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The Shanghai Shipping Exchange is to offer financial derivatives based on its newly released Shanghai Containerised Freight Index (SCFI) to fill the hole in the global shipping financial trade.
"The derivatives will be released as soon as possible," said exchange president Zhang Ye. He did not reveal when the derivatives trading will begin but added that derivatives on the Forward Freight Agreement (FFA) were likely to be the first of the new instrument.
The derivatives will be based on the new SCFI released on October 16. The index, published at 3 pm every Friday, starts at 1,000 points with October 16 as the baseline. More than a month later, on November 20, the index climbed to 1,051.32.
The 15 lines comprising the indices display their individual ocean freight rates and related surcharges such as BAF and CAF. Lines serving Europe and the US West Coast account for 20 percent of the indices, those serving the Mediterranean 10 percent and the rest is accounted for by lines serving the US East Coast, Persian Gulf and Red Sea, Australia and New Zealand, East/West Africa, South Africa, South America, West/East Japan, Southeast Asia, South Korea, Taiwan and Hong Kong.
The index displays international container rates, spells out shipping activities and trends, reflects foreign trade flow, and serves as a tool for making hedge strategies by exploiting spot and forward differences.
"The SCFI not only serves as an industrial yardstick that will make the spot index more practical, objective and timely to reflect the market, we'll also explore its function as a tool of investment that fits into the needs of the FFA and futures trading," said Zhang.
Theoretically, each of the 15 container routes listed in the index could give rise to a derivative upon completion of trading contracts. And different contracts for each route could lead to different derivatives as well.
In addition, Zhang said that the exchange was still working on introducing more financial derivatives, such as developing futures products based on the China Containerized Freight Index (CCFI), which is the world's only gauge to track the container freight market.
The new SCFI meets the needs of carriers, freight owners and forwarders and traders while at the same time filling the hole in the provision of financial instruments.
The world has seen a number of shipping indices except one on container freight, said Zhang. The FFA trading, based on the Baltic Dry Index, has attracted more than a dozen Chinese carriers and traders, he added.
"Although the Baltic Dry Index remains the key indicator to reflect maritime trade in general, the financial crisis has propelled more investors to watch the CCFI, which expresses a much broader picture of the status of international seaborne trade," Zhang said.
Compared with the SCFI released in December 2005, the new SCFI includes 15 members from freight forwarders on the editorial board to balance the number of carrier members.
"The presence of freight representatives avoids unbalanced information flow and raises the objectivity and creditworthiness of the index," Zhang said.
The exchange has developed a complex but easy-to-operate online system for the reporting and compiling of indices and to encourage fair trading, exchange staff are not allowed to engage in any trading of shipping index derivatives.
The shipping exchange's task team will conduct face-to-face check of index information from each member at the latter's office apart from regular checks before weekly releases. The exchange itself will engage third-party auditors.
The exchange has been busy but cautious in the selection of index products, design of agreements and other preparations but has been unable yet to set a date for the launch of the derivatives because of difficulties collecting reliable data, which is linked to government policies and rules.
According to exchange officials, the technical problems related to trading in derivatives have been solved after six years of testing and research into the product, but their launch has been delayed because of concerns over policy and supervision, aspects beyond the province of the exchange. The exchange also has to make sure the derivatives are free from manipulation and resilient against speculation.
The exchange said that to obtain reliable data, the source of the data must be regulated. There must be proper supervision of resources pooled from shipping associations, securities commission, legislatures, and the government.
"We're confident that in the near future, the index will become the basis of settlement for trading in international container index derivatives," Zhang said.
In April, the State Council designated Shanghai as China's future international financial and shipping centre and urged the city to enrich its shipping financial instruments and build up its freight index products.
All financial centres in the world are also shipping centres at the same time, and "Shanghai has to live up to the twin expectations", Zhang said.
He said an international shipping centre should offer low-cost but high-level shipping services with fair market standards.
An industry source also said that an international court of arbitration for the shipping industry, the country's first of its kind, will be launched in Shanghai soon.
Source: cargonewsasia Author: Raymond Duan |
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