Over 400 brokers and shipowners attended a meeting at the Baltic Exchange last week to address a perceived “crisis of confidence’ in the dry bulk market. The move followed the collapse of dry bulk rates, as reflected Baltic Dry Index which had fallen from its record high of 11,793 points in May to just 815 points, its lowest level since 1999.
Exacerbating the problem is the threat of widespread defaults in the derivatives trading of Forward Freight Agreements (FFAs), with some brokers saying that speculators have been driving down the market. Baltic indices are used as the benchmark for FFA trading and therefore underpin the market.
The meeting attempted to settle nerves by reporting that 99% of outstanding October FFA contracts were successfully settled, an estimated 11,500 agreements with notional value of $20.25bn.
Baltic Exchange vice chairman Mark Jackson, who chaired the meeting, stressed that all obligations must be met on time under existing contracts in both the physical and freight derivatives market. Companies that risked “extreme financial distress” in doing so should alert their counterparties at an early stage in order to try and reach a resolution, he said, reminding that the Baltic has a posting system under which defaulting parties can be reported for contravening the Baltic Code.
In addition, the financial procedure of ‘netting’ – allowing the positive value and negative value of contracts to be set off against each other (i.e. rather than each being settled individually) – is being used as a “short-term solution” in the FFA market, Jackson reported.
Exacerbating the problem is the threat of widespread defaults in the derivatives trading of Forward Freight Agreements (FFAs), with some brokers saying that speculators have been driving down the market. Baltic indices are used as the benchmark for FFA trading and therefore underpin the market.
The meeting attempted to settle nerves by reporting that 99% of outstanding October FFA contracts were successfully settled, an estimated 11,500 agreements with notional value of $20.25bn.
Baltic Exchange vice chairman Mark Jackson, who chaired the meeting, stressed that all obligations must be met on time under existing contracts in both the physical and freight derivatives market. Companies that risked “extreme financial distress” in doing so should alert their counterparties at an early stage in order to try and reach a resolution, he said, reminding that the Baltic has a posting system under which defaulting parties can be reported for contravening the Baltic Code.
In addition, the financial procedure of ‘netting’ – allowing the positive value and negative value of contracts to be set off against each other (i.e. rather than each being settled individually) – is being used as a “short-term solution” in the FFA market, Jackson reported.