WRMA launches electronic trading standard

The Weather Risk Management Association (WRMA), a global industry body promoting weather derivatives, launched its extensible mark-up language trading protocol, WXML, on Friday following a two-year development process.

Version 1.0 enables electronic processing of weather trades, allowing compatibility between internal and external systems, and is designed to reduce trading costs and operational risks. Currently, most weather risk processing is confined to in-house systems, or relies on e-mail, fax and/or telephone confirmations. WXML is free to all weather risk participants and details will be posted on WRMA’s website www.wrma.org over the next few weeks.

“As the weather derivatives market expands, all active players will need one system that is cost-effective, reliable and capable of handling more complex structures,” Paul VanderMarck, managing director of California-based weather risk software company Risk Management Solutions and chairman of the WXML committee at WRMA, told RiskNews. “Standardisation at this early stage will minimise changeover costs for existing participants, as well as encourage the entry of new participants.”

The WXML concept was conceived by Peter Brewer, who recently moved from Kansas City, Missouri-based Aquila to set up a weather desk at Credit Lyonnais. Both Aquila and Credit Lyonnais have already agreed to use WXML, as has Hetco, a Massachusetts-based energy trading company.

WXML is designed to be compatible with other XML data standards initiatives, such as FpML (financial products mark-up language), and allows data to be presented in a format incorporating business terminology that is readable by both computers and people.

The protocol can be used for calls, swaps and collars at single weather station locations, or for basket transactions, from a one-day contract up to one year.

“I realise there was some initial scepticism about the idea of WXML by some who thought the weather risk market wasn’t yet big enough for a standard protocol,” VanderMarck said in a speech to WRMA conference delegates. “But I would encourage everyone in the market to use the protocol at least for in-house communication purposes.”

Plans are already underway to further develop WXML. VanderMarck plans to introduce a standard protocol for presenting weather data and, along with other WXML committee members, will encourage exchanges to use WXML for weather derivatives trade confirmations. WRMA also hopes to introduce multi-year contract capabilities.