Liffe confirms weather trading start date

The London International Financial Futures and Options Exchange (Liffe) has confirmed that it will launch its weather futures contracts on December 10 2001. The contracts will be listed and traded on Liffe Connect, and will be the first exchange-traded weather derivatives in Europe.

But the news follows closely from the weather derivatives launch by IntercontinentalExchange (ICE), the Atlanta-based electronic commodity market-place (see - ICE enters weather risk market).The initial listing of six weather futures contracts will be settled against the monthly and winter season indexes based on daily average temperatures in London, Paris and Berlin, that Liffe introduced earlier in the year. The indexes are based on the monthly mean of daily average temperature. This is calculated by taking the midpoint between the minimum temperature of the day and the maximum temperature of the day which, when combined with the averages for the month to date, forms a cumulative average for the month.

Liffe said it has focused on average temperature rather than the usual heating degree/cooling degree days format, as it believes that average temperature has the benefit of consistency all year round. As a result Liffe said its indexes will remain relevant not only to the energy industry, but also to a wide range of other market sectors.

“We expect participants in the energy sector to be particularly attracted to these contracts. However, the unpredictability of weather impacts on many diverse sectors, including insurance and agriculture as well as the manufacturers and retailers of everything from soft drinks to cold remedies, and those involved in the organisation and provision of everything from pop festivals to package holidays. Over time this suite of contracts will grow to offer effective hedging of weather risk on a global basis,” said Ian Dudden, Liffe’s director of non-financial products.

Stuart Jones, business development manager for weather risk at Accord Energy, the trading subsidiary of UK energy company Centrica, said Accord would actively participate in the Liffe weather market.

Meanwhile, Japan’s Kansai Electric Power Company (Kepco) and Osaka Gas Company plan to structure an innovative deal where they share out profits from excessive weather variations to ensure more consistency in earnings. Effectively excess Kepco profits in hot summers - which see an increased need for air conditioning - will be shared with Osaka Gas, which usually sees lower gas demand when temperatures are high. The two companies will do the opposite in cool summers.