Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

CME weather volumes down in 2011 but niche contracts up significantly


The Chicago Mercantile Exchange (CME), which is the main location that weather futures and derivatives are traded, has experienced a significant drop in the volume of contracts traded across the exchange during 2011 when compared to the prior year. The CME has been experiencing good growth each year but 2011 saw a decline in volumes of 36% across their whole suite of weather products. It’s not all doom and gloom though as some of their niche weather contract lines saw huge growth.

Across the whole CME weather suite of products volume dropped from 459, 702 contracts traded in 2010 down to 294,905 in 2011. The majority of the decline came from the temperature linked weather derivatives and futures which are the core staple of the CME’s weather product line. The volume of temperature contracts declined from 455,702 in 2010 to 290,655 in 2011.

What’s the reason for the decline? Hard to say, there are some obvious reasons that this decline could have been so steep though. One reason is the weather experienced in 2011 and the difference to 2010. 2011 did see some significant weather extremes although we would have thought that hedging of weather risk would have become more important, although positions may have reversed from previous year.

A contact at the CME told us that there are a number of factors likely to have impacted CME weather volumes but didn’t expand (so we assume he meant the weather), but he also added that the CME has heard from industry participants that in the current economic climate some companies and investors are more risk averse to alternative investments such as weather. That’s interesting as we are not really seeing the same in the ILS and catastrophe bond space.

Despite this steep decline in temperature contracts traded on the exchange, the CME has seen significant success in some other weather product lines. The table below shows where some of these successes have been.

Product 2010 volumes 2011 volume % Change
European CAT contracts 1,125 3,775 236%
Pacific Rim contracts 1,000 8,500 7,500%
Snowfall contracts 329 510 55%
Hurricane contracts 4,000 4,250 6%

So we’re assuming that the main reason for the steep decline in overall and temperature contracts traded is predominantly an effect of differing weather patterns combined with the economic climate during 2011. We’re interested in the opinions of anyone involved in the weather markets so please let us know what you think in the comments below.

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