Monday, 16 May 2011

Baltic launches the BALTEX

The Baltic exchange, home of the bellwether Baltic Dry Index and others, will soon roll out a new index – the Baltex. The UK’s Financial Services Authority (FSA) has authorised its subsidiary Baltic Exchange Derivatives Trading Ltd (BEDT) to run a Multilateral Trading Facility to offer trading in Forward Freight Agreements (FFAs). The Baltex, a central screen based trading solution for the dry FFA market, will go live shortly, a Baltic press release said after a meeting of their Board on May 4.

Baltic Exchange chairman Mark Jackson said, “In establishing and funding the Baltex system, the Baltic continues its core role in facilitating the development of the shipping marketplace in all its forms. This is the right response to broad market developments and emerging regulatory change.”

Baltic Exchange chief executive Jeremy Penn said that the Baltex would be the only FFA trading platform authorised by the FSA, adding, “We are pleased to have finally received the FSA’s approval and Baltex will be opening for business very soon. We have held back the launch to allow companies wishing to participate enough time to deal with the formalities of signing documentation.”

FFAs are essentially derivatives- risk management tools that derive their value from underlying assets. In the shipping industry, the underlying asset is the freight rate for a specific physical trade route. FFAs are meant to allow interested parties to hedge exposure to the freight market and so manage their risks. Started in the early 90’s, FFAs today have evolved into more complex instruments today in line with other derivates markets; like other derivates markets, they have attracted many speculators as well.

The Baltic Exchange says that the Baltex will be “underpinned by the highest supervisory and compliance standards”, and a high level of market support. “This is a trading system created by the shipping market and presents a unique opportunity for all freight derivatives stakeholders to benefit from faster execution and a more efficient transmission to clearing. It has been designed to attract new financial and commodity-orientated participants who prefer to trade in a regulated environment,” a statement says.

The Baltex, developed over the last two years, will trade Dry Bulk voyage FFAs and Time Charter FFAs- both Trip and Average- for frequented trade routes. Based on technology developed by Elysian Systems , the BEDT run system screens will provide FFA prices live; the system will also support straight through processing to international clearing houses across the world, displaying real time information to participants but keeping the trader’s identity secret to all except the nominated broker. The Baltex will have a custom made screen layout with warnings and can be modified to individual trading needs. It will also have a ‘view only’ function for those who want to see market conditions without trading. The exchange hopes that the genesis of the user friendly system, developed in collaboration with the market, will make it a popular choice for brokers, ship owners and other interested parties.

FFAs conventional thinking says is that the market for FFAs will soon come to surpass the underlying physical market in terms of dollar value. Critics point out that the mismanagement of broader derivates was responsible in large part for the near collapse of the international financial system that hit the world recently- and that FFAs are today used similarly by many, more for speculation rather than hedging risk. That may be true, but FFAs are here to stay anyway; perhaps a well regulated Baltex will help keep malpractices out of the system.

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