Container Derivatives Overview

The Container Freight Swap Agreement

In January 2010 Clarkson Securities executed the world's first Container Freight Swap Agreement (CFSA) settled against the Shanghai Shipping Exchange's SCFI index. The initial trade was the result of many years research into the potential market for container derivatives and an eventual decision to concentrate on the container freight market and its 'dollar per box' pricing, as the most exciting for a futures market. Since then, 2 years assisting the Shanghai Shipping Exchange in developing a new index product has seen unprecedented volatility in the underlying physical market that has strengthened the argument for improved risk management capacity in this sector.

The index is comprised of freight rates from Shanghai to a number of mainline ports around the world giving USD per TEU assessments on a range of tradelanes. Rates are assessed on an ‘all in’ basis for spot shipment by 30 panellists, comprising of container lines, non vessel operating common carriers and freight forwarders.

Commenting on the first trade, Alex Gray, CEO of Clarkson Securities Ltd said:

'We are delighted to announce the first trade of our newly developed Container Freight Swap Agreement. We have been working closely with the Shanghai Shipping Exchange to ensure the SCFI will be a suitable mechanism for container freight derivatives such as this and firmly believe this index heralds a new era for marine risk management.

As well as providing an interesting product for financial investors, the CFSA will allow industry players to cover their own exposure against an agreed barometer of the market without affecting their competitive advantage. By allowing carriers to protect themselves against market fluctuations better competitive conditions for all will be created.'

Trading the CFSA

The CFSA contract allows participants in the container freight sector to exchange a fixed for a floating cash flow (a swap trade) with the floating element being supplied by the Shanghai Containerised Freight Index. Swapping financial risk is widely used in commodity, currency and interest rate markets and as such has a proven track record; ease of execution and cash settlement have further driven the early adoption and growth of the CFSA since January.

Clarkson Securities are promoting the four main tradelanes covered by the SCFI as settlement routes with forward pricing available for North Europe, Mediterranean, U.S. West Coast and U.S. East Coast trades ex Shanghai. There is also the opportunity to trade the comprehensive SCFI index (a weighted average of all 15 routes) or one of the smaller routes. Although the market is intially OTC only, CSL are working closely with a partner to provide cleared trading on the main routes as soon as possible.

To learn more about trading the CFSA and OTC acceptance contact your Clarkson Securities broker here.