Nasdaq Veles Water Index and Nasdaq Veles California Water Index Futures
Adding transparency to understand the true value of water, giving water stakeholders more tools to mitigate water risk exposure
The Nasdaq-Veles California Water Index (NQH2O), the first of its kind, benchmarks the price of water in a way that supports price discovery and allows for the creation of a tradable financial instrument to manage financial exposure associated with water supply risk.
One such tradeable financial instrument is the Nasdaq Veles California Water Index futures market, launched on December 7th, 2020.
Key components of NQH20 Index
- Tracks spot price of water in California
- Represents current value of water based on real-time water transaction data
- Reflects ongoing supply and demand shifts in 5 different water markets in the state
- Provides transparency in notoriously opaque market
Key components of the Nasdaq Veles California Water Index futures
- First of its kind regulated, exchanged-traded risk management tool to manage water risk
- Flexible: Small contract size means wide range of options for market participants
- Decoupled from physical water, based on the NQH20 Index
What is the NQH20 Index?
The NQH20 Index tracks the water prices in California’s five most actively traded water market regions, including California’s surface water market (i.e reservoirs, rivers) and four groundwater markets regions (i.e water from aquifers): the Central Basin, the Chino Basin, the Main San Gabriel Basin, and the Mojave Basin.
The value of water in the index is the priced per acre foot of water ($/AF)*, or the price to cover one acre of land (43,560 square feet) in one foot of water. That’s 325,851 gallons.
Look at the chart above to see how the index price has changed since it was first launched on October 31st, 2018.
At its heart, the index reflects changes in the relative scarcity of water in California. In assigning a value to this important phenomenon, water stakeholders in the state can now make better informed decisions on how they manage their water resources.
Underlying the index is hard, reliable data from our Waterlitix™ database, the largest and most comprehensive database of water transaction information in the Western United States, reflecting decades of water transactions.
*The value of the index reflects the volume-weighted average price of water, excluding conveyance costs and losses, and is calculated and disseminated once per week after the close of business on Wednesday, representative of all data through the end of the prior week.
What are Nasdaq Veles California Water Index futures?
In essence, the water futures contracts allow contract holders to hedge against future water price volatility by purchasing futures contracts in 10 acre-feet increments. These contracts are tied not to physical availability of water in given area, but are financially settled based on the NQH20 Index, which again reflects ongoing trading activity in California’s major water markets.
For a helpful video that breaks down what an example transaction would look like, please feel free to look at CME Groups helpful explainer video.
This innovative tool, powered by the NQH20 Index, helps manage price risk and fosters true price discovery in a market in which water prices have been opaque due to a number of structural reasons.
What does the California water market look like?
Water in California can be sold or leased by a wide range of water stakeholders who own water rights. A water right holder can divert or pump water from rivers, streams, and groundwater basins for so-called “beneficial use” like farming or urban water consumption. Water rights are the most common type of water asset traded. Other commonly traded assets include shares in groundwater banks, surface reservoir storage rights, and treated wastewater which can be reused for irrigation and other beneficial uses.
The overall size of water markets in California is relatively small compared to other more commonly traded natural resources, but given the volatility of extreme droughts combined with tension between agricultural and urban water uses, the state has become the largest and most active water rights market in the country. Water trading is also active in all the Western U.S, however, with more than 20 distinct water trading regions.
Overview of NQH20 Index futures contracts
Overview of Index