Weather and climate derivatives market forecast to keep growing: CME

With climate change concerns on the rise for businesses around the world, a new report from CME Group has noted that average trading volumes for weather derivatives are seeing a boost in interest.

According to CME, last year, it saw average trading volumes for its weather derivatives suite surge over 260% compared to 2022, while the number of outstanding contracts was up 48% year-on-year as of May.

Anne Krema, Commodity Research and Product Development Director at CME Group explained that more extreme weather, such as heat waves or deep freezes, is fuelling demand for the exchange’s winter and summer weather contracts, called heating degree days (HDDs) and cooling degree days (CDDs), respectively.

“These tools are designed to hedge temperature-related risks. As these risks increase, more of our customers are using and becoming educated about weather-based contracts,” Krema added.

In 2023, CME expanded its weather derivatives franchise to include new territories as a growing number of market participants sought solutions to hedge risks around the world.

“To meet this need, contracts tied to weather in Paris, Essen, Burbank, Houston, Philadelphia and Boston were added to the suite, boosting a U.S. and international portfolio that already included cities like New York, Chicago, London, Amsterdam and Tokyo,” the firm said.

Writing in CME’s report, Stephen Doherty, founder and chairman of Speedwell Climate, suggested that the climate risk transfer (CRT) derivatives market is currently worth well over $25 billion.

Extreme weather events, such as rising floods and droughts, are also said to driving demand for climate-based derivatives, and not just from businesses.

“Dubai, for instance, is currently looking for ways to stem losses from disruptive weather, such as the intense rains and flooding in April,” CME’s report read.

At the same time, Norwegian renewables firm Statkraft is boosting its use of CRT derivatives to offset meteorological risks, according to U.K. Power Desk Director Matthew Hunt, who also commented in CME’s report.

“The current attention on CRT derivatives highlights that more companies are thinking about managing overall risks in energy markets, CME concluded.