India exchange developing weather futures index, after weather derivative approval

The National Commodity and Derivatives Exchange (NCDEX) of India is working on the construction of a suite of weather indices to facilitate the trading of weather futures, after the central government recently added weather to its approved derivatives list.

For years now, India market participants and those controlling financial market structure have been discussing weather derivatives, weather futures and options.

In fact, Artemis first wrote about India’s National Commodity & Derivatives Exchange’s plan to launch a weather index based product way back in 2008 and exchange-traded weather derivatives and futures have come up a number of times over the years since.

While the Indian market has seen plenty of activity with parametric and index-based insurance and microinsurance, a fully-fledged exchange-based trading system for weather derivatives has never quite come to fruition.

But now the regulatory landscape has been put in place to facilitate the launch of weather futures trading, after India’s central government added weather to its allowable list of derivatives earlier this month.

On March 1st, the government of India’s Ministry of Finance expanded the list of items permitted under the Securities Contracts (Regulation) Act of 1956 (SCRA) commodity trading rules.

The list of allowable items has been increased to 104 and one of those added to the commodity derivatives list is weather.

The goal is to enable better price discovery and encourage liquidity, while making access to these derivative tools for risk management much easier.

Any exchange wanting to trade these derivatives has to apply and be approved by the regulator, but with year’s of discussion on the subject of weather derivatives behind it the NCDEX is already ploughing ahead.

India’s government said that it sees the need for such derivatives and believes there is already a robust supply-demand dynamic for them.

The NCDEX is now working on an index for trading weather futures, perhaps updating on some of the work it had previously undertaken in exploring the weather index insurance and weather derivatives space.

Approvals will be needed from the securities regulator of India, but the feeling is that with such a large agricultural commodities industry, the Indian economy could see significant benefits from the introduction of tradable weather hedges and instruments.