Weather derivatives for the middle market.

With all the talk about climate and climate change in the news, it seems like a propitious time to start offering weather-related indexes and derivatives. And that's just what Storm Exchange Inc., a small New York company, is doing.

Formed in April 2006, the company launched a technology platform this past April that lets subscribers choose from a series of customized indexes of weather-related data. Company founder and CEO David Riker said in an interview that Storm Exchange is aimed at mid-market companies with between $10 million and $500 million in revenues. Larger companies, he says, are likely to have derivative relationships with banks or investment banks, and have greater product and geographic diversification and the cash to handle more counter-party risk.

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The idea is to give smaller companies information and tools they can use to help manage weather-related risks, which impact a wide variety of sectors: energy and agriculture, retail, tourism, seasonal manufacturing and more. Derivatives contracts then pay out based on the occurrence of predefined weather parameters and reduce the impact of unplanned weather events on earnings.

Weather-related futures trade actively on the Chicago Mercantile Exchange (CME), which popularized the concept in the late 1990s. "We see this as an exciting opportunity for us--people are very interested in index products. It's an opportunity for us to take a CME approach into the OTC (over the counter) market."

Riker says Storm Exchange is in active discussions with banks, investment banks and others to set up derivative contracts. The average contracts will be valued at about $10 million, with the size of the contract based largely on value limits. "We want to provide transparency around pricing," Riker adds. "A 'black box' pricing approach is what has prevailed."

Riker says the company already has created more than 500 customized indexes for five industries, based on weather correlations over specific time periods to benchmarks such as heating degree days. North America is the focus now, he says, and expansion to global markets "will be limited to where there is good weather data."

While Storm Exchange's entry into companies may come through the CEO, "the CFO is the primary buyer," with help from treasury. Buying the derivatives "is a capital efficiency decision," Riker says.