A New XML-based Standard for Weather Derivatives Transactions Proposed

WeatherML Aims to Simplify Trading of Weather DerivativesXML has taken a strong foothold in the financial services industry, and the weather derivatives market is next in line for a standard trading protocol of its own. The Weather Risk Advisory, a software and consulting company focusing on weather derivatives, is leading an initiative to develop WeatherML, an XML-based data protocol that looks to be a standard for the electronic processing of weather derivatives. The development will be spearheaded on an international basis by the WeatherML Steering Committee, which will include representatives from various areas of the weather derivatives community such as trading organizations, banks, insurers, reinsurers and brokers.

The tentative proposal calls for the first version of WeatherML to be released in the second quarter of next year. The WeatherML Steering Committee recently submitted its proposal to the Weather Risk Management Association (WRMA), the weather derivatives industry trade group for its opinion and possible endorsement. WeatherML will be used to tag data on weather derivatives transactions. "WeatherML creates a standard so people can build an interface from their systems to WeatherML and then communicate with anyone in the market that is using WeatherML," says Gautam Jain, director at Weather Risk Advisory. He adds that WeatherML would be useful in areas such as streamlining the electronic confirmation of trades and furthering the growth of the weather derivatives market as a whole with the spread of software development for the industry.

Currently, Jain describes weather derivatives trading as a tedious and manual process for all parties involved. "For example, trader A has to enter the details of a transaction on the system and the system holds an internal representation of that transaction," says Jain. "Counter parties to that trader would have their own systems with internal representation of the transactions data." In other words, there is no standard to integrate the two systems and foster automatic communication between trading parties. This manual system, in turn creates operational risks with the re-keying of information into each separate system by the traders. "Once in place, WeatherML would allow straight-through processing and the users could connect components within their overall architecture to each other in a seamless manner," adds Jain.

The proposal and draft aspects of WeatherML are available for comment at www.weatherml.com. The steering committee is seeking advice and suggestions by interested weather derivatives industry parties before the initial version is released. "The key thing is WeatherML needs to be used by active traders in the market so there has to be a process where by involved parties can contribute to the standard such that it is useful and practical on a day to day basis," says Jain. Once the standard is released, users would be able to either build their own interfaces to the WeatherML standard, or they could opt for a "conversion tool" which Jain says would be a mapping engine to allow users to map proprietary data base information to the standard and vice versa. Although the proposed WeatherML standard will initially only cover transaction information, Jain adds that if it catches on with market participants in the future WeatherML could also incorporate all weather derivatives market data into the standard protocol.