Shipping( Bulks Carriers) - Freight Forward Agreements

Shipowners and charterers are confronted by a whole series of operational and commercial risks, a major one being the volatility of the freight market. In the last decade, a number of financial instruments have emerged as a way to manage this risk in both the dry bulk and tanker sectors. Such instruments consist primarily of Forward Freight Agreements (“FFAs,” traded “over the counter,” or OTC), a variant on a commodity swaps.

In its simplest form, the FFA is struck directly between the counterparties (usually with the intermediation of a broker) under a variety of contractual arrangements. The numeraire for dry bulk trading is nearly always one of several dozen daily route assessments disseminated by The Baltic Exchange, in London (based on an audited procedure where intermediaries provide pooled input on daily levels of specific voyages in dry bulk sectors), or a composite of individual route assessments.

In the simplest form, an “exchange of differences” around a swap price, around a specific $/ton or $/day on a Baltic route, is agreed between the parties. In more structured versions, a fixed rate is ‘swapped’ for a variable rate set by the market, under a specially modified ISDA swap contract. Options contracts on relevant route and sector indices are also brokered OTC, on a limited basis.

Though FFA’s began trading in the early 1990’s, the dry market has increased in activity since 2003, with the present phase of the strengthened charter market. Additional participants have joined the market, including a contingent of financial institutions. Financial settlement of FFA’s has usually been handled directly between the counterparties, however settlement of a portion of the market’s activity has been “cleared,” through a network of “Members” and/ or “Clearing Brokers,” who have accounts with one of several “Clearing Houses.”