Iron Ore Swaps

The Iron Ore Market

Iron ore is one of the biggest dry bulk commodities traded and shipped. Total iron ore production in 2008 was 1.6bn tonnes; seaborne trade was estimated at 840m tonnes and worth approximately $100bn.

The growth of spot trading in this huge market presents an opportunity for banks, traders, producers and consumers to manage price risk and exposure.

Trading since 2008, the iron ore swap has emerged as the leading instrument for iron ore hedging and risk management. FIS has been instrumental in developing the market; expanding the use of clearing and bringing unrivalled knowledge and unparalleled access for traders.

The first independent brokerage for iron ore swaps, FIS provides a daily forward curve to clearing houses LCH.Clearnet and SGX AsiaClear to ensure an accurate mark-to-market assessment that supports trading decisions.

The FIS Iron Ore Swap

The majority of traded iron ore — up to 80% — has traditionally been sold using an annual benchmark price negotiation. Spot trading so far has been predominantly in iron ore fines driven by producers dealing with trading houses and mills.

But huge swings in the delivered price and the emergence of a larger spot market for iron ore have underlined the need for a dedicated, cleared contract to manage price risk. Going forward, traders will increasingly embrace new derivative tools, pricing methods and the greater use of hedging.

To answer this demand, FIS has helped to pioneer the market for iron ore swaps, enabling better price risk management for users and traders and eliminating counterparty risk, thus managing financial exposure.

Already the leading freight derivatives and fertilizer swap broker, FIS was the first independent brokerage for iron ore swaps, producing the only independent forward curve as well as daily market information, comment and price history. FIS is relied upon to supply its daily mark-to-market assessment to clearing houses LCH.Clearnet and SGX AsiaClear.

The cleared iron ore derivative contract operates as an over-the-counter, cash-settled agreement, with settlement against The Steel Index TSI, 62% FE grade product delivery North China.

Trades can also be settled bilaterally against the Metal Bulletin MBIO or Platts Iron Ore Index, generally under an International Swaps and Derivatives Association agreement. Trades can be made on a per month, per quarter or per calendar year basis and prices quoted up to 24 months forward.

The direct link to LCH.Clearnet ensures the product is designed to meet the needs of the market, through elimination of counterparty risk and better cash management. Banks and funds as well as producers, shippers and end-users of iron ore can each use the contract to benefit their business.

The contract can be traded stand-alone or combined with a freight derivative contract to provide strong risk management.

For more information about the FIS iron ore swap or to discuss trading opportunities, please contact info@freightinvestorsolutions.com.

Iron Ore and Steel Derivatives Association

FIS has played a leading role in the establishment of the first interest organisation for the iron ore derivatives business, IOSDA.

IOSDA grew out of the belief that the iron ore swaps market could benefit from a mechanism for debate, problem-solving and liquidity building, attracting input from traders, brokers and clearers, working together where possible to grow liquidity and increase market knowledge.

IOSDA is now a fully fledged, not for profit organisation, based in Singapore and including members from the leading banks, brokers, traders, lawyers and clearers in the field.

The association will aim to act as from members that can be used to the benefit of the market as a whole and has eight main objectives:

• Raise awareness and promote the trading of the iron ore and related derivatives;
• Promote education and knowledge among market participants;
• Promote high standards of conduct amongst market participants;
• Develop and promote the use of standard contracts;
• Develop and promote commonly accepted forward curves for contract settlement and historical analysis of markets;
• Encourage the development and use of independent market indices;
• Provide a forum for brokers and principals to resolve problems as they arise;
• Develop the use of other OTC and exchange traded derivative products for iron ore and related price risk management.

For more information and details of how to become a member, please visit www.iosda.com.