Swiss Re plans to invite the entire weather market to participate in the first ever weather derivatives auction this summer. The auction will be held over a two or three day period, during which Swiss Re will solicit bids and offers for calls and puts on heating degree and cooling degree-day contracts, according to Frank Caifa, associate director of Swiss Re's financial products group in New York.
"What were hoping for is that the entire market joins in. We believe all of the main players will be interested," said Caifa. By providing an auction and technology that will offer better pricing transparency and increase liquidity, the goal is to entice more players to enter the market by keeping the auction open with Swiss Re serving as a facilitator of the trades. Swiss Re is launching this initiative now because it has recently bought the technology from Longitude.
The auction would likely be held between May and July for customers looking to buy protection for the winter of 2002-03 in North America's largest cities.
Swiss Re plans to initiate regular auctions selling both heating degree-day and cooling degree-day options if the first one is a success. Once the bids and offers are gathered Swiss Re will match the buyers and sellers of protection. Cafia said Swiss Re would receive the orders at its headquarter in New York, where it will serve as a central counterparty for the trades.
A rival market maker said it would participate in the auction at the beginning of a season as the Longitude system claims to be able to price the risks more accurately than going through brokers. It would then be able to use this price as the basis of secondary trading.
