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Introduction to

Container Swaps

5 August, 2010

Introduction to Container Swaps http://bit.ly/get-reports


Agenda

1. The Underlying: Container Shipping

2. The Product: Container Swaps

3. The Index : The SCFI

4. The Clearer : LCH.Clearnet

5. Case Study : ABC Supermarket

6. The Broker : FIS

Introduction to Container Swaps http://bit.ly/get-reports


Container Shipping

38% [ 55 ] East >> East

9% [ 11 ] 19% [ 27 ]
East >> West

7% [ 9 ]
West >> East

27% [ 32 ]
West >> West

Rest of World

Global Container Trade (2010)


Distribution of 144 Million TEUs of Global Container Trade

Introduction to Container Swaps http://bit.ly/get-reports


Container Market Volatility
2200.00

2000.00

1800.00

1600.00
INDEX POINTS

1400.00

1200.00

1000.00

800.00

600.00
05 Jan 07 05 May 07 05 Sep 07 05 Jan 08 05 May 08 05 Sep 08 05 Jan 09 05 May 09 05 Sep 09 05 Jan 10 05 May 10

European Service Mediterranean Service American Service (West Coast) American Service (East Coast)

Container Market Volatility (CCFI)


Introduction to Container Swaps http://bit.ly/get-reports
Container Box-Rate Volatility
2200.00
+ 179%

2000.00
+ 149%
+ 152%
1800.00
USD / TEU

1600.00

1400.00

1200.00
Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10

Shanghai >> Europe (USD/TEU) Shanghai >> Mediterranean (USD/TEU)

Container ‘Box-Rate’ Volatility (SCFI)


Introduction to Container Swaps http://bit.ly/get-reports
Container Shipping

• Containers are like any commodity


• Key price drivers include
– Intermodal container and container ship supply
– Consumer spending and consumer goods demand
• Containers are traded in substantial volumes
• Container box-rates are highly volatile
• Clear requirements for price risk management
• The FIS cash settled container swaps market is
establishing itself and growing rapidly

Introduction to Container Swaps http://bit.ly/get-reports


Agenda

1. The Underlying: Container Shipping

2. The Product: Container Swaps

3. The Index : The SCFI

4. The Clearer : LCH.Clearnet

5. Case Study : ABC Supermarket

6. The Broker : FIS

Introduction to Container Swaps http://bit.ly/get-reports


What are Container Swaps

• Container Swaps
– Are cash-settled wagers
– Agreed between two counterparties
– To ship a precise volume of containers
– On a particular trade route
– Over a specified period
– At a box-rate agreed today

Introduction to Container Swaps http://bit.ly/get-reports


Why Use Container Swaps

600 Purchasing a container swap


with the opposite profit/loss
400 profile to your physical position
causes the profits/losses from
each position to cancel each
Profit / Loss ( USD )

200
other out.

Whether box rates increase or


800 1000 1200 1400 1600 1800
decrease, the net box-rate you
-200 pay/receive is thus fixed
relative to the spot market
-400
The position can be flexibly
-600 escaped (closed out) by taking a
Box-Rate ( USD / TEU ) second swap position that is
equal and opposite to your first
Physical Position Swap Position swap position.

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Who Uses Container Swaps

• For End-Users and Commodity Traders


– Container swaps are used to offset (hedge) the risk of
increasing box-rate costs in a rising physical market
• For Shipping Liners and Operators
– Container swaps are used to offset (hedge) the risk of
decreasing box-rate revenues in a falling physical market
• For Trading Desks and Speculators
– Container swaps can be used to profit by using complex
quantitative and qualitative analysis to speculate on the
direction of box-rate fluctuations

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Indirect Hedging with Container Swaps

1600.00 50000

48000
1500.00

46000

1400.00
44000

1300.00 42000

40000
1200.00

38000

1100.00
36000

1000.00 34000
Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10

Comprehensive
Composite SCFIIndex Ap Moller - Maersk (Share Price)

Composite SCFI vs AP Moller-Maersk (Share Price)


Container Swaps are Used to Hedge Indirectly Against Highly Correlated Commodities

Introduction to Container Swaps http://bit.ly/get-reports


Agenda

1. The Underlying: Container Shipping

2. The Product: Container Swaps

3. The Index : The SCFI

4. The Clearer : LCH.Clearnet

5. Case Study : ABC Supermarket

6. The Broker : FIS

Introduction to Container Swaps http://bit.ly/get-reports


The SCFI

• The Shanghai Containerised Freight Index (SCFI)


is published weekly on a Friday at 15:00
Shanghai Time and is administrated by the
Shanghai Shipping Exchange (SSE)
• 30 Volunteer Panellists
– 15 Global Shipping Companies (Net Long the Underlying)
– 15 Local Freight Forwarders (Net Short the Underlying)
• 15 Indexed Shanghai Export Routes
– The SCFI provides a fair and faithful representation of container
Box-Rates across constituent routes
• BAF/FAF, EBS/EBA, CAF/YAS, PSS, WRS, PCS, SCS/SCF/PTF/PCC included

Introduction to Container Swaps http://bit.ly/get-reports


The SCFI : Panelists

• 30 Volunteer principals
– Account for over 60% of trade volume on indexed routes

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The SCFI :: Routes

• Europe (base ports)


Shanghai • Mediterranean (base ports)
• US West Coast (base ports)
Europe • US East Coast (base ports)
• Hamburg / Antwerp / Felixstowe / Le Havre • Persian Gulf (Dubai)
Mediterranean • Australia / New Zealand (Melbourne)
• Barcelona / Valencia / Genoa / Naples • West Africa (Lagos)
US West Coast • South Africa (Durban)
• Los Angeles / Long Beach / Oakland
• South America (Santos)
US East Coast • West Japan (base ports)
• New York / Savannah / Norfolk / Charleston
• East Japan (base ports)
West Japan
• Osaka / Kobe • Southeast Asia (Singapore)
East Japan • Korea (Pusan)
• Tokyo / Yokohama • Taiwan (Kaohsiung)
• Hong Kong (Hong Kong)

Introduction to Container Swaps http://bit.ly/get-reports


The SCFI :: Sample

The Shanghai Containerized Freight Index (SCFI) – Sample Data


Shanghai>> Europe Shanghai >> Mediterranean Shanghai >> US West Coast Shanghai >> US East Coast
Date Composite Index
(USD / TEU) (USD / TEU) (USD / FEU) (USD / FEU)

30 Jul 10 1555.3 1890 1838 2787 4085

23 Jul 10 1563.97 1895 1859 2779 4012

16 Jul 10 1579.16 1903 1886 2794 3988

09 Jul 10 1581.85 1901 1910 2816 3987

02 Jul 10 1583.18 1887 1919 2833 3962

25 Jun 10 1576.84 1870 1906 2823 3960

18 Jun 10 1569.04 1868 1908 2810 3897

11 Jun 10 1543.72 1874 1906 2743 3822

Introduction to Container Swaps http://bit.ly/get-reports


Agenda

1. The Underlying: Container Shipping

2. The Product: Container Swaps

3. The Index : The SCFI

4. The Clearer : LCH.Clearnet

5. Case Study : ABC Supermarket

6. The Broker : FIS

Introduction to Container Swaps http://bit.ly/get-reports


LCH.Clearnet

• LCH.Clearnet sits in the middle of a trade and


acts as the legal counterparty to each side
– Minimises credit risk
– Maintains trading anonymity
– Maximises processing efficiencies
• principals must trade through one of LCH’s
general clearing members (GCMs)

Introduction to Container Swaps http://bit.ly/get-reports


FFA Clearing

100%

80% 34%
49%
69%
60%
90% 97%
40%

20%

0%
2H 2007 1H 2008 2H 2008 1H 2009 2H 2009

OTC Cleared

• In 2006 cleared FFA trades made up 15% of the total market


• In 2009 that figure rose to a staggering 93%
• A clearing account is essential to trading container swaps

Introduction to Container Swaps http://bit.ly/get-reports


EXECUTION
Clearing Process

Swap Buyer Swap Seller


1 1
(Front Office) (Front Office)
Broker
(FIS)

Clearing Member 3 Clearing House 3 Clearing Member


CLEARING

(Back Office) (LCH.Clearnet) (Back Office)

4 4

Swap Buyer Swap Seller


(Back Office) (Back Office)

Introduction to Container Swaps http://bit.ly/get-reports


LCH Cleared Container Swaps

• LCH currently clears contracts against the four major


SCFI settled Shanghai export routes
Tradable Routes Pricing Contract Size LCH Contract Code
Shanghai >> Europe USD / TEU 1 TEU CNW
Shanghai >> Mediterranean USD / TEU 1 TEU CMD
Shanghai >> US West Coast USD / FEU 1 FEU CSW
Shanghai >> US East Coast USD / FEU 1 FEU CSE

Tradable Periods Months Quarter Calendar Year


Contracts Available M/M+1/M+2 Q / Q + 1 / Q +2 / Q +3 Cal + 1
Q3 2010 / Q4 2010
E.g. On 01 Apr 2010 Apr / May / Jun Cal 2011
Q1 2011 / Q2 2011

Introduction to Container Swaps http://bit.ly/get-reports


Initial Margin

• The initial margin is a returnable deposit placed


at the start of a trade in respect of the estimated
risk of a party’s net open positions
– LCH reviews several factors on a monthly basis to
estimate this risk
• The initial margin protects LCH against significant
financial loss in the case of counterparty default
• For container swaps initial margins are approx 10
– 15% of the value of a position

Introduction to Container Swaps http://bit.ly/get-reports


Variation (Maintenance) Margin

• Each day the profit and loss is calculated on a


party’s positions against the end of day price as
supplied by a panel of container swaps brokers
• A party’s clearing member account is credited
when the position is ‘in the money’
– New funds in excess of your initial margin may be withdrawn

• A party’s clearing member’s account is debited


when the position is ‘out of the money’
– Additional funds must be deposited to maintain your initial margin

Introduction to Container Swaps http://bit.ly/get-reports


LCH Cash Settlement & Costs

• Contracts are Cash Settled Monthly


– The settlement price is the average of the SCFI
route prices published during the contract period
• Clearing Costs
– $6 (approx.) per swap contract
• $3 initial clearing house fee
• Approx. $3 additional clearing member surcharge
– Full clearing fee is subject to individual terms negotiated with your clearing member

Introduction to Container Swaps http://bit.ly/get-reports


Agenda

1. The Underlying: Container Shipping

2. The Product: Container Swaps

3. The Index : The SCFI

4. The Clearer : LCH.Clearnet

5. Case Study : ABC Supermarket

6. The Broker : FIS

Introduction to Container Swaps http://bit.ly/get-reports


Hedging :: Market Example

Position
“ABC” supermarket knows it needs to ship 100 containers in FEB 2010 and is worried that box prices
from Shanghai >> Europe will rise in response to increased consumer demand
On DEC 10th 2009 ABC buys 100 CNW FEB swap contracts at the current spot price of $1,800 / TEU
• ABC posts an initial margin deposit of $18,000 (N.B. Total position value $180,000)

SCFI rates rise to $2,400 / TEU during FEB 2010 SCFI rates fall to $1,600 / TEU during FEB 2010

Physical Position / ABC pays $240,000 during In JAN ABC becomes concerned that market is
FEB to ship 100 TEUs [100 TEUs x $2,400] falling rather than rising as expected
Paper Position / ABC settles its 100 CNW FEB On Jan 15th, ABC sells 100 CNW FEB contracts
swaps on MAR 1st, receiving $60,000 at spot market price of $1,750 USD
[ 100 TEUs x ($2,400 – $1,800) ] ABC’s net swap position is closed out at a loss
Net Position / ABC successfully hedges their of $5,000. This is $35,000 less than holding on
costs. ABC pays $60,000 less for FEB transport to the contracts until settlement. ABC once
relative to spot-market trading competitors again exposes itself to physical box-rates alone.

Introduction to Container Swaps http://bit.ly/get-reports


Agenda

1. The Underlying: Container Shipping

2. The Product: Container Swaps

3. The Index : The SCFI

4. The Clearer : LCH.Clearnet

5. Case Study : ABC Supermarket

6. The Broker : FIS

Introduction to Container Swaps http://bit.ly/get-reports


Who are FIS?

Freight & Commodity Derivatives Brokerage


Leading players in the global FFA markets
Global network of offices, brokers & clients
London / Athens / Dubai / Singapore / Shanghai / Tokyo / New York

Consistent, measured, annual growth


FSA (London) /MAS (Singapore) Regulated

Introduction to Container Swaps http://bit.ly/get-reports


The Role of Brokers

• Freight Investor Services


– Facilitates & Negotiates trades between buyers
and sellers of FFAs; generating market liquidity
– Advises clients on moment to moment market
movements and sentiment
– Disseminates market reports and daily forward
rate curves to keep clients informed
– Maintains high standards of trading within the
market place and protects client anonymity

Introduction to Container Swaps http://bit.ly/get-reports


Some FIS FFA Clients
ship broking, dry bulk, iron ore, steel, fertilizers

Introduction to Container Swaps http://bit.ly/get-reports


Container Swaps :: SUMMARY

• Container swaps are the single greatest


development in containerization since the
first standardization of intermodal containers
• Container swaps allow for flexible, cost-
effective risk-management, universal pricing
stability, price transparency & price discovery
• Container swaps trading is simple. It can and
should be effortlessly integrated within an
existing operational and corporate structure

Introduction to Container Swaps http://bit.ly/get-reports


Next Steps

Get our free container market reports + price curves


1st by email | info@freightinvestor.com
online | http://bit.ly/get-reports

Contact Arthur for a telephone or personal consultation


in person | 80 Cannon Street, London, EC4N 6HL
2nd by telephone | +44 (0) 207 090 1120
online | http://bit.ly/more-information

Thank you for your time. Arthur Worsley [ + 44 (0) 7595 657 672 ]
We look forward to hearing from you soon. Container Freight Derivatives Broker