Baltic mulls average daily time charter rate

Michelle Wiese Bockmann - Friday 27 June 2008

Penn: requests made by derivatives traders. Penn: requests made by derivatives traders.
THE Baltic Exchange will consider industry demands to develop an average daily time charter rate for the Baltic Dry Index, to boost transparency for the rapidly-growing market in freight derivatives. 

The move follows the recent launch of a series of retail-based derivatives products based around the BDI, aimed at banks, hedge funds and other investors outside shipping seeking direct exposure to global freight rates. 

Now viewed as a vital economic barometer for world trade, the BDI reflects the average freight rates for 26 routes and four ship types, and is expressed via points, not as a dollar-per-day rate for bulk carriers. 

Baltic Exchange chief executive Jeremy Penn said the request for establishing a time charter average had been made by derivatives traders. 

“There’s an argument that if we can do that (provide a time charter average) then so can everybody else,” Mr Penn said. 

“But we will certainly be taking a look at that and come back with a view on that, and whether it’s unnecessary because it’s something we already can do on our own.” 

In June derivatives brokers Imarex and ICAP Hyde both launched derivatives contracts based around the BDI. 

Forward freight agreements for the dry bulk industry had previously been traded only on the daily average time charter rate for different bulk carrier types or the daily time charter cost on major routes. 

These are then settled against the corresponding Baltic Exchange indices. 

Both brokers said there was strong demand for a simpler global freight derivatives contract as the evolution of screen-traded, cleared contracts sharply reduced counter-party risk, opening up new participants. 

Six months ago the Baltic Exchange began providing a dollar-per-day rate for its tanker indices for the first time, in addition to Worldscale rates. 

A daily average timecharter rate for most tanker types is now provided for the Baltic Dirty Tanker Index for very large crude carriers, suezmax and aframax tankers. 

The step was viewed as an important step forward to boost transparency for paper trading in tanker derivatives, allowing contracts to be better priced and more easily understood by traders outside the shipping industry.
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