CME and UK's Met Office to launch European weather derivatives

The Chicago Mercantile Exchange (CME), the UK's Met Office and its joint venture company, Weather Xchange Limited (weatherXchange), have unveiled plans to jointly develop global weather futures and options contracts.

The three companies plan to introduce a series of CME-Met Office futures and options on futures contracts based on weather indexes, including heating degree-days (HDD) and cumulative average temperature (CAT). The new global weather contracts for six initial sites in Europe should be launched later this year, pending review and approval by the Commodity Futures Trading Commission. All weather futures and options created through this relationship will trade on the CME.

The CME also signed a letter of intent with the Met Office and weatherXchange to make an initial equity investment of $800,000 in weatherXchange in the third quarter of 2003. Depending on the trading activity generated by the contracts and other performance measurements, the CME's investment in the venture could rise to as much as $1.8 million over the next three years. As part of the agreement, the CME will also be granted one seat on the weatherXchange board of directors.

The CME introduced its weather product line by launching US-based weather futures and options contracts in 1999. "Year-to-date volume for these contracts is up nearly 400% from the same time last year, with both volume and the number of participants continuing to grow," said CME chairman Terry Duffy.