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Print articleA new angle on FFAs?
The growing involvement of financial players is starting to move the FFA market in a new direction, says Dorian Benson
 For financial players the deal is the end of the process |
Getting more participation from the big financial players to boost market liquidity has been one of the key aims of organisations such as the FFA Brokers’ Association (FFABA) and the Freight Market Information Users Group (FMUIG) over the past few years. With the introduction of clearing, the publishing of weekly freight volumes, the revision of the FFA and options contracts to make them ISDA compliant, and an ongoing education programme, most of the conditions necessary for that market entry have been met. According to Dorian Benson, global head of dry freight at GFI, they are having the right effect. “We are seeing increased activity from financial institutions,” he says. And increasingly, it is those institutions that are driving the market agenda.
GFI itself was one of the first inter-dealer brokers to enter the shipping market, initially in 2000 and then in more force in 2004. There was initially considerable suspicion of their entry into the market, says Benson: “People were asking what an inter-deal broker (IDB) like GFI was doing in the shipping market.” Four years on, and with a physical shipbroking department in addition to freight desks in London, New York, Singapore and Cape Town: “I think we have now more than proved our commitment to the shipping market.” In addition, says Benson, it is the increasing involvement of IDBs such as GFI and Icap that has been one of the driving factors behind the development of the paper market as we see it today – and that will be driving the market in future.
Above all, says Benson, it is the development of the “clean” FFA deal, where the deal is indeed the end of the process, that is making investment in the shipping market increasingly attractive to financial institutions. “Physical shipping is unique in that the deal is the beginning, not the end of the process,” Benson says. “The fundamental difference between physical and FFA operations is post-fixture. In physical shipbroking, a vast amount of work is done post-fixture – once you have fixed the ship, you still have to deal with the charterparty, delivery, contracts of affreightment and so on.” The FFA does away with the need for extensive back-office operations, allowing financial players to treat freight as a fundamental part of the commodity basket.
One consequence of the increased presence of financial players is an increasing call for screen trading. Again, this is very much driven by the need for a financial deal with no strings attached: “ Shipping is not an execution-only deal, whereas screen trading by its very nature lends itself to the execution-only business model,” says Benson. “The more the financial institutions get involved, the more we see a growing groundswell – at least in that sector of the market – for an active screen-based system.” For the moment, the screen trading remains fragmented, although demand for a single, centralised system is growing, and GFI is constantly looking at its own screen-based system and how it might best meet clients’ needs.
 For physical shippers it’s just the begining |
Apart from the lack of a centralised screen trading system, screen trading continues to present a problem with regard to managing credit risks whilst the OTC model remains the standard. “The credit matrix becomes vastly more complicated as you deal with OTC screens online,” explains Benson, as each new trade exponentially increases the complexity of risk involved. As clearing grows, the opportunity for a single trading screen will grow as well. And clearing certainly has been growing. “Over the last year, we have seen exponential growth in clearing houses. “We estimate that at least 25 per cent of [dry] business is now cleared, and the percentage continues to grow,” says Benson. In addition, clearing is becoming increasingly popular in the Asian market, despite some early resistance. A further sign of the maturity of the clearing market is that clearing through General Clearing Members, rather than through the clearing houses themselves, has now become a reality, and, says Benson, the market is “developing all the time”.
Another major change over the past year has been the increasing trade in options. Benson is unwilling to say exactly how much, as, again, this is an OTC market, so it is impossible to get hard figures. However, he says the growth has been “dramatic”, and that, anecdotally, large options deals are going through on a weekly basis. This has been due to the involvement of “non-traditional” shipping market players who have a greater understanding of what options can give, he believes.
Whilst the introduction of clearing, ISDA contracts and screen trading have been ongoing concerns for a while now, one of the most recent innovations in the FFA market has been the weekly reporting of trade volumes to the market. This is a measure that the Baltic Exchange and the FMUIG, among others, have been requesting for some time now, claiming that it will increase transparency, thereby attracting more users to the market, and increasing liquidity. It is still much too early to tell what effect it will have on the market, as figures have only been available for six weeks at the time of the interview. In addition, he says, there is little precedent to judge how this will affect the market in advance: “I don’t know any other OTC market where volumes are declared. By nature OTC markets are difficult to quantify, but the greater the percentage of cleared deals that take place, the more accurately we will be able to gauge the volume of the market,” he says. At the moment, this is nigh on impossible, although the current weekly reporting regime is, Benson says, “a step in the right direction”.
One thing is for sure – the markets will continue to change. “The large corporates look at the market from a different angle, and they will help develop it in the future,” says Benson. GFI has something of a reputation for swallowing freight-broking teams whole – hardly surprising for a desk which has grown from 5 to 35 people in a little over three years. Most recently, the dry broking team has purchased Century Shipbrokers. Other IDBs seeking entry into the market – notably IcapHyde – have employed similar tactics. Now, they seem to have spread to traditional shipbrokers as well, with Clarksons reported to be using “golden hello” welcome bonuses to attract experienced brokers from other areas. This comes back to the emergence of financial institutions as significant forces in the FFA field – Clarksons ceo Richard Fulford-Smith recently said that the company is no longer competing with traditional broking shops for staff but against investment banks and derivatives brokers.
So can traditional shipbrokers keep their talent in-house? Unless they are willing to match the financial sector, then maybe not, at least on the FFA side. “There will always be a place for the small, bespoke broking shop in physical shipbroking because they provide so much back-up to the principal,” says Benson. “On the other hand, to be an FFA shop is very different, because it is mainly a question of volumes and understanding the market.” This was the thinking behind GFI taking on several ex-physical brokers. “The product itself remains the bastion of shipping interests and whilst the market is in a state of constant evolution a wide spectrum of abilities and expertise is paramount to the success of any broking operation”.
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