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CME Group, Nasdaq launching first-ever water futures

Futures to provide agricultural, commercial and municipal water users opportunity to hedge price risk.

CME Group and Nasdaq announced this week plans for a new futures contract on the Nasdaq Veles California Water Index (NQH2O). CME will launch its new Nasdaq Veles California Water Index futures contract late in the fourth quarter, pending regulatory review.

The NQH2O futures will be an innovative, first-of-a-kind tool to provide agricultural, commercial and municipal water users with greater transparency, price discovery and risk transfer – all of which can help to more efficiently align supply and demand of this vital resource.

"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," said Tim McCourt, CME Group global head of equity index and alternative investment products. "Developing risk management tools that address growing environmental concerns is increasingly important to CME Group. This innovative new water contract builds on our strong partnership with Nasdaq as well as our proven 175-year track record of helping end users and other market participants manage risk in essential commodity markets, including agriculture, energy and metals." 

Lauren Dillard, executive vice president and head of Nasdaq Global Information Services, said, "The Nasdaq Veles California Water Index helps drive better outcomes for water market participants through verifiable price discovery. Our collaboration with CME Group has the power to deliver greater transparency around the management of an important natural resource."

A liquid, transparent futures market will help create a forward curve so water users can hedge future price risk. For example, 40% of water currently consumed in California is used to irrigate the state's 9 million acres of crops. The NQH2O futures would allow an agricultural producer to plan ahead for changing costs of the water they need for large-scale irrigation. It would also allow a commercial end user, like a manufacturer, to better navigate business and financial risks when water prices fluctuate.

The new California water futures contract will be financially settled based on the Nasdaq Veles California Water Index launched in 2018, with each contract representing 10 acre-feet of water. The index sets a weekly benchmark spot price of water rights in California based on the volume-weighted average of the transaction prices in California's five largest and most actively traded water markets. Nasdaq developed the NQH2O Index in partnership with Veles Water Ltd., a firm specializing in the development of financial products for water markets. The data utilized in the calculation of the index are provided by WestWater Research, an economic consulting firm focused on pricing, valuation and transaction advisory services for water rights and water resource development.

TAGS: Business
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