CCP group LCH.Clearnet has launched a new service clearing over-the-counter (OTC) contracts on the forward freight agreement (FFA) market. LCH.Clearnet says the usual benefits of using a CCP – elimination of counterparty credit risk, multi-lateral netting, and improved operational efficiency – apply.
At this stage, the clearing service covers 4 wet (crude and refined products) routes and 9 dry (dry bulk commodities) routes in the freight forwarding market. The service aims to allow charterers and shippers to hedge their shipping exposure and provide arbitrage opportunities to bank, broker-dealer and trading company participants in the market.
“We are delighted to see this further development in our clearing services to commodity markets,” says David Hardy, Group Chief Executive at LCH.Clearnet. “Our financially robust central counterparty model, with its considerable depth of default backing, is in broad use across a wide range of trading activities, and it is very pleasing to see the forward freight market now enjoying its benefits.”
The LCH.Clearnet service is available to all participants in the FFA market, and allows OTC-brokered or bi-laterally executed trades to be registered directly with LCH.Clearnet for clearing. LCH.Cleranet says it has received “strong support” from the market.
Sacha Konan, Manager, Cape Trading at Cargill SA, says the new service is an important step in the evolution of the FFA markets. He adds that it “addresses the broad concern in the freight markets over counterparty risk. The new clearing service will act as a great stimulus to increase market liquidity.”
Mark Hubbard, Commodity Business Development Manager for ABN AMRO Futures Limited, a major user of LCH.Clearnet clearing services, also welcomed the new servce as “an attractive risk mitigant for our clients.”