News / EU's reporting rules on swaps will throw new light on container derivatives market

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New reporting regulations for the derivatives and swaps market to be introduced in the EU this week could shed new light on the hitherto unreported use of forward freight agreements (FFAs) in container shipping.

From Wednesday, everyone who trades derivatives in the EU must report their transactions to one of six new “trade repositories” – a move designed to take some of the risk out of the market following the collapse of Lehman Brothers and subsequent financial crisis, much of which was blamed on the opacity of much of the derivatives market.

The new rules cover private transactions – so-called over-the-counter deals or swaps – which make up the bulk of the derivatives business globally. Those that take place through clearing houses or on exchanges had to be reported..

Container freight derivative brokers estimate that 98-99% of box FFAs are over-the-counter – that is, deals arranged privately between a client and a merchant bank which hitherto have remained private and unreported.

As a result, claim brokers, few outside the market realise that around 3-3,500teu per week are fixed as FFAs, mostly on the highly volatile Asia-North Europe tradelane.

This activity has been masked further by the decision of broker Clarksons to close its container freight desk, due to a lack of business. Its product saw trades settled through a clearing house, which reduced counterparty risk but is a considerably more expensive way of settling FFAs than over-the-counter trades.

“The investment banks offer very favourable credit lines,” one broker told The Loadstar. “A clearing house might charge $6 per teu while a bank is more likely to charge $1-2, which adds up when you are talking thousands of teu.”

Those involved in FFA deals include some major shippers, and 3PLs including SEKO Logistics, while some of the major carriers are now said to be hedging up to 1,000teu at a time.

”What has changed over the past year is that a lot of people admit that container shipping has effectively become a commodity; and once you realise that, taking the next step to hedging is easier,” another broker explained.

He added that the motive for forwarders to engage in FFAs was not purely hedging against price fluctuations, but also freeing-up management time.

“They are using FFAs to guarantee freight rates and capacity, and then talking to customers about the other business lines that forwarders provide,” he said.

Brokers hailed an industry lunch with 3PLs last week as a success, and claimed another four forwarders would soon be using them for FFA deals.

“At least two out of those four will be among the global top 10 forwarders, but the market won’t know about them until there is more transparency,” one said.