FMC to look at container swaps
The U.S. Federal Maritime Commission has created a working group that will research and analyze issues arising from the use of container freight rate indices in service contracts and index-based derivative transactions.
“Index-based ocean freight rates and derivatives have potential to be useful tools for shippers, intermediaries and ocean carriers to increase rate certainty and manage risk,” said Chairman Richard A. Lidinsky Jr.
“It's important that market participants have flexibility in structuring rates and hedging strategies. At the same time, I want to explore whether modest, common-sense standards are needed to ensure participants have adequate information and avoid manipulation.”
Lidinsky’s chief of staff, Lowry Crook, will chair the working group that will advise Lidinsky and the four other commissioners.
The FMC has “started to see a handful of service contracts with rates that reference a freight index,” but he said confidentiality rules prevented him from sharing any specifics.
Container freight indexes have been developed by the Shanghai Shipping Exchange and Drewry Shipping Consultants, and have been promoted as tools to manage freight risk.
The group will consult with other agencies involved in regulating derivatives such as the Commodity Futures Trading Commission, Securities and Exchange Commission and Federal Energy Regulatory Commission.
Lidinsky has asked the working group to begin by examining:
' “What potential statutory issues may arise as shipping lines and their customers use index-based rates? For example, what types of index-based rates satisfy the Shipping Act requirement that service contracts include line-haul rates?
' “Do freight rate indices comport with the current commission requirement that outside terms referenced in a service contract be ‘contained in a publication widely available to the public and well-known within the industry’? Should the current regulations be modified to allow service contracts to reference an index that is readily available to the parties but not the general public?
' “Are safeguards needed to ensure that an index referenced in a service contract is verifiable and beyond the control of the parties to the contract?
' “Do various indices' methodologies or structures raise concerns about transparency or potential manipulation?
' “After the Dodd-Frank Wall Street Reform and Consumer Protection Act takes effect, what U.S. and foreign regulations will govern proposed container freight index swaps that incorporate rates in U.S. trade lanes or involve U.S. counterparties?
In addition to Crook, the members of the Container Freight Index and Derivatives Working Group will be:
' Ronald D. Murphy, FMC managing director.
' Florence A. Carr, FMC deputy managing director.
' Tanga S. FitzGibbon, deputy director, Bureau of Certification & Licensing.
' Roy J. Pearson, deputy director, Bureau of Trade Analysis.
' Gary G. Kardian, director, Office of Service Contracts & Tariffs.
' Joseph R. 'Randy' Johnson, industry economist, Bureau of Trade Analysis.
' Ernest L. Worden, industry economist, Bureau of Trade Analysis.
' Rebecca Fenneman, FMC general counsel.
' Daniel S. Lee, attorney-advisor, Office of General Counsel.
The working group has been asked to provide an initial status
report at the next commission meeting on June 8, 2011. ' Chris Dupin