In this series, Baltic Exchange showcases key details and information behind Forward Freight Agreements (FFAs) to help potential entrants better understand the entire FFA process and support the business development aid for FFA brokers.

The Baltic's FFA resource can be found on our website by  clicking here  or by clicking “FFAs” on the top taskbar. Please direct any comments or queries to Nadia Mirza, Head of Business Development at the Baltic.

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What is a Clearing House

A clearing house is a fundamental feature of FFA trading because it provides stability to the market by eliminating counterparty risk and ensuring both the buyer and seller fulfil their contractual obligations.

The clearing house stands in the middle of the trade. They will take the opposite position of each trade therefore becoming the seller to the original buyer’s General Clearing Member (GCM), and the buyer to the original seller’s GCM. This means they take on 100% of the risk themselves and therefore impose margin requirements.

The freight market is presently serviced by four clearing houses: CME, EEX, ICE and SGX.

Click here to see which Baltic Exchange freight futures and options are listed on each clearing house. 

 

Types of margins

Initial margin - a security deposit required by the clearing house before accepting a trade, to cover counterparty risk. Calculated as a percentage of the trade’s notional value based on the asset’s volatility, it is published monthly on the clearing house’s website. Funds must be held with the GCM for the trade’s duration and are returned upon closure. 

Variation margin – a daily mark-to-market calculation between the daily settlement number and the trade rate. For Baltic freight contracts, the end-of-day Baltic Forward Assessment is used by the clearing houses as the daily settlement rate. If the variation margin is favourable to the client, funds will be received by the GCM for that account.

Maintenance margin – a minimum equity level that is maintained with clearing houses who are monitoring their positions and exposure in real time to ensure there are sufficient funds to cover their risk. 

 

Forward curves

The forward curve provides the market participants’ valuation of the future spot price, on that day, for each contract time period. It provides visibility of potential freight costs and is used to negotiate and secure freight income and control freight costs.

The end-of-day Baltic Forward Assessments are used by the clearing houses as the daily settlement rate.

The curve can exhibit backwardation (where future prices are lower than the spot price) or contango (where future prices are higher). Traders may leverage these conditions to sell front months in backwardation or adjusting strategies in contango.

 

Baltic Panellists

Baltic Exchange works with experienced and competitive shipbrokers who do not invest in the markets they report and are free from conflicts of interest. These shipbrokers provide forward assessments for dry, tanker, gas and container FFAs.

Click here to access the full list of the Baltic’s FFA panellists under Forward Assessments.