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Freight derivatives are traded as Forward Freight Agreements (“FFAs”) which are
OTC instruments traded on a principal-to-principal basis. As such they are flexible
and not traded on any Exchange.
Contracts are normally traded be based on standard terms and conditions.
The main terms of an agreement cover:
(a) The agreed route.
(b) The day, month and year of settlement.
(c) Contract quantity.
(d) The contract rate at which differences will be settled.
Settlement is between counter parties in cash within five days following the
settlement date. Commissions will be agreed between principal and broker. The
broker, acting as intermediary only, is not responsible for the performance of
the contract.
The market is predominantly cleared. Cleared contracts (or “futures” are settled
on a daily basis through a clearinghouse and settlements are based on a close-of-play
trading price. At the end of each day, traders pay or receive the difference between
the price of the paper contract and the market index. Clearing is offered by:
LCH.Clearnet, NOS, SGX and CME.
The majority of FFAs are traded against the timecharter averages for the four
main vessel types: capesize, panamax, supramax and handysize and settlement is
made against the Baltic Exchange averages which are published daily.
So what drives the freight derivatives market? Part of the answer lies in the
mutual, but opposite interests of the natural buyer (Charterer) and the natural
seller (Owner) in the shipping market and the opportunities these create for the
Trader or Operator in the middle. It was largely these tensions that CSL sought
to address when developing FFAs in the 1990s.
The increased visibility of freight in the global markets and the interest in
trading it as a “commodity” has meant that we have seen a surge of interest and
engagement from the financial markets
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