Credit Lyonnais to trade weather risk

Credit Lyonnais has set up a weather derivatives unit, adding to the recent thrust of new entrants into the embryonic market. Peter Brewer, who joins Credit Lyonnais from US energy firm Aquila, will head the London-based weather desk.

Credit Lyonnais’ derivatives arm, Credit Lyonnais Rouse Derivatives, already trades a variety of energy products, including crude oil, jet fuel and gas oil. “It’s a natural extension for the bank since they already have a strong energy derivatives business and cater to companies whose industries are often affected by the weather,” Brewer told RiskNews.

Although Brewer expects most weather demand to come from energy companies, he said more corporate end-users are also buying weather protection. “Market liquidity and volumes have really picked up over the last year or so and at Aquila we were sometimes doing four trades an hour.”

But some people believe the market is saturated. Although IntesaBCI and BNP Paribas have pulled back from the market, South Africa’s Gensec Bank, Italy’s Banca Nazionale del Lavoro and New York-based Marsh & McLennan Enterprise Risk have all set up desks in the last few months. “We now need more end-users prepared to realise the benefits of hedging their weather exposure, not more weather desks,” said Hans Esser, managing director of Dusseldorf weather risk consultancy FinanzTrainer.com.

Brewer was formerly a weather risk origination manager at Aquila, and will start in his new position next Tuesday. He also ran his own consultancy, Weather Risk Advisory, which folded last September, and currently chairs the Weather Risk Management Association’s (WRMA) weather data protocol committee.

WRMA, the Washington DC-based trade body for weather risk managers, plans to develop a standardised format for trading weather derivatives, Weather ML, based on extensible mark-up language. At the moment most weather derivatives communication relies on phone, e-mail and fax, making it manually intensive. “Weather ML will facilitate automated trade processing, cutting costs and reducing data errors,” Brewer said. “And as trade volumes rise, this will become increasingly important.”