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Derivatives

Banks Enter Weather Derivatives Market

Investment banks entering the weather derivatives market gave the nascent industry a seal of approval just before Enron, one of its pioneers, filed for bankruptcy. Among the firms to enter were Barclays Capital (DW, 1/15), Dresdner Kleinwort Wasserstein (DW, 5/7), Credit Suisse First Boston, Deutsche Bank (DW, 5/20) and Italy's IntesaBci (DW, 7/16).

The collapse of the Houston-based company is expected to be felt for months to come and may stifle innovation (DW, 12/23). "Enron as a whole really sets everything back a bit," said one broker. However, the Nordic division of the company did not file for bankruptcy and is looking for a buyer (DW, 11/21).

However, before Enron collapsed there was a steady stream of new products. These included Entergy-Koch Trading structuring the first wind derivatives and Enron setting up a precipitation index (DW, 11/30, 8/19). But, temperature continued to be the main yardstick for weather derivatives contracts, with roughly 95% of all contracts referenced to it.

Last year also saw the first EUR100 million (USD90.54 million) weather transaction (DW, 10/14). The deal was executed by ABN AMRO on behalf of a Dutch counterparty rumored to be hedging exposure to frost. Spreads on heating-degree day contracts across Europe widened as a result, for example spreads on Heathrow blow out by 10 hdds to 1,700/1,702.

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