Shipping is an inherently volatile industry that is characterized by a high risk- high return profile. Therefore, it is difficult to forecast the rates and prices and hence business projects are less accurately budgeted. Freight rates and their fluctuations constitute one of the most significant sources of business risk. As a result, many derivative products have come to the market that helps in managing or mitigating the risks.
What is Freight future contract?
To start with, a futures contract is a legal agreement to buy or sell an underlying asset in a specified month. Each futures contract represents a specific amount and is standardized according to quantity, quality, place and time. The only variable factor is the price, which is discovered based on an auction process in an electronic exchange platform.
There are two types of futures contracts – one that involves physical delivery of the asset and the other one that is settled in cash. Shipping freight future contracts are generally settled in cash and there would be no movement of the ships. Each freight future contract is specific to an underlying commodity or a financial instrument. In the response to the market activity and economic events, the date of delivery and the price for each contract will fluctuate all through the trading season.
As is the case with shipping freight future contracts, all futures contracts are cash-settled and end without the actual delivery of the physical asset. It is the contract and not the physical asset that is bought and sold again among different parties.
Freight future settlement
Generally, freight futures contracts settle over the average price of spot freight during the corresponding month. As explained above, there is no physical delivery of the asset and contracts are settled in cash against the arithmetic average price of spot freight.
Main brokers that provide freight future trading
Main brokers that currently provide dry bulk freight futures trading are: Freight Investor Services (FIS), Clarksons, Simpson Spence Young (SSY), GFI, BRS, Arrow Shipbrokering and Braemar Atlantic Securities.
Advantage of freight futures
- One of the most important advantages of freight futures is the opportunity it provides to participate in the actual shipping market in the most cost-effective, direct and simple way without the difficulty of owning ships
- One can gain the benefit of both rising and falling markets, as freight futures can be bought or sold short
- During times of market fluctuation in the short period, freight prices tend to increase and once the market balance is restored, freight prices return to equilibrium
- Supply and demand of the ships is the driving force behind the market during the short term, although during a longer period of time economic activity is the major driver
A typical day of a freight broker
A freight broker wakes up early as he has many things to do once the cargo starts loading and ships sail out. He checks his computer and reviews his emails, checks voicemails and proceeds to review the ship schedules for the day
- As the morning rolls out, brokers start working on their appointments for the day and schedule their pickups and deliveries. By mid-morning, the appointments are met, schedules are set and the ships have picked up their loads. The remaining part of the morning is spent on following up with customers, scheduling loading and unloading of cargo, tracking deliveries, and other activities that need to be done in relation to cargo delivery.
- After lunch, the afternoon is spent verifying morning pickups, matching afternoon schedule with trucks, giving quotes to inquiring customers, and dispensing advice on the best manner of moving cargoes. The time is spent on planning and coordinating customer’s shipment schedules on time within the allowable budget.
- In the evening, freight brokers have to make sure all pickups and deliveries for the day have been carried out on time. They would also spend the evening planning for the next day, preparing the schedules.
The pandemic has forced the brokers to spend their working time largely at their homes as working from home is the norm around the world. That would mean that personal meetings are rare and most of their communication is done through electronic communication, including mobile calls and messaging. They have their WhatsApp web and desktop open always for handling transactions and coordinating with customers. WhatsApp trading has become omnipresent in the freight futures contract trading. Regulatory mandates make it critical for these brokers to strictly follow WhatsApp communication recording and archiving policies of the firm.
It is also imperative for the firms to give training to the traders on the implications of WhatsApp trading and the security protocols that are to be followed while using WhatsApp for trading purposes. If the need arises, brokers should be able to provide their WhatsApp communication recording to their firms and other investigative agencies that may ask for the recording.
Recordkeeping requirements for freight future companies
The Export Administration Regulations explain the recordkeeping requirements, including how long to keep the records, what type of records are required to be kept, how to reproduce documents if required and which documents are exempted from retention. At the same time, some documents are not required by regulations to keep, but it is in the best interest of companies to keep.
Shift to electronic communication
To comply with freight compliance regulations, a company must create a system to manage the records of communication. Electronic communication records are to be managed by the IT department and a robust system in place will ensure easy access, retrieval and maintenance.
Freight future companies are often faced with the challenge of managing overwhelming volumes of information and records. All business communication done through electronic communication channels including messaging apps must be recorded and archived. Freight compliance regulations make it mandatory for freight future companies to monitor phone calls and record SMS messages that are used for business communication. The use of WhatsApp for business communication has increased after the prevalence of work from home during the pandemic of Covid-19. WhatsApp archiving is a must for complying with the freight compliance requirements as per the Export Administration Regulations.
Every employee in the freight future companies needs to identify critical and important documents, share and retrieve documents, properly dispose of hard drives, thumb drives and other portable devices as well as maintain a back-up system.
Importance of recordkeeping
Freight future companies must make sure that all required communication documents are captured and archived correctly to allow efficient search and retrieval by conducting periodic audits of the recordkeeping system. All business communications including calls and messages must be archived in easily retrievable form and location. Companies must regularly conduct internal reviews of recordkeeping to ensure proper practices and procedures are followed.
Companies must take steps to maintain a back-up system for electronic storage of communication data and implement measures that will assist recovery of information and other electronic communication records including phone calls and messages. Certain US government agencies may require freight future companies to inspect these records of business communication whenever they deem it necessary.
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