Over-the-counter trading in the dry bulk derivatives market has fallen in the fourth quarter to date by 81% year-on-year as traders opt for clearing.
Fear of counterparty risk is boost to clearing
Over-the-counter trading in the dry bulk derivatives market has fallen in the fourth quarter to date by 81% year-on-year as traders opt for clearing.
Following the collapse in the dry bulk market since August, counterparty risk has become a major concern. This has led to a shift away from OTC trading.
Weekly volume data reported by the Baltic Exchange showed that OTC forward freight agreement volumes from the start of October to the week ending December 12 were 58,430 lots.
This compared with 316,239 lots traded between the start of October 2007 and the week ending December 14 that year.
One lot is 1,000 tonnes of cargo or one day of time charter.
With a number of the contracts fixed back in the peak now incurring considerable daily loss, the risk that payments will be defaulted on has risen sharply, particularly for the fourth quarter contracts.
Many traders had bet on a rates rebound in the fourth quarter but this failed to materialise.
The capesize average time charter rate fell to an all-time low of $2,316 per day on December 2, down from $38,897 on October 1.
China"s Cosco, the country"s largest shipping group, last week said it had nearly Yuan3.9bn ($580.9m) potential losses on its freight hedging.
Meanwhile, Danish dry bulk operator Atlas Shipping became the latest company to file for bankruptcy as a result of the market downturn.
The company is understood to have struggled with huge daily losses onchartered-in tonnage that was fixed before the collapse in freight rates.
Atlas Shipping was an active player in freight agreement market
Atlas Shipping was also an active player in the forward freight agreement market, and one of the participants in the OTC netting facility.
The purpose of the service performed by Norwegian clearing house NOS is to reduce credit risk and funding costs through the opportunity to net and settle counterparties" bilateral contracts on a multilateral basis.
While Atlas Shipping had signed up to the October and November netting facility, it failed to register itself for December.
Atlas has been left with an OTC exposure of some $50m-$60m. Atlas was not available for comment.
Other companies that shared the same fate in the last three months were Ukrainian-based Industrial Carriers and UK-based Britannia Bulk, both citing losses on FFA positions and chartered-in tonnage.
The netting facility for the OTC dry FFA market in November reduced the settlement funding by $527m to a net amount of $96m and attracted 44 participants.
Freight Investor Services managing director John Banaskiewicz said at the time he hoped that more companies would come on board for December, especially Far Eastern counterparts.
However, FIS broker Michael Gaylard told that December"snetting facility had failed to attract Asian companies.
?It"s been a pretty poor show from that side. It"s going to be much the same as November with pretty much everyone that was in for November in for December. We expect very much a like for like in terms of value and the number of trades,? he said.
Trading activity was limited last week ahead of the quiet Christmas period.
?We suspect the following few days will be deathly quiet with the market nursing the Christmas revelry,? FIS said in its daily report.
Contract rates drifted down by the end of last week as the physical market showed signs of easing.
The capesize first quarter contract was trading on Friday around $13,000 per day, according to FIS. The panamax first quarter contract was trading at $9,125.
In the deferred market, the capesize calendar year 2009 contract was trading at $17,500 per day, while the panamax Cal 09 contract was trading at $12,250.
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