CME Group and Nasdaq said they plan to offer futures contracts based on the Nasdaq Veles California Water Index.
The index, launched in 2018, is based on the volume-weighted average of the transaction prices in California’s five largest and most actively traded water markets.
In a statement, the companies said each contract would represent 10-acre feet of water and allow users to lock-in prices, increasing transparency, price discovery, and risk transfer.
“With nearly two-thirds of the world’s population expected to face water shortages by 2025, water scarcity presents a growing risk for businesses and communities around the world, and particularly for the $1.1 billion California water market,” Tim McCourt, CME Group global head of equity index and alternative investment products, said. “Developing risk management tools that address growing environmental concerns is increasingly important to CME Group,” he said.
Peter Gleick, a water expert at the Pacific Institute, said the market could result in some users conserving water and selling a surplus for a profit, but he thought the impact of the futures market would be small because selling was complicated due to rights issues.
“There are fewer places in California where water can be transferred legally,” Gleick said. “The vast majority of California water isn’t accessible to these water markets.”
Rostin Behnam, a commissioner at the Commodity Futures Trading Commission, said derivatives based on water prices would be an important way for businesses to manage climate risk, citing increasing prevalence of extreme weather events.
“Every time I talk about this, these weather events are just validating the need to take action,” Behnam said.
“We have a very volatile precipitation pattern. It can be dry or wet in any given year, and demand is tighter,” said Ellen Hanak, vice president and director of the PPIC Water Policy Center.
Sales of the contracts would begin late in the fourth quarter, pending regulatory review.
Carlos Avila Gonzalez/The San Francisco Chronicle via Getty Images