Italy's IntesaBCI plans to become a market maker in weather derivatives as part of an expansion into high-margin capital market products. Richard Turrin, director of structured products in New York, said it is setting up the department as part of a wider expansion into alternative investments, structured reinsurance products and tax derivatives.
The bank will start executing customer flow business in the next three months. Turrin points out this will make it the first Italian institution to offer weather derivatives, which should give it an advantage in offering the products. He predicts most of the customer flow will come from the Italian energy, tourism and agriculture industry.
BCI will also make markets in the U.S. and seek end-users but it expects less customer flow because it has a smaller customer base in comparison to Italy.
The weather derivatives market has developed over the past four years and questions over its long-term viability have been quashed as the number of players and contracts has rocketed, said Turrin, which makes now a good time to enter the market.
Colt Heppe, partner at weather broker United Weather in Jersey City, N.J., said IntesaBCI's entrance to the market should boost liquidity and bring a new set of end-users. "Banks are the one leg of the stool that is missing," he continued, adding that several banks, such as Goldman Sachs and Lehman Brothers, have traded weather products but they have yet to come in full time, added Heppe. Officials at Goldman and Lehman did not return calls.
The motivation behind the move is to become a major player in niche derivatives markets, according to Turrin.
