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US Banks Take on Weather Risk

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US Banks Take on Weather Risk MARKETWATCH 30 Days weighted-average price. In the OTC mar- ket the average price per HDD is US banks take on $5,000–$10,000. Degree-day spreads in the OTC market occasionally start as wide as 100 days and are then whittled weather risk down during a trade’s construction. IFR S investment banks are moving Swiss Re to roll to become weather derivatives The US Commerce Umarket-makers that will add out on-line sales much needed liquidity to the fledgling Department recently market. Merrill Lynch in July became the estimated that one wiss Re plans to make its on-line first US investment bank to execute an ninth of the US gross weather derivative products avail- over-the-counter weather derivative trade Sable to UK clients. Even though the as a market-maker, and Salomon Smith domestic product is site was launched on 26 May, legal and Barney is exploring whether to enter the regulatory obstacles had to be resolved market as a risk taker later this year. affected by weather before the web-based service could Like other investment banks, Salomon become accessible for end-users in the is already brokering structured weather UK. transactions. Louis Dreyfus Risk Online’s e-trading platform for OTC To date, UK users have been able visit Management, Hess Energy Trading derivatives is helping the weather deriv- the site but were denied trading access Company and Chubb Financial atives market grow as it is drawing in to buy any of the products. The final go- Solutions are also gearing up to take on new end users, say market participants. ahead is expected soon. When the site net risk positions this autumn. It is also offering pricing spreads that was launched, it was immediately rolled The new firms planning to warehouse are five to 10 degree-days wide, they out to US, Canadian, Swiss and other weather risk join Koch Industries, Enron, note. “It’s indicative of where the OTC European markets. Swiss Re New Markets, Aquila Energy, market should trade,” said one official, Norway and Finland followed soon Societe Generale, Southern Company noting that the tight bid-offers are useful thereafter. Swiss Re is following in the Energy Marketing, El Paso Energy and references. footsteps of other weather derivatives Reliant Energy as market-makers in this A degree-day is a measure of the market players, like I-WeX.com, sector. variation of one day’s temperature tradeweather.com and EnronOnline, “Weather hedging can reduce volatility against a standard reference tempera- which tried to take their products on-line in earnings,” noted David Maccarrone, ture, typically 65 degrees Fahrenheit (18 (see IFR 1317, 1345). Vice-President for natural gas company degrees Centigrade). Both cooling In its end of May launch, Swiss Re equity research at Goldman Sachs in degree-days (CDDs) and heating introduced the sale of weather New York. “Investors crave predictability degree-days (HDDs) exist. Customers derivatives via its ELRiX platform. The and growth,” he added. The US on EnronOnline’s site can only order products are primarily heating degree Commerce Department recently estimat- about 10 $100 city temperature con- day and cooling degree day put or call ed that one ninth of the US gross domes- tracts at a certain price at a specific options targeting utilities, gas tic product is affected by weather. time, the official noted. distribution companies, heating-oil Price discovery in the OTC tempera- More than 10 contracts can be pur- distributors and other temperature- ture market remains difficult. But Enron chased through the platform but at a sensitive businesses. IFR On-line OTC commodity exchange forms alliance he Intercontinental Exchange (ICE) Goldman Sachs, Deutsche Bank, the ICE will charge its liquidity providers – the US electronic over-the- Societe Generale, BP, Royal Dutch/Shell the same commission on every trade. Tcounter commodity exchange – Group and TotalFina Elf Group as liq- According to a recent estimate by the has formed an alliance with the six nat- uidity providers for the exchange. Gartner Group, on-line trading saves ural gas and energy suppliers that make ETP member companies American roughly 15% per transaction. From a up the Energy Trading Platform Holding Electric Power, Aquila Energy, Duke cost saving perspective, ICE should also Co (ETP). ICE plans to launch a London Energy, El Paso Energy, Reliant Energy pan out well for the OTC dealer players. operation and is also preparing its and Southern Company Energy Trading in financial and physical debut in Singapore. Marketing have also enlisted as ICE OTC contracts on precious metals, Under the arrangement, the ETP partners. crude oil, natural gas and electricity members that banded together earlier The deal makes sense on several lev- will be possible through the platform. this year to form their own on-line ener- els. For the ETP companies it cuts their The exchange’s debut trade was gy trading forum join ICE founding lead time into the energy OTC e-trading scheduled to be a precious metal firms Morgan Stanley Dean Witter, market and reduces transaction costs as transaction. IFR 8 The Treasurer – September 2000 MARKETWATCH 30 Days ISDA explores Abbey National innovates master agreement loan hedge he International Swaps and Agreement and the Emerging Market bbey National Treasury Ser- Derivatives Association (ISDA) is Traders Association’s Master Agreement vices used an innovative deriv- Tconsidering developing a single for Options on Emerging Market Aatives structure in its recent master agreement that would act as one Instruments are tied together through the £255m term loan for University documentation platform for the full range BMA’s agreement. Nine industry trade College London Hospitals NHS Trust of derivatives transactions. groups worked together to form the and Health Management. The swap ISDA’s single agreement would pull umbrella agreement. structure offered it protection against together all existing ISDA agreements While some industry officials believe a low-inflation environment – a rare and encompass netting provisions for all that modernising the agreement and cre- feature in the context of a private derivatives – swaps, options, foreign ating a single document would help allay finance transaction. exchange, repo and securities lending fears of systematic risk and simplify The loan involves a 40-year project arrangements. The move, if taken, would unwinding of positions, others in the vehicle, with a concession under the be another approach to reaching the industry are not sold on the concept of an UK government’s private finance ini- goal achieved by the cross product net- “all-singing, all-dancing” agreement. tiative, whose income stream is fully ting agreement that was published by the They say that ISDA should explore creat- inflation-linked. Bond Market Association (BMA) earlier ing a bridging document that builds on To hedge against low inflation, a this year. The BMA’s agreement overlays all of its individual agreements. 35-year retail price index swap was the four most widely used master agree- Many firms, particularly in the US, entered with Abbey National ments for derivatives dealing with a new already use bridging documents in- Financial Products. The project umbrella “master-master” agreement. house, but having a standardised form vehicle is fully risk-covered, and the The BMA’s Master Repurchasing would make it easier for users to swap was entered in a notional Agreement, the Foreign Exchange Master negotiate with customers, say those in amount that would provide for Agreement, the International Swaps favour of the prospect of a move to a sufficient cover in a low-inflation and Derivatives Association’s Master single agreement. IFR scenario. IFR likely to raise just €5bn in the loan BT reduces the strain market and the remaining $9.5bn through public and private placements in ritish Telecom is renewing the completed a more modest $5bn deal the bond market. £16bn 364-day seven-bank club with a 15-strong club of banks. The overall financing features nine Bloan that it self-arranged in May for The financing was priced even more banks, including the lead managers of a further year and increasing it to £18bn. aggressively than the original £16bn the bonds issues: ABN AMRO, Deutsche Although the UK telecoms giant is allow- club. It is split into a £12bn 364-day Bank, Goldman Sachs and UBS ing the seven banks to reduce their hefty revolving credit with a 12-month term out Warburg. All four were, like their peer commitments a little by bringing a further option, which will be used as a CP back- group, very keen to position themselves five banks into the deal, it has sought and stop, and a £6bn 364-day revolver also for the mass of private funding that achieved more aggressive pricing with with a 12-month term out option which Unilever has left to do in the bond sector. this renewal. can be used by BT and its affiliates – with The bond issue was initially expected to The original seven banks were the implication that it will be drawn. IFR comprise $5bn and €2bn of bonds. The Barclays, Bank of Tokyo-Mitsubishi, issue showed more clearly than ever how Citibank/SSSB, Deutsche Bank, HSBC, large a disparity there is between Europe Lloyds Bank and Royal Bank of Scotland. Unilever taps and the US. Europe was enormously The new banks are ABN AMRO Bank, price-sensitive. The deal was oversub- Bank of America, Bayerische Landesbank, the markets scribed at Libor plus 10bp – the eventual IBJ and SG. Citibank/SSSB is co-ordinat- reoffer level – and undersubscribed at ing the deal and it is unlikely that further nilever – the multinational foods plus 9bp. IFR syndication will be conducted. and household products group In a departure from previous jumbo that is acquiring Bestfoods of the U These extracts are from IFR loan etiquette, earlier this year both US – tapped the US dollar and euro (International Financing Review).
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