Container Freight Derivatives Overview

The Container Freight Swap Agreement (CFSA)

CSL executed the world’s first container freight derivative trade in January 2010, followed by the first cleared trade in June 2010. By working in partnership with the Shanghai Shipping Exchange (SSE) to develop their Shanghai Containerized Freight Index (SCFI) product, CSL has been the driving force to market this new product.

The container industry provides a network of fixed port, time scheduled services that has made globalisation a reality. Manufactured consumer goods, foodstuffs, agriproducts and a variety of other commodities are regularly shipped by the world’s container lines (carriers) in a large fleet of specially designed container ships with main trade lanes being from Asia to Europe and Asia to the U.S.

Container freight rates are subject to a complex set of supply and demand fundamentals that can destabilise the $/TEU market
The availability of ships from the carriers and the charter market, together with global consumption of goods are key market drivers
Clarksons has a significant presence in the global charter market and a dedicated Research desk producing industry benchmark standard container market analysis.

The export of manufactured goods is key to the Chinese economy and containerised freight rates offer a leading indicator as to the health of Chinese output. The SCFI is the first global index to capture $/TEU freight rates and the CFSA contract will allow banks and hedge funds to get access to container market pricing.

CSL is working with investors in shipping equities to develop risk management strategies for their positions. Clarksons dedicated container sale and purchase team is also working with clients to use CFSAs to service debt requirements and to protect future vessel earnings and asset values.

Trading the CFSA

The Container Freight Swap Agreement (CFSA) is settled against the SSE's Shanghai Container Freight Index (SCFI). The index is comprised of freight rates from Shanghai to a number of mainline ports around the world giving USD per TEU or FEU assessments on 15 tradelanes. 30 panellists assess rates on an ‘all in’ basis for spot shipment. The panel is comprised of container lines, non-vessel operating common carriers and freight forwarders

The initial trade was the result of many years research into the potential market for container derivatives and the decision to concentrate on the container freight market and its 'dollar per box' pricing, as the most exciting for a futures market. The intervening two years spent assisting the SSE in developing a new index, saw unprecedented volatility in the underlying physical market. This strengthened the argument for improved risk management practices in the market.

Our customers are the world’s largest shipping lines, retailers, manufacturers, logistics providers and investment banks.

The CFSA contract allows participants in the container freight sector to exchange a fixed for a floating cash flow (a swap trade). The floating element is 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.

CSL is 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.

Clearing is available through LCH.Clearnet and SGX AsiaClear.

To learn more about trading the CFSA contact your CSL broker here.