Box derivatives traders plan clearing house settlements

Janet Porter - Monday 18 January 2010

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TRADES in a brand new paper product based on container freight rates = could=20 soon be settled through a clearing house rather than over the counter, = if all=20 goes according to plan.

That would give a significant boost to the fledgling market launched = last=20 week at a time when freight rates are showing clear signs of recovery. =

Alexander Saverys, managing director of Delphis, which completed the = first=20 ever transaction in the new instrument on Friday in a trade with Morgan = Stanley,=20 said container freight swap agreements could provide a genuine hedge = against=20 future rate movements for both carriers and shippers, if handled via a = clearing=20 house.

That removes any risk of losses resulting from default by the = counterparty=20 that is the weakness of over-the-counter trading.

Clarkson Securities, which developed the new derivatives product in=20 collaboration with the Shanghai Shipping Exchange, is in talks with a = clearing=20 house and hopes events now move on quickly. But first of all, the = pioneers of=20 container swaps need to attract more counterparties, establish some = liquidity,=20 and create a forward curve before a clearing house will agree to settle = trades.=20

Mr Saverys said hedging tools would be welcomed in the container = shipping=20 trades that =E2=80=9Chave been torn apart=E2=80=9D over the past 18 = months as customers walked=20 away from contracts and demanded new terms amidst plunging freight = rates.=20 Operators had no choice but to renegotiate or be saddled with major cash = flow=20 problems, but hedging opportunities would have helped to mitigate the = situation.=20

Until now, lines have had no means of protecting themselves from a = drop in=20 revenue such as the collapse last year that has brought some to the = brink of=20 collapse.

Conversely, they have had no way of compensating for market increases = when=20 locked into low rates through annual contracts that are a feature of the = transpacific trades.

=E2=80=9CWe definitely intend to remain active (in = derivatives),=E2=80=9D Mr Saverys told=20 Lloyd=E2=80=99s List.

Container shipping participants have been debating for years about = whether=20 derivatives trading should be based on charter or freight rates.

Although numerous indices based on charter rates are published, very = few=20 existed until recently that measure freight rates. However, the European = Liner=20 Affairs Association now publishes price indices based on routes serving = Europe.=20

The new hedging tools developed by Clarksons will be based on = container=20 routes out of China, however.

Clarkson Research, the first to launch a paper product, developed the = Shanghai Containerised Freight Index in partnership with the Shanghai = Shipping=20 Exchange that collates freight rates from lines operating services from=20 Shanghai, and so already had a suitable database.

The index is based on 15 routes, with derivatives trading expected to = focus=20 on four of these initially. Even if they do not offer an exact match = with=20 physical trades that potential counterparties may want to hedge, the = swap=20 agreements should still provide a a good degree of protection, said = Clarksons.=20

The new instruments will be quotes in dollars per 20 ft container, = with a=20 30-strong panel established to ensure the index provides an accurate = barometer=20 of market conditions.

For Delphis, Friday=E2=80=99s trade was not a genuine hedge but an = opportunity to be=20 the first to trade in a market that Mr Saverys expects to become much = bigger.=20

The spot container freight market was highly liquid, he said, whereas = the=20 spot charter market was potentially illiquid. That was because as soon = as the=20 market started to pick up, charter contracts were likely to lengthen to = six or=20 12 months, or more, with genuine spot trading vanishing.

Separately, Mr Saverys said Delphis would be lodging a formal = objection to=20 the Baltic Max Feeder scheme that the European Commission is = investigating.=20 However, he predicted that by the time Brussels has completed its probe, = the=20 dire charter market that owners are currently facing will probably have = eased.=20

New order cancellations and delays have given owners some breathing = space,=20 while market sentiment is showing distinct signs of improvement as cargo = demand=20 starts to grow again on some major freight routes.

Box derivatives traders plan clearing house settlements

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