Container swap derivative clearing to boost market

LCH Clearnet's launch of a new over-the-counter (OTC) clearing service for container freight swap agreements is set to inject liquidity into the emerging market

London clearing house LCH.Clearnet has launched an OTC clearing service for Container Freight Swap Agreements (CFSA) in a move market participant believe will help to inject more liquidity into the market.

“It’s a significant milestone in terms of the development of the market,” says Alex Gray, chief executive officer of UK-based freight brokers Clarksons Securities Limited (CSL). “Even though the volumes for container swaps have progressed well since the first trade in January, we see clearing driving much more activity,” he adds.
   
Pricing of container rates has experienced huge volatility over the past 12 months. The cost of shipping a container from Asia to Europe soared from $400 per twenty-foot equivalent (TEU) units in March 2009 to $2,100 per TEU in March 2010, according to CSL data.

On the back of this increased volatility, large-scale companies that use containers to ship their goods from the Far East to Europe and the US, such as US conglomerate Walmart, have shown increased interest in managing the associated risks.

CSL completed the first container derivatives trade on January 15, hedging the forward price of shipping a container from Shanghai to Europe.

John Banaszkiewicz, managing director of global shipping brokerage Freight Investor Services (FIS), agrees the launch of the clearing service represents the “next important milestone in the evolution of this emerging market”.

According to Banaszkiewicz, most brokerages have begun trading the new product but he points out that the Baltic Exchange is yet to get on board. “It’s just a shame that the Baltic Exchange, which already publishes the indices for dry and wet freight swaps, has missed the golden opportunity to add the container sector to its portfolio of assessments and indices.”

In response, CEO of the Baltic Exchange Jeremy Penn says they are taking a wait-and-see approach: “The Baltic is always looking for new opportunities to serve our marketplace but we’re not prepared to compromise on the quality of what we provide, so sometimes we prefer not to rush,” he says.

The CFSA will be settled against the Shanghai Containerised Freight Index, published by the Shanghai Shipping Exchange.