Weather derivatives mooted for Thai futures exchange

The Stock Exchange of Thailand (SET) is assessing launching weather futures and perhaps other weather derivatives in order to provide weather risk management tools in an exchange traded environment for farmers.

According to the Bangkok Post, the Thailand Futures Exchange (TFEX) would be the eventual home of the tradable weather risk contracts.

An index based approach to weather trading is the likely solution that would be chosen, but the exchanges want to validate demand and supply before any development takes place.

Weather derivatives would be attractive to a much broader set of end-users than just those in the agricultural space, with commodities, retail leisure and other sectors all potentially able to take advantage of any move to make weather tradable in Thailand.

Market makers would be assigned to generate liquidity if a tradable weather index is created on the exchange, according to the Bangkok Post article.

Weather derivatives and weather futures have been traded on exchanges such as the Chicago Mercantile Exchange (CME) for many years, but they have never built the kind of traction that had been envisaged when the instruments were first developed.

The weather risk transfer market has become highly customised in recent years, with reinsurance and insurance-linked securities (ILS) specialists providing capacity to back complex structured deals, with triggers linked to weather conditions and variability.

These are often structured as a derivative or swap, but can be so complex that a simple index trade on an exchange no longer features as part of them.

Traded weather futures and options continue to be quite broadly used in energy markets, by gas suppliers, electricity generators, and the like.

For Thailand, a country where weather exposure is a significant risk, whether temperature or rainfall related, having a simple, transparent, liquid and structured way to transfer weather risk on an exchange may be useful to a number of industries.