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Baltic Exchange eyes new revenue model

This may be the end of the centuries-old practice in which data was freely supplied as part of membership of the London bourse

Three years after its sale, Singapore Exchange-owned shipping bourse, the Baltic Exchange, is re-evaluating its role within global shipping, including changes to the deal struck with shipbrokers that provide its core data

THE Baltic Exchange is prepared to remunerate shipbrokers who provide it with freight and time-charter assessments, ending the centuries-old practice in which data was freely supplied as part of membership of the London bourse.

Chief executive Mark Jackson told Lloyd’s List the Baltic Exchange was talking with shipbrokers, acknowledged they sought a better deal, and was discussing options.

The Singapore Exchange completed its $108m purchase of the 275-year-old London exchange in November 2016. Brokers, also knowns as panellists, signed a three-year deal to continue providing assessments for the world’s largest shipping indices provider. That was in exchange for free membership and exclusive indices distribution rights, Mr Jackson said. The agreement comes up for renewal in mid-November, covering more than 30 panellists worldwide.

In addition to providing physical freight benchmarks, indices are also used to settle the growing freight derivatives market for dry bulk, crude and refined products.

“What is coming towards us is a situation whereby the panellists are saying: ‘Well, we can go now,’ but they haven't actually said that to me yet,” Mr Jackson said. 

“There’s lots of positioning; the panellists are saying: ‘Look, the indices are encroaching more and more on our business.’ We feel that there is a balance here at all times, whereby indices help markets to grow, then brokers then have more fixtures to do because the traders are doing more business.

“They [the panellists] are saying: ‘We want a piece of the Baltic’s revenue stream.’ Our position is that we’re saying: ‘Let’s work together and see how we can monetise the data that we have in new ways and sharing that.’

“I think that’s the easiest way to say what the position is at the moment… that’s what we’re trying to work together on now: to monetise the data.”

Despite grievances, key shipbrokers remain committed to the Baltic Exchange, amid new indices challenges. S&P Global Platts, which provides energy, freight and commodities price assessments worldwide, has added two freight indices, including one that directly challenges the Baltic’s busiest route by volume.

“Platts is a definitely a credible threat,” said Mr Jackson. “As an organisation, it’s very experienced in producing benchmarks.

“The thing is, they're applying a methodology that works in high-volume markets, based upon this close-of-market price for freight, which doesn't have that same level of transaction.”

On September 30, Platts launched a weighted index for capesize vessels. A year earlier, the group also launched a freight index for rapidly evolving US Gulf-China very large crude carrier route, beating the Baltic.

This included a swap for forward freight agreements and some trading is now done on this swap. Open interest on the Platts swap on the ICE Futures Europe exchange remains small (as of October 23), at 430 lots for January and February by October 24.

The capesize assessment is a bigger, more serious challenge. Some 60% of FFA dry bulk trades in 2018 were settled against the Baltic capesize time charter equivalent index, data shows.

Multinational threat

With big miners such as BHP Billiton testing online freight platforms, shipbrokers fearing disintermediation have rallied around the Baltic. Their assumption goes like this: the Baltic is more invested in their survival than a multinational provider of thousands of indices across hundreds of commodities that uses deals done by miners, oil companies and traders, not only brokers, for price discovery.

Having shipbrokers alone assess freight rates on the route rather than market participants gives an arm’s-length, impartial approach, Mr Jackson said.

The Platts assessment-on-close methodology for freight takes into account fixtures reported to the market not only by brokers but by market participants. However, Platts has asked some panellists to be involved in their rival freight indices.

Eleven of the world’s largest shipbrokers have formed lobby group Competitive ShipBrokers Ltd, which is currently in talks about an historic change in relationship between shipbrokers and the Baltic Exchange.

“We’re looking at it in its entirety,” said the group’s founder Pierre Aury. “It’s impossible [to put an exact financial value on it]; it depends on the brokerage firm. Small firms are, in relative terms, putting in a lot of time compared to larger firms [to provide assessments].

“What we want is to work with the [exchange] board to make sure that these (indices) have got legs and can be existing in 10 years’ time. As an element of remuneration, it is a fixed fee, is it a lump sum, it is through creating a joint stock company, which is something that the Baltic proposed to us... in which case the brokers would get some dividends out of that? I don’t know.”

Nobody is making a separate profit and loss assessment from panellist activity, Mr Aury added. 

“The Baltic has put forward some good ideas and we’re looking at them,” he said.

“After three years, one party is realising it’s not got a very good deal and then that party is asking for changes,” Mr Aury added. The biggest threat is any “market disruption” or the perception of market disruption, which damages trust in the indices for market participants.

Shipbrokers were shareholders in the Baltic Exchange until its sale to SGX, so this reframing of their relationship is not unexpected. Mr Jackson said the Baltic wants to “champion and support” brokers who are necessary for accurate, credible freight indices.

“We are in a business relationship with panellists,” he said. “In any business relationship, people want to put up their prices or renegotiate the terms and they will use certain trigger dates which will push this forward.

“So the November date is one that everybody knows about. It’s an easy thing to cluster around.  The main thing here is that it’s fair to say that we are talking.”

The Baltic is also introducing new indices, for ship operating costs and shipping emissions — projects that extend well beyond the exchange’s traditional remit.

“We can take on bigger projects, because we’ve got the SGX balance sheet behind us now,” Mr Jackson said.

“Whereas before there might have been a lot more reticence under the old board to spend shareholders’ money in something that seemed like a project with no earnings to it, now we look at these projects and say: ‘This is about cementing the Baltics brand in the shipping market.’ This is about us, not necessarily looking at it as a business stream.”

Work is under way to establish a fixture repository for back-testing indices’ robustness, as well as forthcoming indices for shipping emissions and vessel-operating costs.

“Of course, we want to get the money to justify maintaining that database, but it's not seen as a major profit scheme,” Mr Jackson said.

“The higher our standing is in the shipping community in the world, the more people trust us. By default, they trust our indices as well, which is our core business. So we've got to always be looking to how much we can put back into the industry.”

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