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UPDATE 1-Baltic index aims to boost derivatives trading

Published 07/01/2009, 01:27 PM
Updated 07/01/2009, 01:32 PM

* Aims to boost investor interest in index

* Seeks to raise FFA volumes

(Adds Baltic Exchange CEO, broker comment, background)

By Jonathan Saul

LONDON, July 1 (Reuters) - The Baltic Exchange said on Wednesday it had changed the way its chief sea freight index was calculated in a move aimed at boosting freight derivatives trading.

The daily index, which gauges the cost of shipping resources including iron ore, cement, grain, coal and fertiliser, is compiled from data provided by members of the exchange from international ship broking companies.

The main index, which was launched in 1985, will now monitor 20 major export routes for commodities excluding oil and is a key gauge of economic activity.

The Baltic's main freight index is made up of four indices including the Capesize index, which represents rates for the largest class of merchant vessels carrying iron ore and coal.

From July 1 the index will be calculated taking the timecharter components or daily hire rates of the four indices instead of the voyage rate, which had been used previously.

A Baltic Exchange spokesman said timecharter routes were already being traded on the Freight Forward Agreement (FFA) derivatives market.

"These are already liquid routes for FFAs and by just taking these it just makes it much easier to trade the dry index," he said.

The Baltic Exchange's chief executive Jeremy Penn said there had been considerable interest from the wider investment community outside shipping seeking exposure to dry freight.

"What we wanted to do therefore was to make it possible for primarily investment banks to offer exposure to the Baltic dry index to their client base but to be able to hedge the resultant risk back into the liquid FFA market," he told Reuters.

"We are optimistic that this will be good news from the point of view of the existing FFA markets because it should boost volumes in the component parts of the BDI (main sea freight index) which regularly trade in the FFA."

Duncan Dunn, senior director with broker SSY Futures, said the move was very positive.

"By making the Baltic dry index tradable we hope to bring a good new flow of capital into the freight market," he said.

"We are certainly hopeful that banks will get good levels of enquiry into the BDI."

The London-based Baltic Exchange is made up of over 550 member companies including ship brokers, ship owners and operators, and freight derivatives traders.

The exchange's members account for 30 percent of all dry freight fixtures and 50 percent of all oil tanker fixtures.

Penn said the Baltic Exchange had previously considered a separate derivatives freight index.

"The initial problem we had was that launching a new index would potentially dilute the impact that the BDI has around the world and we did not want to do that," he said.

"By making a tiny adjustment to the BDI we have actually achieved what we wanted to achieve."

(Editing by Peter Blackburn)

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