SGX sees Baltic buy boosting Asian freight derivatives

Posted by Joseph Keefe September 28, 2016

Singapore Exchange Ltd (SGX) sees the potential to develop new freight derivatives centred on active Asian shipping routes and expand the use of freight derivatives with its acquisition of London's Baltic Exchange, a senior SGX official told Reuters.

"We believe there are a number of opportunities that the Baltic Exchange and SGX can realise together, including the creation and adoption of new benchmarks of Asian shipping routes," Michael Syn, head of derivatives at SGX told Reuters.

The Baltic's daily benchmark rates and indices are used to trade and settle freight contracts as well as for settling freight derivatives, or FFAs, that allow investors to take positions on freight rates in the future.

On Monday, Baltic Exchange shareholders approved an 87 million pounds ($113 million) takeover by SGX, bringing together the companies from two global maritime hubs.

The acquisition of the Baltic Exchange, which owns a trading platform for the multi-billion dollar freight derivatives market, comes amid a severe downturn in the shipping sector.

"The participation of the Asian shipping community - China, Japan and Korea - in FFAs is among the lowest. We are able to leverage our presence and resources in this region to educate on price risk management," Syn said in an email response to Reuters queries.

"This extends to our ability to talk freight with existing commodities clients in the iron ore and coal space," he said. SGX already offers pricing benchmarks for iron ore and coking coal, which make up a big portion of the dry bulk commodities primarily transported by sea.

SGX, which has a market value of $5.8 billion, is seeking regulatory approval for the deal.

Singapore is the world's second-busiest container port and there are about 130 international shipping companies based in the city-state.

SGX has built up a suite of commodity and financial derivatives in recent years, with the business accounting for about 40 percent of its revenue. This has helped the exchange diversify from sluggish securities trading and a weak market for IPOs.

SGX says it has a 40 percent market share of the global dry bulk freight derivatives clearing business, up from 4 percent at the end of 2014. It competes with the likes of NASDAQ OMX Commodities and LCH.Clearnet, majority owned by the LSE.

"We believe there are good growth opportunities in the FFA market. FFAs currently represent only 30 percent of the underlying physical market," Syn said.