What is Settlement Data?
Meteorological Settlement Data is the data used to settle an index-based weather transaction and is provided by the Settlement Data Provider as listed in the transaction term sheet. This data is unique in that has been quality controlled by an independent third party to confirm the accuracy of the observations. The use of this data guards against problems due to missing observations, delayed reports, and moral hazard.
The official meteorological data used to settle a weather risk contract. This data is unique in that it must meet certain criteria (see below).
Settlement Data Provider
The provider of Settlement Data as listed in the transaction term sheet.
The index-based climate market is a fast-growing segment of the financial markets that allows companies exposed to weather to hedge that risk. Risks that can be hedged include rainfall, solar radiation, wind, temperature and snowfall. Speedwell Settlement Services is a major provider to the market of the data required to settle such contracts and is regulated in this capacity in the EU as a Benchmark Administrator. Speedwell Settlement Services is also the provider of Settlement Data for trades priced through the weatherXchange Platform.
Speedwell Settlement Services Ltd has been granted a Part 4A permission under Part 4A of the Financial Services and Markets Act 2000 to carry on the regulated activity of administering a benchmark.
Why do I need Settlement Data?
There are many reasons why Settlement Data is critical when transacting a weather hedge:
Meteorological Data may have problems too...
Missing values and erroneous observations are more common than people anticipate. In addition, weather stations often move or close completely. On top of everything, one must also be aware of the potential for observation tampering (moral hazard). These problems are not limited to only smaller observing networks, but are found at the largest airports and the most important weather stations used by the weather market.
Attention to Detail
Hedgers and Protection Sellers will often underestimate the details required in order to document the meteorological aspect of a transaction. Details are critical such that both counterparties understand the hedge and what is expected.
Newly introduced EU regulations require the use of Settlement Data as produced by a regulated entity (Speedwell Settlement Services is regulated as a Benchmark administrator) for certain weather transactions.
Settlement Data Checklist
Settlement Data is a particular type of data that must meet certain criteria. The following checklist provides a quick reference for assessing whether a given dataset is appropriate for settlement.
Settlement Data is produced per the Settlement Data Specification. Details concerning the station identification, observation convention, rounding, units, Settlement Data Methodology, and publication schedule are all documented. With Settlement Data there should be no confusion as to what the data is and how it is processed.
Settlement Data must be accurate. Data accuracy is determined through the implementation of the Settlement Data Methodology. This process involves the analysis of raw data in order to detect data errors and missing data. Erroneous and missing values are replaced with estimates of what the true value should be.
Settlement Data should be provided by an independent 3rd party (Speedwell Settlement Services). Settlement Data should never be processed by either counterparty to the trade. Knowledge of the weather stations, observing practices, and data processing is often asymmetric. This can give rise to problems arising from moral hazard.
Any modifications to the underlying raw data should be carefully documented and archived. Counterparties to the weather hedge should be notified of changes to the data and the logic behind making any changes.
Settlement Data represents the official legally binding data used to settle an index-based weather hedge. Settlement Certificates are prepared and published per the Settlement Data specification.
The timeliness of data publication is essential for index-based weather risk management (it is one of the major selling points of the product). The Settlement Data Methodology ensures a value is always available in the event that the underlying raw data is delayed or is missing. Contract counterparties can rest assured that they will have the data they need of the day and time specified.