“Private” sea freight indexes hide Libor like skeletons?

EU Commissioner Michel Barnier, responsible for Internal Market and Services

The almost three centuries old Baltic Exchange is a private and closed platform, where around 60 shipping brokers based mainly in London are contributing voluntarily their cargo prices. On the base of those contributions the Exchange publishes benchmark freight price indexes for a round number of 70 sea routes and vessel categories.

The indexes are used as a benchmark for almost half of all ocean transport contracts, oil tankers and dry cargo included. There is no external control or any other liability over the truthfulness of the brokers’ contributions or on the way they are used by the Exchange services, to calculate the indexes.Over the past years those benchmark prices are also used as a base for shipping derivatives trading and hedge fund transactions, a new and fast developing financial market. Specialised intermediaries and a small number of major banks involved in shipping loans and transactions are behind this new derivatives and hedging markets.

Since last year however British, American and European financial market regulators after months of investigations came upon criminal and fraudulent behaviour by banks and bank dealers, who influenced according to their interests the daily setting of Libor and Euribor. Those two major interest rate benchmarks are used by the entire financial world, in concluding loan contracts, financial derivative pricing and hedging markets. UBS AG, Royal Bank of Scotland Group Plc, Barclays Plc , Citigroup Inc. and Deutsche Bank AG are under scrutiny and so far some of them have agreed to pay huge fines for their implication in this conspiracy plot to fraudulently setting Libor quotes. Only last week UBS agreed to pay a fine of $1.5 billion and some of its employees face criminal conspiracy charges in the US.

This was a major blow to the entire financial industry, with its management and dealers being exposed to have acted as common criminals. As a result regulators in Britain, Europe and the US are looking now for ways and means to set rules and controls in the so far “private” banking procedure of Libor and Euribor setting.

Given however that the same banks and financial firms are also implicated in the “private” and completely “free” procedure of setting the Baltic Exchange’s sea freight indexes, the European Authorities initiated an investigation on that too. The EU now examines the prospect of opening to official control the Baltic Exchange’s procedures, also making the freight price announcements by brokers compulsory and traceable. To this effect EU Commissioner Michel Barnier proposes the creation of an official digital platform for all that, where everything will be open to control by the authorities.

As it is easily understood that the sea freight prices reporting brokers, the Baltic Exchange and intermediating banks have vehemently rejected this prospect, threatening to abandon London and move their activities outside the European Union. They say that government interference and control over their “private” doings will completely ruin this market.

The problem is however where in the world they can move to? If the EU and the US decide to place the Baltic Exchange structures under government control on an official platform, the only place they can move their “free” doings is Asia. Unfortunately for them, the Shanghai Shipping Exchange has initiated one month ago its own sea freight benchmark indexes, directly rival to Baltic Exchange ones. Obviously there is now less room in South East Asia, for a second sea freight index.

In any case the Baltic Exchange activities, having attracted the interest of the authorities, will remain under investigation. It is more than certain that soon we will be hearing more from this source.

The Sting will be closely following the story to inform its readers.