Container swaps traded
The first trade of a container freight swap agreement based on the Shanghai Shipping Exchange's Shanghai Containerized Freight Index (SCFI) took place last Friday, announced Clarkson Securities Ltd., the derivatives broking arm of Clarkson PLC.
The trade took place between global investment bank Morgan Stanley and Delphis, whose subsidiary Team Lines operates container feeder ships in Europe.
Financial derivatives for the container shipping industry have been long discussed. They are commonplace in the bulk shipping market where they have been in use since the 1990s.
'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,' said Alex Gray, chief executive officer of Clarkson Securities Ltd.
The forwards or swaps are 'principal to principal' derivative contracts — agreements between two counterparties where one takes the view that freight rates will increase above some agreed level in the future, while the other believes they will decrease.
The contract is settled against the price of an index — in this case the SCFI or one of its components — with the difference between the agreed price and the index paid to the company that made the correct call by the other counterparty.
There is no 'physical delivery' of space on ships, as there might be with, say with copper futures, where a contract might be settled by delivery of metal to a warehouse.
Benjamin Gibson, a freight derivatives broker at Clarkson, said the first contract was a small one, covering the movement of only five containers in each of two months.
But Clarkson believes there is big potential in the market, not only among shippers and carriers that may want to hedge risk, but by financial firms looking for a new product to trade.
Gibson noted that there have been proposals in the past to trade derivative products based on containerhip charter indexes such as the ConTex index published by the Hamburg Shipbrokers Association, but he said Clarkson believes there will be broader interest in a derivative based on the actual freight rates.
Getting an unbiased assessment of freight rates in container shipping has always been more difficult than with bulk commodities.
To come up with a reliable estimate of dry bulk shipping rates, the Baltic Exchange averages freight rates estimates from a panel of brokers. The brokers who develop the Baltic Freight Index are seen as neutral since on one day they may be representing ship owners seeking cargo for their ships and the next a cargo owner looking for the best rate to move its commodities.
To come up with a neutral estimate of container freight rates, the Shanghai Shipping Exchange is also using a panel of companies — but it has picked 15 carriers and 15 freight forwarders or shippers to guarantee neutrality. Eleven of the 20 largest container carriers are supplying panelists to develop the index, while Chinese firms dominate the non-carrier panel.
On a weekly basis, the panelists submit freight rate assessments for moving cargo from Shanghai along 15 trade lanes, quoting dollar per TEU 'all in' rate for dry cargo containers that includes ancillary fees such as bunker surcharges. A weighted average of those rates is then calculated to give a comprehensive index. The index is released every Friday at 3 p.m. in Beijing.
Gibson noted it would be possible for companies to trade either the comprehensive index or individual components. Indeed, in the first trade between Morgan Stanley and Delphis, the swap was based on the component of the SCFI for trade between Shanghai and a sampling of North Europe ports.
While Delphis has no ships directly employed on the Shanghai-to-Europe route, Gibson said the companies like it may find it useful to trade forwards on the freight rates of their customers.
Gibson also noted that container freight derivatives can also be used for speculation as wells as hedging.
'We have a lot of interest in this product by the financial industry, mainly banks, but also hedge funds, who come from outside of the container shipping industry, but see a lot of potential in using their experience in other markets to predict where freight rates are going in six to 12 months and want to use this product to speculate,' he said.
Traders will be able to trade futures as far forward as they feel comfortable. Initially, Gibson said he thinks it will be possible to arrange trades for rates three or six months forward, but he would like to see trade going 12 months forward. He said in the dry cargo futures market there are trades on freight up to three years out. ' Chris Dupin