Weather Board of Trade delays launch as problems mount

Atlanta-based Weather Board of Trade (WBOT), which was set for an October launch, will now only start trading exchange-based weather derivatives in February 2003. WBOT has also lost a number of its charter members, encountered problems with its fund raising, experienced difficulty with its meteorological data sets and withdrawn its plans to publish prices on the Chicago-based Merchants’ Exchange.

Dan Parker, WBOT chief executive, told RiskNews that ABN Amro, Credit Lyonnais and Element Re have all pulled out of their charter member status at the exchange. The exchange plans to offer weather derivatives contracts based on its Normal-Departure Index (Nordix), which is geared to trading US temperature and precipitation measures, with sunlight and wind speed measures to be added at a later date.

Dutch bank ABN Amro was “reluctant to make a commitment to the exchange in terms of allocating resources”, Parker said. Meanwhile French bank Credit Lyonnais has pulled out of being part of WBOT’s initial launch in the US, but may still work with the exchange if it rolls out a European operation, planned for late 2003. Connecticut-based Element Re, another dominant force in the weather derivatives market, has also shelved its plan to work with WBOT. Because Element Re is not a member of the Board of Trade Clearing Corporation (BoTCC), the firm will be unable to participate in the exchange, Parker added. BoTCC will clear all WBOT contracts once the exchange is running.

Confirmed WBOT charter members include brokers GFI, Bank One, Chicago-based brokers Man Financial, brokers TFS, Chicago-based energy brokers Castlebridge Partners and US commodities brokerage FC Stone. Although charter membership is free, future membership of the exchange, which is limited to 200 seats, will cost $50,000, Parker added.

WBOT is still in its first round of financing, which is proving to be less successful than anticipated, Parker said. As a result WBOT is considering allowing a potential unnamed market maker for the exchange to share in WBOT equity.

Although Parker had originally hoped that WBOT prices would be published on the Chicago-based Merchants’ Exchange, the choice for market dissemination is now being driven by the unnamed market maker, Parker added.

Furthermore, WBOT found that work on its meteorological data sets, vital for structuring any weather contract, has taken longer than expected.

But Parker is still hopeful. WBOT’s Nordix will be the first weather index to be marked to market on a daily basis, Parker noted, and this could encourage speculators to dabble in the weather risk market. "Hedge funds, for example, will be eager to use this index especially when liquidity picks up," Parker said. "The weather market is uncorrelated to other risks they may have, which makes it an ideal hedge.”

However, market participants said the weather derivatives market is not yet ready for exchange-traded contracts. The London International Financial Futures and Options Exchange (Liffe), for example, has been struggling with its exchange-traded weather futures contracts, which are settled against the monthly and winter season indexes based on daily average temperatures in London, Paris and Berlin. Although US energy firm Aquila traded one contract of five lots on the London indexes, Paris and Berlin have still not been traded – almost a year since Liffe launched the contracts.