Georgi Slavov_ ICAP

  • View
    11

  • Download
    5

Embed Size (px)

DESCRIPTION

Georgi Slavov_ ICAP

Transcript

  • FFA Market Dynamics & Trading Strategies

    September 2010

    Presented to: FFABA Shanghai Forum

    Presented by: Georgi Slavov | Head of Dry Freight & Basic Resources Research

  • ICAP Shipping International Limited 2008. All rights reserved. p. 2 ICAP Shipping International Limited 2010. All rights reserved. Source: The Baltic Exchange, ICAP Shipping

    Short-term

    Price-differentials and subsequent Arbitrage opportunities

    Seasonality and Industry stocking/de-stocking cycles

    Congestion and net fleet availability

    Switches from short to longer haul trades

    Short-term tonnage oversupply/undersupply in the main trading areas and subsequent arbitrage

    opportunities

    Longer-term

    Fleet investment activity

    Macroeconomic conditions

    Mining, steel making and power generation investment

    Global trade pattern changes

    Comparative raw material cost domestic v. imported

    Major dry bulk trading routes

    Source: The Baltic Exchange, ICAP Shipping

    Key fundamental market drivers

  • ICAP Shipping International Limited 2010. All rights reserved.

    FFA market structure

  • ICAP Shipping International Limited 2008. All rights reserved. p. 4 ICAP Shipping International Limited 2010. All rights reserved.

    Trader A enters into an agreement with Trader B to buy specific

    contract on a pre-agreed price at

    W135. The contract will settle at

    the end of the pre-agreed period

    against pre-agreed benchmark

    The market moves in Trader A favor and at the end of the period

    the settlement (average price for

    the entire pre-agreed period) is

    higher than the buying price, say

    W139

    Trader A therefore receives the difference of W4

    The entire process involves only one transaction which is typical for

    the OTC bilateral cash settled swaps

    Cash settled swap trade mechanics

    Source: Baltic Exchange, ICAP Shipping

    Tra

    de

    r B

    pa

    ys

    Tra

    de

    r A

    Tra

    de

    r A

    pa

    ys

    Tra

    de

    r B

    120

    125

    130

    135

    140

    145

    150

    155

    160

    165

    01 Mar

    10

    05 Mar

    10

    09 Mar

    10

    13 Mar

    10

    17 Mar

    10

    21 Mar

    10

    25 Mar

    10

    29 Mar

    10

    Trade: Trader A sells fixed swap to Trader B at $135 pmt

    Spot market (1-31 March 2010)

    Settlement = $139 pmt

    How do the swaps work?

  • ICAP Shipping International Limited 2008. All rights reserved. p. 5 ICAP Shipping International Limited 2010. All rights reserved.

    Traded on a decentralized market with an important role played by the broker in the price discovery mechanism

    Trades are done on the phone (voice broking) but it is just a question of time before screen trading gathers momentum

    Two counterparties agree a price, taking opposing positions

    If OTC, the settlement/payment is done within 5 business days after the settlement date of the contract

    If Cleared, the clearing house monitors the exposure of the counter parties and constantly re-calculates the trading margin

    With the increased interest for clearing and gradual establishment of

    primary and secondary markets, the volumes will shift more and more

    towards screen trading

    Trader

    A

    CLEARING

    HOUSEBroker A Broker B

    Protected in case

    Trader A defaults

    Assumes

    counterparty risk

    Intermediary Intermediary

    CLEARED OTC TRANSACTION

    Trader

    B

    Trader A

    Exposed to Trader B default

    BILATERAL OTC TRANSACTION

    Trader B

    Exposed to Trader A default

    Market dynamics

  • ICAP Shipping International Limited 2008. All rights reserved. p. 6 ICAP Shipping International Limited 2010. All rights reserved.

    Traditional physical market risk management: COAs and/or

    Period deals

    In order to make hedging more efficient, the FFA contract has

    been designed as a cash settled

    swap based on the underlying

    physical freight market

    Therefore, their value depends on the underlying market

    (physical)

    No predictive value whatsoever

    Initially pure OTC products as tailor made swaps, recently more

    and more standardized with

    clearing becoming more and

    more popular

    Therefore they are gradually evolving into futures contracts

    VLCC physical 1y vs. synthetic 1y

    Source: Baltic Exchange, ICAP Shipping

    Cape physical 1y vs. synthetic 1y

    Hedging or Speculation?

    $20,000

    $25,000

    $30,000

    $35,000

    $40,000

    $45,000

    $50,000

    $55,000

    $60,000

    Ja

    n 0

    9

    Ma

    r 0

    9

    Ma

    y 0

    9

    Ju

    l 0

    9

    Se

    p 0

    9

    No

    v 0

    9

    Ja

    n 1

    0

    Ma

    r 1

    0

    Ma

    y 1

    0

    Ju

    l 1

    0

    $/dayVLCC Synthetic 1-yr TC

    VLCC Physical 1-yr TC

    Corr. 33%10000

    15000

    20000

    25000

    30000

    35000

    40000

    45000

    50000

    Ju

    l 0

    9

    Au

    g 0

    9

    Se

    p 0

    9

    Oc

    t 0

    9

    No

    v 0

    9

    De

    c 0

    9

    Ja

    n 1

    0

    Fe

    b 1

    0

    Ma

    r 1

    0

    Ap

    r 1

    0

    Ma

    y 1

    0

    Ju

    n 1

    0

    Ju

    l 1

    0

    $/day Cape 1y Physical T/C

    Cape 1y Paper Synthetic

    Corr. 78%

  • ICAP Shipping International Limited 2008. All rights reserved. p. 7 ICAP Shipping International Limited 2010. All rights reserved.

    Traded on a decentralized market with an important role played by the broker in the price discovery mechanism

    Trades are done either on the phone (voice broking) or on a screen (electronic trading)

    Two counterparties agree a price, taking opposing positions

    A trade RECAP is sent to both parties

    Both parties sign a contract (FFABA, ISDA)

    Agreed route

    Date of settlement

    Contract quantity

    Contract rate

    If OTC, the settlement/payment is done within 5 days after the settlement date of the contract

    If Cleared, the clearing house monitors the exposure of the counter parties and constantly re-calculates the trading margin

    ICAP Freight Trading Screen (Tanker FFA)

    Source: ICAP Shipping

    With the increased interest for clearing and gradual establishment of

    primary and secondary markets, the volumes will shift more and more

    towards screen trading

    Market dynamics

  • ICAP Shipping International Limited 2008. All rights reserved. p. 8 ICAP Shipping International Limited 2010. All rights reserved.

    Dry bulk FFA market Increasing threat of counterparty

    risk inspired more participants to

    seek cleared trading services

    Major clearing houses involved in the process (LCH, NOS, SGX,

    NYMEX)

    LCH.Clearnet attracted the biggest market share of the Dry

    FFA volumes

    The contracts are futures style, subject to initial and variation

    margining

    Wet contracts are forward style subject to contingency margin

    and are held at the original trade

    priceThe easing of the current crisis may inspire more risk taking and OTC

    trading once again. However, we believe that the transition process

    towards a clearing mechanism is irreversible.

    Source: ICAP Shipping, The Baltic Exchange

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    01/0

    4/0

    9

    01/0

    5/0

    9

    01/0

    6/0

    9

    01/0

    7/0

    9

    01/0

    8/0

    9

    01/0

    9/0

    9

    01/1

    0/0

    9

    01/1

    1/0

    9

    01/1

    2/0

    9

    01/0

    1/1

    0

    01/0

    2/1

    0

    01/0

    3/1

    0

    01/0

    4/1

    0

    01/0

    5/1

    0

    01/0

    6/1

    0

    01/0

    7/1

    0

    01/0

    8/1

    0

    Mt '000

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    100

    %

    Cleared OTC Cleared as % of total

    Tanker FFA market

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    100

    09/0

    7/2

    007

    26/1

    1/2

    007

    14/0

    4/2

    008

    01/0

    9/2

    008

    26/0

    1/2

    009

    15/0

    6/2

    009

    09/1

    1/2

    009

    06/0

    4/2

    010

    23/0

    8/2

    010

    #Lots '000

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    100

    %

    Cleared OTC Cleared as % of total

    Cleared vs. OTC trading

  • ICAP Shipping International Limited 2010. All rights reserved.

    FFA market trends

  • ICAP Shipping International Limited 2008. All rights reserved. p. 10 ICAP Shipping International Limited 2010. All rights reserved.

    ShipownersNowadays there are few pure shipowners as most of the asset owners are also involved deeply in the time

    charter market and aim to expand their activity by

    taking in ships on time charter

    Trading housesThose are predominantly the commodity trading houses. They typically specialized in certain

    commodities, such as grain or coal but recently they

    have tended to diversify into other markets as well

    and create interesting arbitrage trades between the

    different trade