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Derivatives

BNP Folds Weather Business

BNP Paribas has pulled out of the weather derivatives market. "The long-term profitability of this business is not at a level that our shareholders necessarily expect," said Jonathan Mullen, head of corporate communications at BNP Paribas in London. He was unable to give details of the French bank's profitability projections. The move will not result in any redundancies, he added.

"They won't be missed," said a rival, noting that BNP Paribas was not a liquidity provider, nor was it a counterparty with a strong customer flow. Although the firm was not an active trader, its departure is nevertheless a symbolic blow for the nascent market, which is still dominated by energy companies. Weather derivatives officials have repeatedly said the market needs the participation of large banks to really take off. To date only a handful of banks, including ABN AMRO and Société Générale, have been actively involved while others, including Goldman Sachs (DW, 8/19) and Deutsche Bank, are hot on their heels.

Rivals were unable to explain why BNP Paribas didn't throw its full weight behind the effort, given that spreads in new markets such as weather tend to be wider than in more mature markets, such as spot fx or secondary bond trading.

"We're going to be honoring all existing contracts," said an official at BNP Paribas in London. The French bank will execute one-off transactions if approached by a customer but will not actively market weather derivatives business. The official referred further questions to Denis Autier, head of global risk solutions at BNP Paribas and co-chair of the European committee of the Weather Risk Management Association. Autier could not be reached for comment.

The decision to exit the business also leaves a question mark over BNP Paribas Asset Management's plan to launch hedge funds using weather derivatives (DW, 7/8). Jean Dominjon, global head of alternative and quantitative asset management in London, did not return calls.

 

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