LME Courting the Baltic Exchange

23 02 2010

On Friday the London Metal Exchange (LME) publish a news release on its web site about the possibility of forming a joint venture with the Baltic Exchange to bring the trading of Foreign Freight Agreements on a regulated exchange and move them from their telephone/over-the-counter basis to electronic trading. That sounds like progress yet it does not seem to generate much of a buy in outside the LME.

Foreign Freight Agreements are financial instruments for trading in the future prices of carrying commodities at sea. They are derivatives, nothing more. Their value is derived from the freight rate for a specific physical trade route which is assessed by the Baltic Exchange Indices daily. They are used to hedge against the fluctuations in freight rates. Taking this segment on board looks like a logical extension to LME warehousing.

The LME initiative, very similar to the one taken a year ago, is still not attracting the favour of the Baltic Exchange’s members who feared a possible loss of business. For now, the LME’s move is seen largely as some kind of joint venture participation awkwardly made through the press. A spokesman for the Baltic Exchange said that “”Naturally [the offer] will be carefully considered and in due course our response will be conveyed directly to the LME”. Many brokers have however already voiced their reluctance towards a tie up. Most eloquently, Freight Investor Services said giving the LME control would be “like putting the drunks in charge of the bar”. Cheers!

Providing an official trading forum for the over-the-counter Foreign Freight Agreements would provide greater transparency and liquidity to the market. LME chairman Donald Brydon estimated in a letter sent to the Baltic Exchange that LME projected FFA trading volumes could grow around 5.5 times “above the volumes projected for the market if it continues unchanged”.

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