Freight Market Fundamentals

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FFA The Principles of Forward Freight
Agreements
BIMCO Centenary, May 2005
Philippe Van Den AbeeleClarkson Securities
Limited
STRICTLY PRIVATE CONFIDENTIAL
STRICTLY PRIVATE CONFIDENTIAL
STRICTLY PRIVATE CONFIDENTIAL
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Format

• History of Freight Derivatives
• The Concept
• FFA Growth
• FFA Volume
• Use of FFAs Today
• Indices
• Freight Derivative Products
• Hot Issues
• FFAs and the Far East
• Major Market Players
• Contacts

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History of Freight Derivatives

• Where did it all start?
• The concept of Freight Futures (BIFFEX).
• Emergence of OTC freight swaps
• - Introduction of basis risk.
• The BFI was split into Baltic Cape Index (BCI),
  Baltic Panamax Index (BPI) and Baltic Handymax
  Index (BHMI) from March 1999.

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History of Freight Derivatives Cont.

• October 2001 NOS launches a clearing service for
  the dry and wet shipping market through Imarex.
  In January 2004 NOS clearing available to all
  FFABA Members.
• Nymex is offering freight clearing services,
  first in tanker ffas, as of May 2005.
• LCH.Clearnet will clear dry and wet freight as of
  July 2005.

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FFAs The Concept

• The concept of FFAs was pioneered by Clarksons in
  1991.
• Effectively Clarksons introduced a mechanism to
  trade an individual route.
• First traded in October 1992 between two well
  known European Shipowners.

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The Concept Cont.

• FFAs are contracts between two clients one party
  (the Buyer) is committed to a view that an agreed
  route (based on an agreed quantity) will be
  valued higher than an agreed rate on an agreed
  date. The other party (the Seller) contracts to
  differ. In nearly all cases, it will be a
  component part of a Baltic index on the agreed
  date which determines the rate at which the FFA
  is settled.
• Ease of execution
• Cash settlement

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The Concept Cont

• Confidence in indices.
• Growth of options trading (automatic
  settlements).
• FFA concept of swapping financial risk is
  widely used in commodity, currency and interest
  rate markets.

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The Concept Cont

• FFAs are Tailor-made, customised, flexible with
  regards to cargo size, flexible with regards to
  settlement dates, low cost.
• Forward Freight Agreements are aimed at
  professional clients only.

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FFA Growth

• Priced against specific routes
• Reduction of basis risk
• Increase in statistical correlation
• Greatly improved liquidity
• Narrower bid/offer spread

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FFA Volume / Dry
Source FFABA
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Indices

• 43 routes / 4 panels / 32 shipbroking companies /
  11 countries.
• Dry Cape (BCI) / Panamax (BPI) / Handymax (BHMI)
  
• Tanker Dirty TD / Clean TC.
• Indices are all used as general market indicators
  for the respective sectors and as settlement
  mechanisms for Forward Freight Agreements (FFAs)
  traded on the over the counter market (OTC).

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Indices Cont.

• Panellists Duties.
• Panellists Requirements.
• The Baltic Exchange is responsible for
  calculating the final index figures, which are
  then published at 1pm (dry) and 4pm (tankers),
  London Time.

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Baltic Panamax Index 74,000 dwt 22/05/05
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Most Liquid Panamax Routes

• 4 T/C BPI More than 1000 years traded in 2004
• R2a Cont/Far East
• R3a Transpacific round

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Why Use FFAs?

• To dampen freight volatility
• Trading tool/making money
• Floating price hedging
• Fixed price hedging
• Arbitrage Trading
• Can be anonymous
• No pollution problems
• No Logistical Headaches

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4 T/C BPI May 2002 May 2005
Support
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The FFA Prices Basis BCI (Capesize)
/mt basis 20/05/05
Freight priced and traded up to 12 months forward
on monthly basis quarterly contracts traded up
to 4 yrs forward
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Freight Derivative Products

• Dry Cargo FFAs
• (Cape/Panamax/Handymax)
• Tanker FFAs
• (15 Wet and 6 Clean)
• Options
• (Dry and Tankers)
• SPFAs/Container FFAs

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Hot Issues

• Clearing
• Financial guarantor/counterparty
• Initial deposit and variation margins
• NOS/NYMEX/LCH CLEARNET
• Is there an ideal scenario?

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Hot Issues
SCREEN TRADING - Hybrid Voice / Screen - 3
Brokers CSL, Ifchor and FIS - Support from
LCH.Clearnet - To be launched as C.I.F. Summer
2005
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Market Players Dry Cargo
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Market Players Tankers
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BCI and Global Steel Production
Steel Production
BCI
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Contact Details
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