Hedge Funds Boost Freight Derivatives

Terry Flanagan

Richard Baker, chief executive of Cleartrade Exchange, said commodity hedge funds made up a fifth of trading volumes last year on the electronic platform which specialises in derivatives related to the shipping industry.

Baker told Markets Media: “We saw a big shift last year with three large commodity hedge funds entering the market. Hedge funds made up 20% our volumes in 2013.”

He said he expects this trend to continue as banks are exiting physical commodities due to regulatory scrutiny and traders are leaving to set up their own hedge funds. For example, Morgan Stanley is selling its stake in TransMontaigne, the petroleum and chemical transportation and storage company, to Russian energy company Rosneft as the Federal Reserve reviews banks trading in commodity markets.

In addition Cleartrade has filed in the US to become a foreign board of trade which would boost trading by hedge funds.

Singapore-based Cleartrade Exchange (CLTX) was founded in 2010 to provide a cloud-based electronic trading venue for dry bulk freight derivatives with central clearing for the shipping industry.

Cleartrade now provides associated products such as containers, iron ore, steel and fuel oil. Although these are nascent derivatives markets, Baker said they have the same potential to develop as other commodities such as coffee, where paper markets are many times the volume of the physical markets.

Baker spoke to Markets Media after a press conference about the sale of a 52% stake in CLTX to The European Energy Exchange (EEX), part of Deutsche Börse, the German exchange group. EEX lists power, natural gas, carbon emission allowances, coal futures and guarantees of origin, which are related to green energy such as hydro and wind power.

Baker said: “We work closely with clients such as EDF, Cargill and Morgan Stanley who are all involved in freight and want to trade on one venue and integrate clearing and reporting. Many clients involved in the shipping markets are also EEX members so we have complementary ecosystems.”

Peter Reitz, chief executive of EEX, said at the briefing: “The clients Richard mentioned are the largest users of EEX and have asked to trade in one venue rather than in three as they have to do now. That is one of the reasons we were interested in Cleartrade in the first place.”

Reitz gave the example of a power plant that needs to buy and ship coal, and also purchase emission certificates. “We have a very strong unique offering,” he added.

Baker said Cleartrade is hoping to launch coal futures in this quarter, subject to regulatory approval, and is looking at shale gas products in the longer-term.

Reitz said: “The combined firm has 10 asset classes but it will not stop there and se are testing new contracts with clients.” He said potential new markets include pulp and waste, two of the biggest exports shipped out of Europe.

The deal will also allow clients to benefit from netting of margins, cross-margining and the use of a  single collateral pool.

EEX provides clearing for seven exchanges while Cleartrade is connected to clearers including the US’s DTCC Depository Trust & Clearing Corporation and LCH.Clearnet, which is owned by the London Stock Exchange.

Reto Francioni, chief executive officer of Deutsche Börse, said in a speech this week that the exchange was focused on Asia for its growth strategy. Reitz said: “This is one component of that growth strategy but not the last step. It is a good addition.”

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