EU regulatory cloud worries centuries-old Baltic ship exchange

• Baltic says shipping should be seen as a unique market
• China dry freight indices among potential threats

LONDON (Reuters): European plans to tighten financial market regulation are raising commercial worries for London’s Baltic Exchange, which has shaped global shipping business for centuries but now faces potential challenges from new rivals.

Brussels is approving a set of measures in a bid to eliminate market manipulation after several banks were investigated this year over rigging of London’s benchmark Libor interest rate.

The Baltic Exchange, the hub of the global shipping market since its founding in 1744, says its system of self-regulation works well and it should be treated as a special case.

“What concerns us is...the idea that we might get caught up accidentally in regulatory change which is being imposed across the piece,” its chief executive Jeremy Penn, said.

Despite its name, the Baltic Exchange is no longer the forum for trade in the chartering of vessels but produces daily benchmark rates and indices that are used to trade and settle freight contracts. It also publishes data used in the freight derivatives market.

Among the EU proposals are possible new rules on the compilation and use of indices. While it is too soon for the Baltic Exchange to pinpoint the exact risk the changes pose, it fears losing business having to outsource operations.

“Unilateral action by the EU would either support the production of rival indices in Asia or drive the Baltic Exchange production process outside the jurisdiction,” Penn said.

“You can see that there are some issues with the way in which Libor and certain other benchmarks are produced. But it would be a great shame if there was some assumption that all markets should be treated in the same way,” he told Reuters.

Barclays was fined 290 million Pounds (US$ 465 million) in June by British and US regulators for manipulating Libor, the London Interbank Offered Rate.

The Baltic says shipping is a private, global market and should be viewed as different from other sectors.

“The risk is they make it very difficult for the Baltic to produce what are well respected, heavily used benchmarks,” Penn said.

In late November the European Commission closed a consultation in which market stakeholders were invited to comment on the possible new rules. The Baltic made a submission.

A Commission spokesman said a summary report would be available in coming weeks, but the body, the EU executive, would not comment on any specific briefing papers submitted.

“All contributions were welcome and will be taken into account as we take forward our preparatory work on a possible Commission initiative on the regulation of indices, which is foreseen for next year,” the spokesman said.

The exchange’s indices and rates, which were launched in 1985, are compiled by a global panel of shipbrokers, which it says are neutral and reliable as panellists do not trade the market on their own account.

Its overall dry freight index, known as the BDI, which gauges the cost of shipping commodities including iron ore, coal and grain, has long been the world benchmark.

“It is a fair reporting system that is robust and has passed the test of time for almost 30 years,” said professor in shipping risk management at London’s Cass Business School Nikos Nomikos.

“Shipping is different in many respects by the fact you do not have transparency of the underlying assets it’s not like the stock market or the Libor market.”

The 200 or so ship broking firms operating in London had an estimated US$ 1.5 billion turnover on UK operations alone, according to a 2011 report by TheCityUK.

Several industry executives, when contacted, said the Baltic’s system was satisfactory.

“If it’s not broke, why should there be any need to tinker just for the sake of it?” one US-based ship broker said.

A London based ship broker commented, “The beauty of the Baltic is it’s completely independent. This is different from Libor and some other markets where you can argue that traders are contributing to the index.”

The Baltic Exchange, which traces its origins to the Virginia and Baltick coffee house, wound up its trading floor in 2001. The exchange building moved after an Irish Republican Army bomb blew up its previous home in 1992.

With the growing importance of Asia as centre for the global shipping market, the Baltic is now contending with challenges from potential rivals. Last month the Shanghai Shipping Exchange (SSE) launched China’s first dry bulk and oil import indices.

The Baltic Exchange has described SSE’s benchmark indices as ‘poorly modelled on the Baltic indices’.

“The opportunity for third parties to produce alternative benchmarks is there at any time,” the Baltic’s Penn added.