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10 December 2023

LME proposes new exchange for freight derivatives

By Reuters

The London Metal Exchange (LME), the world's largest market for aluminium and copper, has proposed forming a joint venture with the Baltic Exchange to bring trading of freight derivatives onto a new exchange.

The Baltic Exchange and its members are "invited to consider a substantial equity participation, between 25 and 50 per cent, in a new exchange", the LME said in a press release on Friday. LME Chief Executive Officer Martin Abbott declined to give a cost to the exchange on a conference call.

Forward freight agreements (FFAs), as the contracts are called, enable hedging against or betting on future shipping costs. FFAs are settled against indexes from the Baltic Exchange, which traces its history back to 1744. Rates to hire capesize-class vessels, the largest bulk ships tracked by the exchange, have dropped 11 per cent this year.

The Baltic Exchange will respond directly to the LME in due course once the proposal has been "carefully considered", spokesman Bill Lines said by phone. He declined further comment.

Trade in FFAs linked to dry-bulk commodity shipping will likely almost double to $60 billion (Dh220bn) this year, London-based brokerage Freight Investor Services said last month.

"We are talking about a market that's very large," Abbott said on the call.

Initiatives are under way to create a global platform to broker, trade, process and clear freight and other commodities, John Banaszkiewicz, managing director at Freight Investor Services in London, said in a statement yesterday.

The Baltic Exchange, as the industry's index provider, will play a "key part" in the development and a takeover or alliance with the LME may spur a drive to set up an alternative index provider and alienate the Baltic Exchange's members, users and subscribers, he said.

"The FFA market has a common wish to see the development of electronically-traded contracts, but in a manner and to a schedule that is suited for freight trading," Banaszkiewicz said. "A one-size-fits-all solution from LME is a recipe for disaster."

The Baltic Exchange's origins go back to the Virginia and Maryland coffee house in 1744 when it changed its name to the Virginia and Baltick, reflecting the business of the merchants and ship owners who met there.

Participants "will not be taking decisions on the basis of one or two opinions", Abbott said. "What will happen is the entire marketplace will weigh up the proposal and there will be a broad-based decision."


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