Dry derivatives vehicle grinds to virtual standstill

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Michelle Wiese Bockmann - Tuesday 19 May 2009

TRADING in the newest freight derivatives contracts, launched a year ago based on the Baltic Dry Index, has slowed to a trickle, with most products either withdrawn or infrequently traded.
Swiss bank UBS no longer offers its UBS Blue Sea Index, launched in April 2008, while liquidity in rival products offered by other derivatives brokers remains very low.
ICAP Shipping, Imarex and SSY Futures all began offering contracts settled against the BDI at the height of the shipping supercycle in the first half of 2008.
Their derivative products were positioned as an alternative to conventional forward freight agreements. 
They aimed to attract banks, funds and investors piling into the booming paper market alongside shipowners, charterers and commodities traders.
The contracts were based on the premise that banks wanted simpler paper exposure via the BDI, a points-based composite index of 22 dry bulk shipping routes, globally recognised as a key economic barometer of commodity freight rates.
But the market crash in September, which saw freight rates plummet and global financial markets freeze, drastically changed the freight derivatives market landscape.
“With the downfall in the industry, it’s getting less attention than before due to the fact that people are focusing more on physical and regular FFAs,” said Imarex global head of dry bulk derivatives Bjorn Stromsnes about the Norwegian derivatives broker’s BDI Futures contract, launched in June, 2008.
“BDI interest is still there and is being traded in fewer larger chunks in the market among the banks, but it has not taken off to the extent that we expected due to current market conditions.”
Mr Stromsnes said paper trading now focused on the most liquid routes such as panamax and capesize dry bulk carriers.
“Generally we have had a lot of interest from the financial community, and we expect the BDI market to improve along with the rest of the market,” he said.
Imarex has not released details of volumes traded.
SSY Futures, which launched a BDI product cleared via LCH.Clearnet, initially had “an interesting flow of inquiry”, according to SSY Futures senior director Duncan Dunn.
“But what we found was that when a serious inquiry came in it was far more expedient just to put them into a panamax time charter [FFA contract] or whatever, simply because it was more established, and the sorts of inquiries that we were getting were tending to be from professional investors of the type that the panamax contract was not an unsuitable opportunity for,” Mr Dunn said.
Asked about the product’s current status he said: “To date there’s not been any volume through it.”
ICAP Shipping also launched a BDI futures contract, convinced that financial institutions sought just one contract to bet on whether global freight rates would rise or fall.
Last June the broker’s derivatives managing director Edmund Gordon Clark hoped it would turn into “a significant index”. He did not return calls today.
The struggling products largely replicated the Baltic Exchange’s failed Biffex futures contract, a financial instrument withdrawn in 2001, also because of low liquidity. The FFA market has evolved since then with contracts centred not on the BDI but buying daily time charter equivalents for different bulk carrier types, and even specific routes.
Mr Dunn hoped the pending launch of the Baltic Exchange’s purpose-built index for paper trading, the Baltic Dry Trade-able, would provide one product instead of disparate BDI trading alternatives.