HEX prepares for weather derivatives launch

The Helsinki securities and derivatives exchange (HEX) will start trading weather derivatives from tomorrow.

The exchange's weather risk contracts will take a similar form to those offered by the London International Financial Futures and Options Exchange (Liffe) – to date the only exchange-traded market for weather derivatives in Europe. But so far, US energy firm Aquila has traded one contract of five lots on the London indexes; with contracts still not traded in Paris and Berlin – over half a year since Liffe launched the contracts.

“We have not been discouraged from developing the exchange-traded product, despite Liffe’s failure to trade more than one contract since its December launch,” said Jyrki Kiviniemi, HEX project manager for weather derivatives. “Although our index is similar, we have a very different market structure to Liffe," he added. "If an energy company wants to buy Liffe weather futures, it has to go through a market-maker. But HEX will allow energy companies direct-trading member status, which avoids unnecessary third-party complication.”

HEX will initially offer monthly contracts based on one location – Helsinki – although it may expand to other locations across the Nordic region, depending on client demand. The exchange will start publishing its index, based on the monthly mean daily average temperature, once trading starts. This index is calculated by taking the mid-point between the minimum and maximum temperature of the day, which, when combined with the averages for the month to date, form a cumulative average for the month.

HEX said it focused on average temperature rather than the usual heating degree-/cooling degree-day format, used by the over-the-counter market, as it believes average temperature has the benefit of consistency all year round.