ICE enters weather risk market

IntercontinentalExchange (ICE), the Atlanta-based electronic commodity market-place, has launched weather derivatives on its trading system. ICE said its weather derivative products would provide energy market participants with a valuable tool for managing energy volume or demand risk in the market-place. These products can also be used to support a variety of energy-related, cross-product and risk-shifting strategies utilised in a number of industries.

Intercontinental weather derivatives will be financially settled on the basis of five-day average temperature readings for either the current week or the next forward week. Settlement temperatures will be measured by the National Weather Service at five major airport weather stations located throughout the US: Chicago, O'Hare; Dallas, Fort Worth; New York, La Guardia; Philadelphia, International; and Sacramento, Executive.

Settlement temperatures will be gathered and reported to ICE participants by EarthSat, a US vendor of weather data, and contracts will be tradable in multiple contract quantities. Each contract will be sized to settle at $10,000 per degree of deviation from the strike price. The products were developed in conjunction with US energy company Aquila and other unnamed weather market participants.

"Our expansion into the weather derivative market-place is not only an exciting development for our participants to better manage their exposure to weather factors, but is also a great opportunity for Intercontinental to expand into new markets," said Rafael Pirutinsky, senior vice-president of ICE. "As with all our markets, the weather derivative products grew primarily out of client demand and complement our efforts to provide a full spectrum of risk-managed products to meet the needs of users and traders of energy and metal products."

Ravi Nathan, general manager of weather at Aquila and president of the Washington DC-based Weather Risk Management Association, added: "The five-day average settlement period means these products are well aligned with the National Weather Service mid-range temperature forecasts (MRF) – a key weather reference source for most energy traders and weather traders alike. Intercontinental weather products… have the potential to become the first crossover product that will be used by traders on the weather desk and the energy desks in the over-the-counter market."