedging of risks related to the fluctuation of these key economic benchmarks. Weather risk instruments, which became popular as the U.S. electric utility industry deregulated during the mid-1990s, have turned temperature, precipitation and other weather phenomena into commodities as well.
About CME
Chicago Mercantile Exchange Inc. (www.cme.com) is the largest futures exchange in the United States and the second largest exchange in the world for the trading of futures and options on futures. As an international marketplace, CME brings together buyers and sellers on its trading floors and GLOBEX® around-the-clock electronic trading platform. CME offers futures and options on futures primarily in four product areas: interest rates, stock indexes, foreign exchange and commodities. The exchange moves an average of about $1.8 billion per day in settlement payments and manages $27.4 billion in collateral deposits. CME is a wholly owned subsidiary of Chicago Mercantile Exchange Holdings Inc. (NYSE: CME).
About the Weather Risk Management Association
Founded in 1999 by some of the leading companies in the industry, the Weather Risk Management Association (WRMA) is an international trade organization dedicated to promoting the industry both to those within it and to end-users. As a part of its mission, WRMA initiates surveys of the industry, advocates the standardization of contracts and other documentation used for transactions and sponsors forums and conferences around the world for members to meet and discuss a range of topics such as international markets, data collection issues and tax and legal matters.
