Major boost for swaps liquidity as WCI backhaul routes are listed for clearing.
Introduction of clearing for new Europe-Asia routes will bring significant additional trading potential to container derivatives market. The World Container Index is pleased to announce that two WCI route assessments, covering Los Angeles to Shanghai and Rotterdam to Shanghai will now be cleared by LCH.Clearnet. The addition of clearing, which provides risk management for over-the-counter container freight swap trades, has been made in response to increased demand to manage freight price risk and reflects the growing market acceptance of the WCI.
Since launch in September 2011, the WCI has emerged as the preferred tool for pricing index-linked contracts in the physical container market while also providing the platform for hedging of exposure in the derivatives market.
WCI director Richard Heath said: “From its foundation, the World Container Index has been working closely with freight buyers and sellers to ensure that our products satisfy their needs for risk management. These first cleared contracts represent another step forward for the WCI and for the growing container freight derivatives market, helping to bring new solutions to a wider number of shippers, carriers and intermediaries.”
The contracts are similar to Asia-Europe routes already listed by LCH.Clearnet but differ in that WCI contracts are marked in FEU rather than TEU, to more accurately reflect the physical market. Contracts are settled monthly and initially will be available across the front three months, four quarters and front calendar periods. LCH.Clearnet director of freight and commodities Isabella Kurek-Smith, said: “LCH.Clearnet is delighted to clear these first WCI contracts, providing transparency and robust risk management for traders in the container swaps market. The growing demand for these new backhaul routes demonstrates that this is a market with considerable potential.”
Brokers in the Container Freight Swap Agreement (CFSA) market welcomed the develop as an important step in building trust and transparency in the WCI and delivering an additional layer of swaps market liquidity. FIS Container Swaps broker Steve Phillips said: “The listing of these contracts by LCH.Clearnet is a critical development for the container swaps market. Traders have been waiting for liquid contracts that complement the existing headhaul routes. These contracts bring their own unique opportunities for hedging and risk management and will provide a new impetus for increased swaps volume. The availability of these contracts, coinciding with the announcement by the WTSA, regarding the proposed GRI on westbound Pacific routes, highlights the benefits that container swaps can provide in managing volatility.”
Both the Los Angeles-Shanghai and Rotterdam-Shanghai contracts are classed as backhaul routes, with cargoes that are generally of lower value than the corresponding headhauls. The largest commodity groups include wastepaper, scrap metal, scrap plastic as well as agricultural commodities and chemicals, carried under a larger percentage of spot business than is typical on the Asia-Europe trade lanes. While freight rates on these routes are less volatile, market movements can be much larger in relative terms due to the low value of the freight and doubling of rates is not uncommon. Rates are driven by the availability of containers rather than vessel space, which makes rates less predictable and therefore highly suitable for hedging.