CME Group Tackles Water Scarcity With New Futures Contract

In partnership with Nasdaq Inc NDAQ, CME Group Inc CME, the world’s largest derivatives marketplace, formally announced it plans to launch a futures contract this year based on the Nasdaq Veles California Water Index (NQH20).

As part of the development, Benzinga chatted with Tim McCourt, global head of equity index and alternative investment products, to discuss CME Group’s impact on innovation- and sustainability-driven financial markets.

About CME Group

Derivatives allow market participants to gain efficient exposure in underlying assets. Founded in 1848, CME Group is an exchange that builds markets around derivatives like futures, or agreements to buy and sell assets at a particular price and time in the future.

The company has a long standing history, offering global benchmark products based on interest rates, equity indices, foreign exchange and commodities.

In addition to building products, CME also facilitates and clears trades through its clearinghouse, CME Clearing.

“When you look at an institution like CME Group, with our nearly 175-year history, we build markets and products for natural buyers and sellers, where the suppliers and demanders come together to transfer and manage risk,” said McCourt.

“We look to marry the natural supply and demand functions that exist in the market in an efficient and trusted way.”

Recent Events

Water scarcity is an emerging challenge in the 21st century.

In farming — both a cause and casualty of water scarcity — the impact of challenges such as climate change, on freshwater resources, has created water price volatility, which in the past was difficult to hedge against.

“Water is a critical and vital resource,” McCourt said. “Around 2 billion people already live in geographies that are experiencing high water stress. If you look at some of the reports, just a few years out, by 2025, nearly two-thirds of the world’s population could be facing water shortages.”

The CME product based on the the Nasdaq Veles California Water Index comes at a time of concern regarding water price volatility, and on the heels of its push into sustainable investing with the launch of the E-mini S&P 500 ESG index future.

Its unit of measure represents the U.S. dollar price of the water needed to submerge an acre of land in 1 foot of the resource.

NQH20 futures will be cash-settled, allowing participants like crop producers to gain financial exposure to the value of 10 acre-feet of water.

“When we look at the California water market — the most active and dynamic water market in the U.S. — there are currently no centrally cleared exchange traded risk management products,” McCourt said.

“When you’re looking around the agricultural complex or commercial end-users, these folks and institutions have real needs around risk management and need access to water for consumption or as a raw input into their process.”

Nasdaq’s work around building the underlying benchmark on the California water market was the true catalyst for CME, he said.

Innovation Outlook

CME Group is striving to be a force behind positive change in financial markets, said McCourt.

“It’s really important for us to build a marketplace around these products,” he said.

“Outside of building markets and working with market participants to build new mechanisms for two-way price discovery, we put a tremendous amount of focus on education.”

Going forward, CME aims to do its part in creating more efficient and sustainable markets, honing in on product innovation and adding to recently launched products like futures on the Nasdaq-100 Volatility Index (VOLQ).

“For the next few months and certainly well into 2021, we’re really focused on not only growing and building these existing markets such that they become viable and successful in their own right, but continuing to engage with market participants around all the benchmark and bellwether products we have,” McCourt said. 

“As the market continues to discover new price ranges and people look to manage their risk, we will work with them, so we can do it as efficiently as possible at CME.”

To learn more about CME Group, click here.