Going for gas

Nadia Mirza, head of new markets at the Baltic Exchange, discusses what's needed to fast track the nascent market for FFAs in LNG.

We want to help build a world-class infrastructure to support companies involved in the movement of LNG by sea manage their freight risk. We have a vision of a highly liquid market for LNG freight derivatives, which allows the volatile freight element of this commodity to be traded. But to do that, we need the support of the LNG shipping and trading community.

The Baltic Exchange has been here before: we have changed the way the dry bulk, dirty and clean tanker community manages its risk by commoditising freight rates by providing credible benchmarks. Today we have a liquid market for Forward Freight Agreements (FFAs). Trading FFAs is an activity which hundreds of shipping market participants undertake. They use FFAs to manage their exposure to the volatile freight markets or gain exposure to a segment in which they may not have invested in the underlying asset, i.e. the ships.

We helped achieve this by working with brokers, owners, charterers, traders and clearing houses to build consensus around a set of assessments. We worked behind the scenes to bring competing parties together, encourage clearing houses to look at freight as an asset class and educated the market on how derivatives work.

We invested significant resources in achieving regulated status and continue to invest to ensure that our information is audited, verifiable and completely independent. We have gone beyond basic regulation, and have had our processes audited by PwC, taking us far beyond the basic audits which just look at whether or not an organisation's data is in compliance with the principles set out by IOSCO.

The result is a liquid market, supported by a network of professional brokers, choice of clearing, all underpinned around a single set of credible benchmarks.

This is a process which took years to achieve. It started with the launch of the Baltic Freight Index in 1985, but really gathered pace in the early 2000s as we created more and more individual route assessments and reported on more vessel types.

For the LNG market, we want to fast track that process.

The fundamentals are already in place. Seaborne volumes of LNG have increased and the way in which shipping contracts are handled has changed: over the past five years an increasing amount of ships have been put to work in the spot markets. LNG carriers continue to be built on a speculative as well as a project basis.

There have already been a few FFA trades. Total, Vitol and Trafigura have been active in the market and brokers report growing levels of enquiry and interest in the concept.

We have two clearing houses CME Group and ICE, but we have two competing sets of indices: ours and a set by Spark Commodities. Some trades have been settled against our three assessments at CME, some against Spark's on ICE.

I don't want to set out the case for the superiority of the Baltic Exchange offering here - our record speaks for itself - but the market will eventually settle on one benchmark.

I do however want to set out the case for the Baltic Exchange being the catalyst for the development of a highly liquid LNG freight derivatives market.

The first step is for the LNG trading desks and LNG ship owners to join the Baltic Exchange and take part in the consultative process. We've done this with the energy majors and commodity traders' crude oil, iron ore, coal and grain desks. Now it's the turn of the LNG teams. We have a system of working and consultative groups and advisory councils which ensures that our vessel and route descriptions are keeping pace with the physical market. We offer a neutral space for competing parties to share their views.

The second step is to beat the drum for the market and help introduce new participants. Our reach is global. We are a membership organisation whose role it is to support our members.

We want to support the LNG shipping community, but to do that we need your support and participation.

Nadia Mirza

[email protected]

Click here for details about joining the Baltic Exchange https://www.balticexchange.com/en/apply-page.html