LCH.Clearnet Ltd has launched its over-the-counter (OTC) clearing service for iron ore swaps. Six clearing members have already signed up for the service, with additional members expected to become active in the coming weeks.
The first trade, between Cargill and Morgan Stanley, was successfully cleared on 1 June 2009, brokered by Freight Investor Services (FIS), a freight and dry bulk broker.
The contracts are monthly cash-settled swaps, traded out to two whole calendar years, using The Steel Index (TSI) iron ore reference price for settlement.
The enthusiasm for this ground-breaking new service indicates that there is a strong market demand for iron ore swap clearing. The timing of the launch is exceptional as interest in this nascent market develops, volumes continue to grow and participants increasingly look to reduce their counterparty risk, says Isabella Kurek-Smith, director of energy and freight.
We are pleased to trade the first ever LCH.Clearnet iron ore swap. We believe this contract will come to be seen as a vital tool in the fast-moving steel and freight sectors. With only 15% of the 2009 iron ore requirement fixed so far, we believe more iron ore will be fixed spot, resulting in a spike to freight rates, says John Banaszkiewicz, managing director of FIS.
Iron ore trading compliments Morgan Stanley’s freight business which shipped several million tonnes of third party iron ore last year on our own time-chartered vessels, says Joe Radmore, freight and iron ore trader, Morgan Stanley.
We view being able to clear iron ore derivatives as a big step forward in increasing liquidity to the market. Combined with bigger physical volumes of iron ore trading in the spot market, this market should really grow within the next 12 months.
Cargill has been trading iron ore swaps for nine months and now the availability of a cleared contract will enable us to protect the value of assets and will also result in improved transparency for the buyers and sellers, particularly beneficial to the mills and mines, says Mark Lyons, trading manager, iron ore and steel derivatives, Cargill.
L.D.