FMC Launches Container Freight "Index & Derivatives" Working Group
The Federal Maritime Commission has announced the formation of an internal agency Container Freight Index and Derivatives Working Group. The group will work on issues arising from the use of container freight rate indices in service contracts and index-based derivative transactions.
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Index-Based Rates and Derivatives Could Help Trade Manage Risk
FMC Chairman Richard Lidinsky, Jr. stated that index-based ocean freight rates and derivatives have potential to be useful tools for shippers, intermediaries, and ocean carriers to increase rate certainty and manage risk.
He added that it is important that market participants have flexibility in structuring rates and hedging strategies. At the same time, he wants to explore whether modest, common-sense standards are needed to ensure participants have adequate information and avoid manipulation.
Working Group to Examine Issues on Use of Index-Based Rates, Safeguards
Chairman Lidinsky requested that the working group begin by examining the following issues:
- What potential statutory issues may arise as shipping lines and their customers use index-based rates? For example, what types of index-based rates satisfy the Shipping Act requirement that service contracts include "line-haul rates"?
- Do freight rate indices comport with the current FMC requirement that outside terms referenced in a service contract be "contained in a publication widely available to the public and well-known within the industry"? Should the current regulations be modified to allow service contracts to reference an index that is readily available to the parties but not the general public?
- Are safeguards needed to ensure that an index referenced in a service contract is verifiable and beyond the control of the parties to the contract?
- Do various indices’ methodologies or structures raise concerns about transparency or potential manipulation?
- After the Dodd-Frank Wall Street Reform and Consumer Protection Act takes effect, what U.S. and foreign regulations will govern proposed container freight index swaps that incorporate rates in U.S. trade lanes or involve U.S. counterparties?
Working Group Asked to Report at June 8 FMC Meeting
The working group has been asked to provide an initial status report at the next FMC meeting on June 8, 2011
(The Container Freight Index and Derivatives Working Group will be chaired by Lowry Crook, Chairman Lidinsky’s Chief of Staff, and has the following members: Ronald Murphy, FMC Managing Director; Florence Carr, FMC Deputy Managing Director; Tanga FitzGibbon, Deputy Director, Bureau of Certification & Licensing; Roy Pearson, Deputy Director, Bureau of Trade Analysis; Gary Kardian, Director, Office of Service Contracts & Tariffs; Joseph Johnson, Industry Economist, Bureau of Trade Analysis; Ernest Worden, Industry Economist, Bureau of Trade Analysis; Rebecca Fenneman, FMC General Counsel; Daniel Lee, Attorney-Advisor, Office of General Counsel.)