Possible New Life for Ship Futures Tie-up

By MarEx 2014-06-20 13:06:00

London's centuries-old Baltic Exchange and clearing house LCH.Clearnet are in talks about a tie-up aimed at breathing new life into the loss-making Baltex dry bulk freight derivatives platform, the two groups said on Friday.

Baltex was launched by the Baltic Exchange in June 2011 as the first central electronic marketplace for freight forward agreements (FFAs), which enable investors to take positions on freight rates at a point in the future, but it has been little used by brokers who have preferred to trade FFAs by phone or on screens of their own to maximize their commission.

Though the Baltic says that the Baltex platform will ultimately prove more profitable for brokers and boost transparency in the market, it has continued to rack up losses and has come under fire from some shareholders and brokers.

The privately held Baltic Exchange and LCH.Clearnet, owned by the London Stock Exchange, are seeking a way for FFA trades to be cleared and reported via Baltex, a multilateral trading facility, which will allow greater transparency amid calls for tougher regulatory scrutiny of global financial markets.

The Baltic's chairman Quentin Soanes, who steps down in July, said the exchange was finalizing arrangements with LCH.Clearnet, which clears about 70 percent of trades on the dry FFA market.

"We believe that this project will shortly reward the patience of both board and shareholders," Soanes wrote in the exchange's annual report, published on Friday.

Though the Baltic's Chief Executive Jeremy Penn acknowledged that the exchange's inability to generate significant trading volume has been very disappointing, he said the proposed tie-up with LCH.Clearnet "has the potential to dramatically change the fortunes of Baltex".

Shareholder Criticism

LCH.Clearnet confirmed separately on Friday that it was in discussions with the Baltic Exchange.

Sources told Reuters last year that the Baltic had received expressions of interest in Baltex from exchanges and financial operators including the London Metal Exchange, CME Group and LCH.Clearnet.

Baltex is run by a subsidiary owned by the Baltic, the hub of the global shipping market since it was founded in 1744. Baltex recorded a loss of 636,830 pounds ($1.1 million) in the year to March 31, having posted a 682,093 pound loss the previous year.

In a letter to fellow Baltic shareholders this week, Peter Kerr-Dineen, chairman of ship broker Howe Robinson, said accumulated losses from Baltex were rapidly approaching 3 million pounds.

"It is apparent that this project was based on a flawed business plan, which has resulted in the establishment of a trading facility, which is spurned by the market yet continues to run with an overhead resulting in a monthly loss of circa 60,000 pounds," wrote Kerr-Dineen, who was the Baltic's chairman from 2003 to 2005.

"This situation cannot continue. Costs need to be covered, or the venture should be shut down."

By Jonathan Saul (C) Reuters 2014.