The Baltic Exchange is overhauling the way its forward curves for freight derivatives are formulated, in response to feedback submitted by the Independent Forward Freight Agreement Association.

Members of the association, which comprises traders, shipowners and end users, say they have found the curves inaccurate and not a true reflection of the current market.

The IFFAA said this is down to the large burden placed on brokers to submit data to the Baltic — up to 228 different data points, many of which are for cleared products that are not being traded.

This huge data burden can lead to inaccuracies, which increase the risk of mismarking FFA prices, which can incur extra costs of up to 5% and “multimillion-pound repercussions across global trade”, according to the association.

Philippe van den Abeele, IFFAA chairman, told TradeWinds: “The mismarking of FFA prices is that the brokers that are supposed to give these numbers are basing it on the bid-offer spread or the buyer and the seller price that they receive from their clients.

“Everybody knows, in the trading environment, which are the brokers that have the most volumes, the most clients that then allow them to have a closed bid-offer spread and a true representation of where the market lies at the time.”

Smaller, less active FFA brokers with no knowledge of what the big traders are doing are also quoting their own bid-offer spreads, but these may be “way out of line” with the rest of the market, added van den Abeele, who trades FFAs as chief investment officer of Consortium Maritime Trading.

The problem is that these spreads are given the same influence and importance as those circulated by bigger shops that see the most market volumes, he said.


Most of the IFFAA’s proposed changes relate to panamax data submitted by brokers.

Three such routes — P1A, P2A and P3A — will be tweaked under the proposals. The “last seven days” settlement routes are being axed, leaving only the “all index days” routes, which will be reduced in length to help accuracy.

Brokers have been required to make 39 assessments for these routes, even though they are not traded.

The changes have been agreed in principle, but the IFFAA said clearing houses EEX and SGX want to coordinate timing and secure regulatory approval for trade data to be removed.

Once effected, this removal will filter back to brokers and reduce the number of data points they are required to submit to the Baltic.

Only the front three months of the panamax curves are actually traded in the market, yet data requests for six contracts extends out to 2027.

The Baltic is also working with broking shops to ensure a senior employee is assigned at all times when data is submitted.

“The proposal that came from the IFFAA is to say there should be a weighting of importance to the FFA brokers that have the most volume, that transact the most volumes in the marketplace, because they have more knowledge, they have more data,” he said.

“So if you have more data points, your contribution should have a higher weighting, compared to the smaller FFA brokers who are providing these prices.”

This is set to change. Brokers’ submissions will soon be weighted according to their market share.

Van den Abeele said the mismarking of FFAs is not a persistent, everyday issue, but it can happen and can have knock-on effects for traders.

“Sometimes it happens at awkward moments, like at the end of the month or at the end of the quarter where people have to report to their shareholders,” he said.

“Then it becomes an official number that comes into a balance sheet or that it comes into a shareholders’ report and that’s crystallised with a certain value, which is then valued against the share price or the value of the business — and that’s where it can become a little bit awkward.”

Van den Abeele said the Baltic has been very responsive and many of the suggested changes have already been made or are underway.

The Baltic has hired long-time FFA broker Andrew Hawtin to oversee its work on FFAs. Hawtin worked previously for derivatives brokerage Freight Investor Services.

Van den Abeele sees the curve clean-up as a necessary part of the professionalisation of the maturing FFA market, in which investors from outside shipping are already showing a healthy interest.

“Now we have what are called non-shipping financials — algo[rithmic] traders, CTAs or commodity trading advisers — coming into this market,” he explained.

“They’re coming into this market because they like the volatility, but they are suddenly faced with a market that is still — not in the dark ages, but is behind the curve compared to sophisticated markets that are quoted on exchanges.

“If we want to attract these kinds of people to the market, if they want to come in, we will have to step up. And it’s happening as we speak. It’s going to take a number of years, but it’s happening.”