Exchange traded weather derivatives planned for China

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Recognising the need for industries to be able to hedge their weather risks using robust data and indices, alongside exchange listing and trading, the National Meteorological Information Center of China and the Zhengzhou Commodity Exchange will work together to develop derivatives products such as weather index futures.

electronic-reinsurance-ils-tradingThe two organisations have signed a strategic cooperation framework agreement under which they will jointly develop weather derivatives, such as weather index futures, as they try to unlock the value of weather data for China’s industries that face exposure to weather variability.

The aim is to make available robust, exchange listed and tradable weather indices, that allow for the construction of derivatives products to hedge weather risk through buying instruments such as futures.

Products ranging from temperature to rainfall are set to be explored, with a particular focus on making tradable weather derivatives products available to the agriculture, commodities and energy sectors.

More broadly though, the project would like to create hedging tools that could be used by broader sectors of the economy, where weather risk can impact revenues and operations.

The National Meteorological Information Center is a Chinese government department, part of the China Meteorological Administration and provides national weather forecasting and climate prediction services, as well as studying climate change, collecting meteorological information and disseminating weather data.

The Zhengzhou Commodity Exchange is one of China’s four futures exchanges and is regulated by the China Securities Regulatory Commission (CSRC).

The pair, in announcing their cooperation framework, said that authoritative and standardised data and indices are recognised to be critical in providing the necessary tools for weather derivatives and weather futures trading.

They will work together to compile weather indices and conduct feasibility research, product design, solicit market opinion and list weather index futures and other weather derivatives.

A weather derivatives market in China could provide significant utility to the country’s climate and weather exposed industries, in enabling them to hedge their exposures and trade on the weather inputs that affect their operations and profitability.

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