Worst Floods in 70 Years May Prompt Thai Water Futures Trade

Thailand may start trading of water derivatives, giving investors a means of hedging against disasters after the nation’s worst floods in almost 70 years, the Securities & Exchange Commission said.

The regulator is studying the possibility of introducing contracts whose value would be linked to rainfall, or the level of water in the nation’s major dams, said Vorapol Socatiyanurak, who started as secretary-general of the SEC in October. He declined to say when trading might begin.

Thailand is seeking to offer protection to investors in Southeast Asia’s second-biggest economy after flooding in the central region killed almost 700 people and swamped about 1,500 industrial facilities. The waters may cause 1.3 trillion baht ($41.6 billion) of damage to the economy, Prime Minister Yingluck Shinawatra said on Dec. 8. Intel Corp., the world’s largest chipmaker, cut its revenue forecast this week as the floods disrupted personal-computer production.

“Flooding has become more frequent in Thailand, with much greater economic impact,” Vorapol said in an interview in Bangkok yesterday. “The new security would offer investors, insurers and manufacturers an instrument to help alleviate financial losses in future catastrophes.”

The contracts would also help protect farmers from the impact of floods and drought, Vorapol said.

Liquidity Risk

The total face value of global weather-related derivatives grew by 20 percent between 2010 and 2011 to $11.8 billion, according to a May 20 report by the Washington DC-based Weather Risk Management Association. Demand growth was seen in contracts related to rainfall, snow, hurricanes and wind from industries such as agriculture, construction and transport, it said.

The majority of weather contracts are traded on the Chicago Mercantile Exchange. (CME) CME snow contracts, for example, are based on the exchange’s Snowfall Index, a measure of average monthly snowfall in certain U.S. cities. Traders “determine what amount of snowfall would be detrimental to their businesses and take futures or options positions based on that,” the exchange said on its website.

“The new instrument is unlikely to help cover all exposure from water-related risk, but it’s good to provide another alternative,” said Sanya Harnpatanakitpanich, head of derivatives at Globlex Securities Co. Ltd., the nation’s largest derivatives brokerage by trading volume. “The SEC and Stock Exchange of Thailand need major market makers such as foreign companies and domestic water utilities to assure the trading liquidity of water derivatives.”

Insurance Payouts

The Cabinet urged insurers to pay companies and households affected by flooding within six months, deputy government spokeswoman Anuttama Amornvivat said yesterday. The Office of Insurance Commission estimated that insurers would pay out 262 billion baht ($8.4 billion), with 228 billion going to 928 factories and the rest to households, she told reporters.

California-based Intel reduced its fourth-quarter revenue forecast on Dec. 12 by about $1 billion, saying a shortage of hard-disk drives as a result of Thailand’s floods is cutting customers’ production of personal computers. Thailand is home to plants producing about a quarter of the world’s hard-disk drives. Honda Motor Co. (7267) and Toyota Motor Corp. (7203) also cut their profit estimates after the floods disrupted output.

Bond Sales

Thailand’s regulator also plans to relax rules to encourage bond sales by small and medium-sized companies whose access to investors may be hampered by low credit ratings, Vorapol said. Those issuers will probably be allowed to sell the bonds to some wealthy individuals, he said.

The SEC allows only Thai and foreign companies with investment-grade ratings to sell bonds to individual investors, he said. It may also allow more investment by mutual funds in bonds with credit ratings below investment grade, he said.

Vorapol, 56, was appointed the head of the regulatory agency for the nation’s equity, bond and derivative markets in October. He has a doctorate from the University of Pennsylvania’s Wharton School and was a lecturer at the National Institute of Development Administration, a state university.

He was hired after his predecessor Thirachai Phuvanatnaranubala resigned to become finance minister.

To contact the reporter on this story: Anuchit Nguyen in Bangkok at anguyen@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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