CME weather contracts hit record trading volumes

Weather futures and options traded on the Chicago Mercantile Exchange (CME) hit a record contract volume of 1,247 in January 2003.

Cold winter conditions in the central and eastern US combined with an increase in activity in weather-related contracts over the past year to achieve the January record, according to the CME and the Weather Risk Management Association (WRMA), a Washington, DC-based trade group. Only 11 contracts traded on the exchange in January 2002, they said.

The weather derivatives sector was hit hard in 2002, as many energy companies cut back their trading operations in response to problems in their core markets. Energy companies have traditionally been the drivers of the weather risk sector.

But trading on the CME was boosted in May 2002 when Chicago-based Wolverine Trading took over the market-making role on the exchange. Wolverine also trades a range of financial and equity products.

“The unprecedented growth in the size and liquidity of the weather risk market on the CME demonstrates that these instruments are playing an increasingly vital role in the financial health of businesses in a variety of industries,” said Valerie Cooper, WRMA’s executive director, in a statement.

The global weather risk market is worth about $11.8 billion, according to WRMA estimates. Cooper said participants in retailing, agriculture, construction, transportation and managed funds are active in the market.

Scott Mathews, chair of WRMA’s Americas committee, says: “This rapid expansion on the CME over such a short period sets the stage for new weather products and for new participants to enter the field.”