FFA : impacts, trends and opportunities

Abstract

Freight Forward Agreements (FFAs) started in 1992 and originated in Europe. It was only in 1998 when it was introduced in Asia. These financial derivatives are used as a paper hedge against freight rate risks in the physical ship market, they can be used for speculative and arbitrage purposes too. Currently, the volume of FFA trading in Asia is small. The conservative mindset of Asian principles, together with the perceived lack of liquidity in the market, the potential counter-party risk and the lack of knowledge about the tool are some reasons that contribute to the low product take-up. There is however a rising trend in the region; a result of ongoing marketing and education efforts in Asia. One of the major advantages of FFA is that it is a flexible tool. However, its basis risks and liquidity risks must be understood and managed well for it to be an effective hedging tool. As the FFA market is still at its infant stage, there are many hybrid things going on. FFA can be bought over-the-counter either cleared with a clearing house or uncleared. Lack of human resource in this market is a problem too and usually, the traders are also the risk managers. In a survey to investigate the awareness and level of knowledge on FFA of the shipping personnel in Singapore, majority was aware of this tool but many were unfamiliar with it. Most respondents expressed interest in wanting to learn more about the tool. Greater practical education and increased market liquidity would be essential to FFA growth and success in the Asia region.