The Baltic Exchange has drafted the below response to the ESMA Consultation on guidelines on information expected or required to be disclosed on commodity derivatives markets or related spot markets under MAR and welcomes comments from members on this draft. The final version needs to be submitted to ESMA by 20 May 2016.

Please send your comments or questions to Paul Stuart-Smith.

 

 Q5: Do you agree that information relating to the “goods” subject to the freight contract should be considered as information indirectly related to derivatives on freight rates? Please, explain.  

Q6: Can you think of other examples of information expected/required to be disclosed in relation to commodity derivatives for which the underlying asset is not an actual commodity as per MAR definition? Please, specify.

  1. Introduction
  • The Baltic Exchange is the leading provider of information used in the trading and settlement of physical and derivative contracts in the dry bulk and tanker freight markets. As well as publishing daily assessments of shipping rates, the Baltic Exchange (in consultation with freight market participants) defines the standardised ships and routes on which those assessments are made. These standardised ships and routes then also form the basis for the contract specifications for freight derivatives.
  1. Summary of response
  • We agree with the suggestion in paragraph 34 of the consultation paper that information such as the assessments published by the Baltic Exchange and other data published by information providers, non-profit organisations and governmental entities may, prior to publication, be considered as inside information directly or indirectly relating to freight derivatives to the extent this information is expected to be disclosed in accordance with market rules or practice.
  • However, we disagree completely with the suggestion in paragraph 35 of the consultation paper that “information relating to the “goods” subject to the freight contract should be considered as information indirectly related to derivatives on freight rates.”
  • Furthermore, there is no information which is expected or required to be disclosed in relation to freight derivatives relating to the “conditions affecting the transport of goods” as suggested in paragraph 36 of the consultation paper.
  1. Explanation
  • Whereas in the past, the shipping market was centred in London, much of it at the physical premises of the Baltic Exchange, today the shipping markets are global and non-centralised. The shipping industry is diverse, fragmented and highly competitive and consists of thousands of companies and other organisations engaged in the transportation of a wide range of commodities on thousands of different routes between hundreds of different ports operating in circumstances which vary dramatically and may include piracy, severe weather or a host of other more or less hostile or unexpected events.
  • Information is the life blood of the industry and because of the broad extent and diversity of shipping there is almost no limit to the number of different pieces of information that can affect physical shipping rates on a day to day basis and, by extension, have an effect on prices of freight derivatives. As ESMA is aware, this includes information about the supply or demand for ships, the supply or demand for cargoes (broadly, the “volumes” of “goods” referred to in paragraph 35 of the CP) and information pertaining to “conditions affecting the transport of goods”, as suggested in paragraph 36 of the CP.
  • However, none of this is information which is expected or required to be disclosed in accordance with market rules, custom or practice (or otherwise as provided for under MAR 7.1(b)), nor do we believe that it is possible to construct guidelines which could divide the plethora of relevant information into two groups, one of which might be classified in principle as inside information under MAR and the other which would not. We do not believe that this can be done either by trying to define categories of types of information nor by trying to classify information based on a scale which measures the likely significance of such information on freight derivatives prices. Any such classifications would be arbitrary and uncertain.
  • The freight derivatives market itself is de-centralised and is largely voice broked with trades reported as block futures to a number of different trading venues around the world. Baltex, the MTF operated by the Baltic Exchange, is one of these. The market comprises only a limited number of instruments and is relatively small and illiquid. It can be highly volatile in comparison to most other commodity derivatives markets with intraday moves of 10% or more not uncommon. Sometimes, these large price moves can be triggered by a small change in supply or demand; on other occasions a seemingly important piece of news causes no major reaction in the price of freight derivatives. In other words, there is no reliable correlation between information and prices and it is therefore impossible to predict which piece of information would be likely to have a significant effect on the prices of freight derivatives if such information were made public. In any case, our understanding from the ESMA open hearing held on 3 May 2016 is that under the terms of its mandate ESMA does not define the meaning of “significant” in MAR 7.1(b). So if a large move in prices of freight derivatives occurs it will be impossible to determine whether this is “significant”, both because of the regularity of such price moves in freight derivatives and because the term “significant” is itself undefined.
  • Furthermore, there is no official or accepted mechanism for disseminating information relating to freight derivatives, nor, because of the global and de-centralised nature of the shipping market, do we believe there can be. Any attempt to specify whether a particular piece of information has been sufficiently disclosed to be considered to have been made public would be arbitrary.
  • Overall, we recognise the difficulties of what ESMA is trying to do in establishing guidelines on inside information but we do not believe that it is appropriate or possible to include information of the type suggested in paragraphs 35 and 36 of the consultation paper in such guidelines.