Traders of shipping derivatives linked to the cost of shipping coal and ore paid US$398 million into a pool to guarantee contract settlements after a record collapse in freight rates, according to Freight Investor Services Ltd.
The London-based brokerage, which worked with Norway's Imarex ASA to set up the programme, said 40 traders agreed to pool funds instead of the normal practice of settling contracts on a company-by-company basis. The plan was instigated because of speculation about potential defaults and banks' unwillingness to extend credit, Michael Gaylard, a strategic director at Freight Investor, said by phone.
'The market is rife with rumour' about traders who won't be able to pay what they owe, he said. 'If they are serious about staying in business, this is a way they can manage their cash flow.' The Baltic Dry Index, a measure of global shipping costs, climbed for the first time in 23 days on Wednesday after dropping by a record in October.
The decline caused Ukraine's Industrial Carriers Corp to file for creditor protection and Britannia Bulk Holdings Inc's UK unit to enter administration under British insolvency laws, leaving their counterparties potentially nursing losses.
Traders normally settle derivatives contracts on a company-by-company basis, working out the net amount they owe one another. Record declines in shipping costs, combined with the credit squeeze, had rendered traders unwilling to commit funds in case they didn't get paid in the event of a counterparty defaulting.
Under the payment system, participating traders were told the net amount they owed and had to pay it into a bank account. Once all the sums were received, they were then released, meaning that traders didn't have to commit funds without knowing whether they themselves would receive payment.
The plan may be extended to all freight-derivatives traders, Mr Gaylard said. Trading in so-called dry- bulk commodity derivatives will be worth about US$140 billion this year, about 40 per cent of which will be settled on an over-the-counter basis, Mr Gaylard said.
The London-based brokerage, which worked with Norway's Imarex ASA to set up the programme, said 40 traders agreed to pool funds instead of the normal practice of settling contracts on a company-by-company basis. The plan was instigated because of speculation about potential defaults and banks' unwillingness to extend credit, Michael Gaylard, a strategic director at Freight Investor, said by phone.
'The market is rife with rumour' about traders who won't be able to pay what they owe, he said. 'If they are serious about staying in business, this is a way they can manage their cash flow.' The Baltic Dry Index, a measure of global shipping costs, climbed for the first time in 23 days on Wednesday after dropping by a record in October.
The decline caused Ukraine's Industrial Carriers Corp to file for creditor protection and Britannia Bulk Holdings Inc's UK unit to enter administration under British insolvency laws, leaving their counterparties potentially nursing losses.
Traders normally settle derivatives contracts on a company-by-company basis, working out the net amount they owe one another. Record declines in shipping costs, combined with the credit squeeze, had rendered traders unwilling to commit funds in case they didn't get paid in the event of a counterparty defaulting.
Under the payment system, participating traders were told the net amount they owed and had to pay it into a bank account. Once all the sums were received, they were then released, meaning that traders didn't have to commit funds without knowing whether they themselves would receive payment.
The plan may be extended to all freight-derivatives traders, Mr Gaylard said. Trading in so-called dry- bulk commodity derivatives will be worth about US$140 billion this year, about 40 per cent of which will be settled on an over-the-counter basis, Mr Gaylard said.