Freight Investor Services (FIS), a major broker of freight and commodity derivatives, has made the first of what it believes will be many renminbi (RMB)-denominated forward freight agreement (FFA) trades.
FIS has spent the last 12 months working with the Shanghai Clearing House to foster the launch of an RMB-denominated dry freight derivatives contract, based on Baltic Exchange indices.
The very first RMB FFA trade was made on 10 December on the December Panamax 4TCs contract at RMB45,000, equivalent to $7,150/day, between FIS as buyer and local broker Windely as seller.
“We are delighted to be the broker for the first FFA trade made in RMB and cleared with the Shanghai Clearing House and we think this heralds a new era in swaps trading in China,” said John Banaszkiewicz, managing director of FIS.
“Freight rate volatility is running at 132% for the front month Cape contract – far higher than the volatility of the commodities being shipped into China. In the next couple of years as freight rates recover, it will become even more important to manage the shipping portion of the delivered commodity price.”
With annual imports of dry bulk commodities equivalent to 44% of seaborne trade, Chinese exposure to freight rate volatility makes it ideally placed to hedge risk using cleared cash-settled swaps.
However, until recently currency controls have made Chinese participation in dollar-denominated markets almost impossible with privately-held Chinese companies wishing to trade forward freight agreements (FFAs) doing so via overseas offices and foreign currency accounts. With the removal of that restriction the market is set to grow rapidly.
“Just as in steel, oil, grain and coking coal, there is a huge pool of potential liquidity here to tap into, added Banaszkiewicz. “FIS is fully licensed in China to broker these swaps and we think in time RMB swaps can be developed into an arbitrage market to dollar-denominated exchanges outside China, creating even more trading potential.”
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