After multiple incidents of wildfires of record-breaking intensities in California, USA, this year, Wall Street is set to start trading in futures contracts on the state's water supply.
The CME Group, the world's largest futures exchange and Nasdaq, on 17 September, announced plans for a new futures contract on the Nasdaq Veles California Water Index (NQH2O). CME Group will launch its new Nasdaq Veles California Water Index futures contract towards the end of 2020, pending regulatory review.
The product is expected to provide agricultural, commercial, and municipal water users with greater transparency, price discovery, and risk transfer by aligning supply and demand.
"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, Global Head of Equity Index and Alternative Investment Products of CME Group.
"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," he added.
"The Nasdaq Veles California Water Index helps drive better outcomes for water market participants through verifiable price discovery," said Lauren Dillard, Executive Vice President and Head of Nasdaq Global Information Services. "Our collaboration with CME Group has the power to deliver greater transparency around the management of an important natural resource."
In a joint statement, the companies said that about 40 percent of water currently consumed in California is used to irrigate its nine million acres of crops. "Nasdaq Veles California Water Index 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," it said.