Baltic Exchange to add airfreight pricing index

Derivatives trading platform Baltic Exchange will adopt TAC Index airfreight rate data to publish its first index of airfreight prices along major air trade lanes. 

The Baltic Exchange, which traces its routes back to the 1700s, provides benchmark assessments for the maritime markets which are used to settle billions of dollars-worth of derivatives and physical trades every year.

The Baltic Exchange will undertake a rigorous review of the TAC Index’s methodology and processes with a view to establishing a governance structure which will make the index compliant with UK’s Financial Conduct Authority’s rules for benchmarks.

A subsidiary of the Singapore Exchange (SGX), endorsement by the Baltic Exchange opens the pathway for International Organization of Securities Commissions approvals and cleared market trading.

The news was welcomed by derivatives broker Freight Investor Services (FIS), particularly give the current market volatility.

FIS traded the first Air Freight Forward Agreements (AFFAs) in August 2019.

TAC Index Managing Director John Peyton Burnett said: “We are very excited to be partnering with the Baltic Exchange. TAC Index has seen its air freight indices become the primary price benchmarks for carriers, lessors, shippers, forwarders and end-buyers globally.

“The partnership with the Baltic Exchange will drive further integration of air freight into the global commodity markets and put the indices at the heart of a substantial new global forward freight market.”

FIS managing director John Banaszkiewicz said: “The COVID-19 pandemic has thrust air cargo into the spotlight in the short term, however the inability of airfreight businesses to adapt to price volatility and uncertainty have been persistent features of the market historically.

“In what is a turbulent time for supply chains globally with China to Europe rates rising 147% from February to April, the opportunity now exists for next-generation price risk management.”

Using derivatives can help businesses hedge their exposure to offer more certainty and protect against market drop offs.

However, they can also limit a company’s ability to benefit from an upswing.

“The timing is right for the airfreight sector to start hedging its risk in volume and with support from several key physical market businesses, the premise for liquidity is strong,” added Peter Stallion, FIS Airfreight Derivatives broker.

“Building on what has been achieved so far, FIS will look to use 2020 to drive market-wide support and involvement, facilitating trading that supports the goals of businesses as we move into a highly uncertain decade.”

The global airfreight market is estimated to be worth $100bn, with 65m tonnes of general cargo moved by air annually.

Baltic Exchange chief executive Mark Jackson added: “Our status as a regulated benchmark administrator opens up all sorts of possibilities for the air freight market.

“We are confident that the index will provide a completely independent and uncompromised view of the air freight market and the audited Index will become listed by financial clearing houses. This would provide the industry with new ways of managing its freight rate risk and potentially bring in new market participants.”