Howworks

Companies looking to buy Weather Protection

NOTE weatherXchange® is only available to larger corporate users, not private individuals.

1

Request Login

Request a log in to access the Weather Protection structuring tool. At this stage we only need your full contact details to provide a login.

There is no charge.

2

Design Weather Protection

Using the Weather Protection structuring tool, create the weather protection contract you require. If required, contact us for assistance through the on-line chat tool. (We are unable to provide financial advice relating to matters such as suitability of a structure, but we can help with general and technical questions).

There is no charge.

3

Save Contract

Save the weather protection contract to your personal Saved Draft Contracts area. This allows you to return to the contract, adjust it or to copy it and create other versions with slightly different parameters.

There is no charge.

4

Know Your Client

When you are ready to ask for a price we are required to request more information for regulatory reasons under the FCA’s "Know your client". We will ask you to provide this before providing you with the enhanced level of login which then allows you to request a price from the risk takers. This is also required if you simply want to contact a particular Protection Seller or Broker-Advisor to request further assistance.

5

Request Price or Contact Broker-Advisor

To request a price for a particular weather protection contract directly from Protection Sellers, click on the icon to generate an email. The email generation is automated but happens outside of weatherXchange. The email attaches the details of the Protection Contract you require in a format that can be manually or machine-read by the receiving counterparties.

Alternatively, contact a Broker-Advisors. Broker-Advisors on the weatherXchange® Platform have specific experience with weather risk hedging and can provide financial advice and on your behalf act to get the best price .

There is no charge.

6

Complete Transaction

If you have contacted Protection Sellers directly, you will be contacted by them. This can all be done by email. You are under no obligation to provide telephone contact details if you do not want to. You can then complete the transaction with your chosen Protection Seller.

Or alternatively, if you are working with a Broker-Advisor, they will work with you on completing the transaction with the Protection Seller(s)

weatherXchange is NOT involved in this stage.

7

Request Settlement Data and Calculation Services

The Protection Seller or Broker-Advisor with whom you deal will enter your trade details into the Speedwell Settlement Services portal for the purpose of generating the official feed of weather data necessary to calculate the value of the contract ("Settlement Data").This is a separate service provided by Speedwell Settlement Services Limited. You and the Hedge Provider will be able to track the contract on this portal. You will be able to see the weather data as it comes in and the calculation of the actual value of the deal.

Calculation Services can also be requested. These allow you to track the standard key valuation metrics throughout the life of a weather protection contract as may be required to satisfy accounting and reporting requirements. This service is provided by Speedwell Calculation Services Limited.

These services are chargeable.

8

Settlement Certificate

At the end of the Contract Period, a Settlement Certification will be issued to you, your Broker-Advisor (if applicable) and the Protection Seller.

How weatherXchange works – Protection Sellers

weatherXchange helps new and existing corporate users of weather hedging products to structure a weather hedge and then contact firms providing weather risk protection directly or via Broker-Advisors. weatherXchange does not work with private or individual ("retail") Hedgers. Companies working with weatherXchange offering weather risk protection include large insurance and re-insurance companies as well as specialist funds. We call these "Protection Sellers". They are listed under the Participants menu on this web site in a randomised order.

For insurance firms or funds that already offer protection in other financial markets such as CAT or ILS but who are new to the index-based weather risk market, weatherXchange functions as a free "salesforce" in an uncorrelated asset class – bringing to you potential new Hedgers and those already involved in the market who value the automation and convenience that weatherXchange provides.

For the removal of doubt, weatherXchange does not act as a broker and is not an execution venue. It helps new protection buyers with the first steps in specifying a possible hedge before then putting them in touch with you, the Protection Sellers. weatherXchange helps existing users of weather hedging by automating the RFP process. There is no formal joining process to be listed as a Protection Seller on weatherXchange. However, it is likely that Protection Sellers are companies already involved in similar asset classes and will be regulated by the relevant financial authorities. There is no charge to either Hedgers for sending RFPs, or Protection Sellers for receiving RFPs. Protection Sellers will need to have access to the underlying weather data to price the transactions.

Joining Information

How weatherXchange works – Broker-Advisors

Many potential users coming to weatherXchange will want in-depth advice. weatherXchange acts as a conduit by which newcomers to weather risk hedging can request the assistance of existing specialists in the field. If you are listed as a Broker-Advisor, then the Hedger can contact you directly leaving you to negotiate fees for your services directly with them in the normal way. weatherXchange does not work with private or individual ("retail") Hedgers. weatherXchange does not provide investment advice and is not an execution venue.

weatherXchange can also streamline the broking process by providing the weather data, tools and easy means for brokers to send RFPs to multiple Protection Sellers. We understand the importance of providing the local data necessary for Broker-Advisors to create the weather risk protection their clients need: on a reasonable-request basis, weatherXchange will work with Broker-Advisors to List required data sets, including gridded data, on the weatherXchange® Platform.

There are three categories of Broker-Advisors:

Global Broker-Advisors: these have access to the underlying data and are able to advise fully on weather hedging in many locations worldwide.

Secondary Market Broker-Advisors: these have access to historical data and pricing tools for the Speedwell-Market sites which relate to energy market trading. They may advise and offer anonymity in working on behalf of protection buyers. Click here for more information on Speedwell-Market sites.

Specialist Broker-Advisors: these are specialist brokers with experience and regulatory permissions who are able to advise on specific industry sectors such as agri-business or construction, generally with a regional focus.

Why use a Broker-Advisor?

A Broker-Advisor can:

  • Provide independent advice on structuring a weather protection contract. For regulatory reasons, not all Protection Sellers are able to provide financial advice
  • Advise on most appropriate counterparties for particular types of weather protection contracts. Not all Protection Sellers can provide all types or sizes of weather risk protection
  • Advise on issues such as credit rating of possible Protection Sellers
  • Negotiate a more favourable price. For larger trades this may involve spreading risk across multiple protection sellers
  • Provide local knowledge

Click here for a list of Broker-Advisors

If you are a Hedger looking for advice, please contact the Broker-Advisors directly. This can be done directly from the weatherXchange structuring wizard allowing the weather protection structure you may have been working on to be provided to the Broker-Advisor.

It is necessary that Broker/Advisors have a provenance in the index-based weather risk market and are regulated by the relevant financial authorities.

Joining Information

Execution-Only Brokers

Execution-Only Brokers are brokers using the weatherXchange platform to service their existing index-based weather risk business. They are not visible to new Hedgers on the weatherXchange website

Joining Information


How Are Weather Risk Contracts Priced?

The price of an index-based weather protection contract depends on the frequency of the event and the size of the payout. There is no single "correct" way to price such contracts and different Protection Sellers will use different methodologies, just as is the case in other markets such as property insurance.

The simplest methodology, which would usually set the lowest theoretical price, is to look at historical weather data and to calculate what the average payout would have been for the required contract over a large number of historical years. This may be adjusted for any views the Protection Seller has relating to trends and other factors. As is the case in other markets, firms providing such protection also have to cover other costs such as administration and cost of capital.

The price of a given contract may also depend on what other contracts a Protection Seller already has on their books. As a result, there are likely to be some benefits in comparing prices from multiple Protection Sellers.

Weather Hedging Terminology

  • Basket: index-based weather protection contracts always reference a weather index. This index can be based on a single site or multiple sites. The latter are described as "baskets". A basket may be useful where, for example, a propane distribution company is looking for protection against warm winters in their customer area. By using a mixture of different weather stations in that area, it is possible to get an index that closely reflects the customer profile. weatherXchange can list baskets on request to reflect the needs of a particular protection buyer.
  • Broker-Advisors: can provide investment advice and act on the Hedger's behalf in placing weather risk. The financial arrangement between Hedgers and Broker-Advisors is discussed directly. weatherXchange is not involved in, and has no financial interest in this process. Broker-Advisors are listed on the Participants section.
  • Cap: the level of a weather index units above which (or below which) the payout ceases to rise. For example, a building company may find that more than 50 millimetres of rain over a particular period causes a problem, but that at 200 millimetres the disruption reaches a maximum. In this case the Cap is 150 millimetres. The maximum payout is equal to the Cap multiplied by the Tick Size. Alternatively, it may be that too many days of extreme rain (say more than 5 days with rainfall above 20mm on each day) causes a problem for a tour operator. However, there are a limit to how many such "Critical Days" impacts revenues as they only ever run 15 tours. In this case the Cap is the difference between the number of such Critical Days where the payout starts (i.e. Strike is 5 days) and where the payout stops increasing (i.e. 15 days). So, in this case the Cap is 10.
  • CDD: Cooling Degree Days. A measure of energy demand related to cooling. Using the average temperature for the day, every degree above 18C (or 65F in the USA) contributes one CDD. If the daily average temperature is below 18C / 65F, zero CDDs accrue for that day. The daily CDD values are added up for the required period.
  • Critical Day: a Critical Day is one where an extreme weather condition applies. For example, in agriculture this could be a day where the maximum temperature is above 35C causing crop damage, or, in construction where daily rainfall above 5mm prevents work. A Weather Index can be based on the number of such Critical Days experienced. For example, a construction company may be able to cope with 4 days of rainfall greater than 5mm but beyond that is exposed to project delay costing $10,000 per day of delay. In this case the definition of "Critical Day" is "rainfall>5mm", the Strike is 4 and Tick Size is $10,000.
  • Gridded Data: these are weather data sets based on interpolated terrestrial observations, historic forecast model output, satellite data, or any mixture of those sources. Gridded data sets can provide weather data for weather variables where little or no observed data is available, for example 80m wind speeds or for marine data such as wave height. Gridded data can also provide data in areas where there are no or few terrestrial observations. Gridded data is often used for weather protection contracts in the renewable power sector. A number of indexes based on gridded data are Listed on weatherXchange. weatherXchange can List additional gridded data sets, including Baskets, on request to reflect the needs of a particular protection buyer.
  • HDD: Heating Degree Days. A measure of energy demand related to heating. Using the average temperature for the day, every degree below 18C (or 65F in the USA) contributes one HDD. If the daily average temperature is above 18C / 65F, zero HDDs accrue for that day. The daily HDD values are added up for the required period.
  • Investment Advice: this term is used in a regulatory context. While weatherXchange is authorised and regulated by the Financial Conduct Authority, we do not provide Investment Advice. So while we can offer practical user-help on using the structuring tool, we cannot advise as to the suitability of a particular contract for a particular Hedger's needs. weatherXchange’s Broker-Advisors are able to provide Investment Advice and can be contacted directly through the Platform.
  • Index-Based Weather Risk: Index-Based Weather Risk hedging uses an observed weather variable at a chosen weather station to create an index on which a payout can be based. This index could be total rainfall over a relevant period, or the number of days of minimum temperatures below zero. Most contracts pay out when an index is above or below a certain level (see "Strike") with the payout proportional to how much above or below that level the index is (see "Tick Size"). The period, the Strike and the Tick Size is chosen by the buyer of the risk protection to fit with their needs. Unlike traditional indemnity-based insurance cover, there is no need to demonstrate that a loss has been made. Settlement is completely objective, based on measured rain, or measured temperature or other chosen weather variable over the period of interest. There is no loss-adjustment process.
  • Reference Station: the weather station chosen as the basis of the weather risk contract.
  • RFP: "Request for Proposal" or sometimes "Request for Price". To receive a price for a weather protection contract, it is necessary to send the Protection Sellers all the details of the weather protection contract require. weatherXchange makes it easy to send an RFP to multiple Protection Sellers at a click of a button.
  • Protection Seller: this is the term we use to describe the (re)insurance company or fund which is able to offer the weather risk protection that hedgers require. Protection Sellers are listed on the Participants section in random order.
  • Settlement Data: the quality-controlled weather data used to calculate the index upon which a weather protection contract is based. This is provided by Speedwell Settlement Services Limited.
  • Start Data/End Date: the Start Date and End Date define the period over which the weather index is measured at the Reference Station. This could be critical period in a crop planting cycle, or the period of ground works in a building project, or a winter period for an energy company looking to protect against warm weather reducing demand for gas.
  • Strike: the level at which the protection starts paying out. For example a building project may be sensitive to more than 50 millimetres of rainfall in the week before construction starts. In this example the Strike is 50 millimetres.
  • Trading Participants: described on the weatherXchange® Platform as the users who are interested in not just sending but also receiving RFPs for exchange-traded sites. The architecture of the weatherXchange Platform allows any user to be provided with the option of sending RFPs to any other user. For most users, these are set by default to Protection Sellers only. However, Trading Participants are able to request the addition of any Participant listed as a Trading Participant, subject to their agreement.
  • Term Sheet: this defines all the "moveable parts" of a weather protection contract. It is the Term Sheet that Protection Sellers need to price a Index-Based Weather Risk contract and which will form the legal basis of the contract between the Hedger and the Protection Seller. weatherXchange allows the Term Sheet to be generated automatically. This can be sent to Protection Sellers to request a price or to Broker-Advisors to seek investment advice or to discuss retaining them to act on the Hedger's behalf in finding the best price.
  • Tick Size: The payout required per millimetre of rain or degree of temperature or per day of freezing temperature (etc) above or below the Strike. For example a building company which experiences increased disruption due to excessive rain might set the payout to be €1,000 per millimetre of rain for each millimetre of rain above a 50 millimetre Strike.
  • Weather Element: the weather variable of interest as measured at the Reference Station e.g. rainfall, daily maximum temperature etc...
  • Weather Index: the starting point of buying Weather Protection is to define what type of weather causes the problem: this is represented by the Weather Index. If it is total rainfall, the Weather Index required is cumulative rain. If it is the number of days of extreme temperature then the index could be the number of days where the daily maximum temperature is above 30C.
  • weatherML: a proprietary "mark-up language" implement by Speedwell Weather Limited used to define the parameters of Index-Based Weather Risk Contract. In effect it is used to generate a machine-readable Term Sheet. A weatherML document can be read either by humans or machine-read by software. When a Hedger sends an RFP pricing request to a Protection Seller from the weatherXchange® Platform, it is sent in weatherML format.