It is a tradable investment benchmark for the freight derivatives market, constructed using liquid, actively traded dry-bulk forward freight agreements (FFAs), which are over-the-counter forward contracts based on one of several underlying freight indexes. The index is weighted with 50% FFAs on the Baltic Exchange Panamax Time-Charter Average Index; 40% FFAs on the Baltic Exchange Capesize Time-Charter Average Index; and 10% FFAs on the Baltic Exchange Supramax Time-Charter Average Index.
These weights are based on liquidity criteria of the underlying FFA contracts to enhance the tradeability of the UBS-BSI and make it more representative of the relative importance of each of the OTC FFA markets.
“Over the past 12 months, the number of freight derivatives contracts traded has increased exponentially. However, FFAs remain predominantly a hedging instrument for organisations involved in the transportation of commodities and are largely inaccessible for the broad investor community,” said Ilija Murisic, executive director, hybrid derivatives trading at UBS in London.
“The UBS-BSI opens up this asset class to institutional investors and private banking clients looking for portfolio diversification as well as providing end users with a simple way to hedge their exposure to freight price volatility.”
Global freight rates are dependent on a range of factors, including not only commodity prices, supply and demand, but also port congestion around the globe. UBS has designed the index to incorporate a proprietary port congestion factor, which takes into consideration the impact on prices in the freight derivatives market of delays in the loading and unloading of dry freight in over 60 iron ore and coal ports worldwide.
The UBS-BSI governance committee will meet annually to determine the composition and the weighting of the index and its three sub-indexes, each of which covers a different size of ship: the UBS Blue Sea Capesize Index, the UBS Blue Sea Panamax Index and the UBS Blue Sea Supramax Index.
The index is one of the latest developments in the dry freight derivatives market, which has seen rapid growth over the past few years. The London-based Baltic Exchange, a shipping information provider and market for FFAs, reported record trading volumes for 2007. Following the first full year of formal reporting of trade volumes by brokers in the dry bulk FFA market, the Baltic Exchange estimated volumes to have increased by 34% year on year.
Total reported trade volume in the dry bulk FFA market for 2007 was 1,868,601 lots (a lot is a day’s hire of a vessel or 1000 metric tonnes of ocean transportation of cargo). Between the start of this year and April 21, 641,426 lots had been traded, according to the Baltic Exchange.
At the same time, clearing houses have also seen an increase in business for this asset class. In 2007, 27% of dry bulk business was cleared through one of the three main houses - LCH Clearnet in London, NOS in Oslo or SGX in Singapore. As of April 18 this year, the total amount cleared was 43%.