THE Baltic Exchange has postponed a critical choice on how its dry bulk time charter index definitions will reflect IMO 2020, the switch to 0.5% sulphur fuel next January.

That decision, to be made by the Baltic Index Council was originally expected by the end of last year.

A confidential document sent to Baltic members on this week confirms that the deadline is now “during the first quarter” and would incorporate input that will not be obtained until late February.

For some market participants, the financial stakes of this decision could be substantial.

If the benchmark ship that underlies an index — and thus all of the outstanding forward freight agreements, known as FFAs, based on that index that settle after January 1, 2020 — is effectively changed to require the use of much more expensive 0.5% sulphur fuel, critics argue that the value of the previously purchased FFAs would materially decrease.

FFA trading participants who oppose such a change claim that ships burning IMO 2020-compliant fuel would be at a significant competitive disadvantage to those burning heavy fuel oil and using scrubbers.

Consequently, they believe tens of millions of dollars could change hands from those who are ‘long’ post-2020 dry bulk timecharter FFAs to those ‘short’ the derivatives.

Given the prodigious scale of open interest of dry bulk time charter FFAs settling after January 1, 2020 — estimated at around $1bn — they argue that the Baltic should instead create temporary parallel indices, as it has on some occasions in the past.

They propose that indices underlying open FFA interest should continue to be based on ships using pre-IMO 2020 fuels (and by implication, scrubbers) and temporary, transitional parallel indices should be created to track rates for ships using compliant fuel.

Opposed to changes

A fund manager who is a major FFA market participant told Lloyd’s List that his company and several other market participants remain opposed to changes that would inherently alter the index definition and affect the value of previously purchased FFAs settling after the IMO deadline.

The fund manager, who spoke on condition of anonymity, confirmed that there are ongoing communications on the dispute with the Baltic Exchange and its representatives.

In terms of timing, Baltic Exchange chief executive Mark Jackson stated during a members-only meeting in Singapore in November that the intention was to “go back to the index council and actually publish our position based on the decision in December. If there is something new or if something gets in the way, that might be delayed until January, but we are really trying to get something out by December.”

In a circular to members in December, the Baltic said that “due to the Christmas holidays, no decision would be made by the BIC this year” and that more information would be available by January 12.

On January 15, the Baltic announced that it would shortly be issuing a “consultation paper” and seeking further feedback. That document was released to members this week, with members asked to “please treat this consultation paper and its contents as confidential”.

The consultation paper, which was obtained by Lloyd’s List, requests responses to questions from members by February 22, “so that all comments can be considered by the BIC and its decision announced during the first quarter of 2019, so as to minimise any uncertainty in the market”.

The paper asks Baltic members three basic questions involving the time charter indices: Is a change to the fuel reference in the vessel description required? Should the base vessel be scrubber-fitted or not? How would an index change impact open FFA interest?

Asked whether the delay in the BIC decision was related to concerns raised by FFA traders, Baltic Exchange spokesman Bill Lines said: “The extended timetable and consultation paper are moves designed to bring together all the feedback gathered during 2018 at the numerous meetings and forums held by the Baltic Exchange around the world. They allow the Baltic Index Council to consider all viewpoints from across the market and to arrive at a reasoned decision thereafter.”

The consultation paper also notes that the outcome of the decision-making process “may be subject to regulatory concurrence”.

Benchmark administrator

The BIC is applying to be regulated as a benchmark administrator by the UK Financial Conduct Authority, and the statement in the consultation paper implies that the BIC decision could be subject to FCA review.

Asked whether the language on regulatory concurrence refers to the FCA, Mr Lines did not respond directly and said only that Baltic benchmarks “are produced to the standards set out the International Organisation of Securities Commissions under its Principles for Financial Benchmarks”.

A central revelation in the consultation paper is that the Baltic’s “currently favoured proposal” is to “clarify and confirm” that the vessels underlying the dry bulk timecharter indices post-2020 should be “non-scrubber-fitted”.

This would not expressly change the language in the index guidelines and specify that the benchmark ship’s fuel must be IMO-2020 compliant fuel, but it would effectively do the same thing, because non-scrubber-fitted vessels would have to use 0.5% sulphur fuels after the IMO deadline.

If the BIC concurs with the Baltic’s favoured proposal, it may set the stage for a clash with certain parties in the FFA trading community, who have confirmed they could pursue both legal and regulatory remedies.