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United Kingdom
United Kingdom
Key definition
Derivatives definition What does Derivatives mean? Derivatives are contracts used to transfer or manage risk, whose value is determined by an underlying asset, interest rate, currency, index, commodity, security or credit event. Common types include futures, options, swaps (interest rate and currency), forwards and credit derivatives (such as credit default swaps), traded on exchanges or over the counter. Legally, derivatives create payment or delivery obligations calculated by reference to the underlying. They are typically documented under an ISDA Master Agreement with a Credit Support Annex for collateral, and depend on close-out netting upon default. Key issues include counterparty capacity and authority, governing law and jurisdiction,...
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Weather Derivatives: Applications, Structures, Standard Documentation and UK Regulatory Framework
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Practice notes
What does this Practice Note cover?
This Practice Note sets out what weather Derivatives are, their aims and uses, and the regulatory framework that applies to them. For guidance on sustainability and environmental, social and governance (ESG) derivatives more generally, see Practice Note: ESG derivatives. It also covers typical purposes, applications, and the rules shaping use too.
What are weather derivatives?
The weather risk market exists to help participants manage the negative financial effects of weather via risk transfer contracts linked to meteorological variables (chiefly temperature, rain, snow, wind and sunshine). Approaches to weather-driven financial exposure usually fall into two main categories: catastrophe insurance or weather derivatives. Catastrophe insurance suits infrequent risks with potentially large consequences, such as extreme drought or flooding, whereas weather derivatives are better aligned to high frequency/low impact situations, for example an unseasonably cool August or a particularly wet May Bank Holiday. A key benefit of standardised weather derivatives for lower impact events is that payment is triggered automatically once the Index moves beyond a specified level. By contrast, to obtain recovery under an insurance policy, the insured must submit a claim proving loss. The same feature is, however, a drawback when it comes to covering...
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Web page updated on 22/05/2026
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