Baltic Exchange Threatened by ‘Regulatory Tsunami’

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December 12, 2012

Photo provided by The Baltic Exchange

Michelle Wiese Bockmann

The Baltic Exchange, the London- based bourse whose data are used to set freight rates for about 75 percent of seaborne trade, said European moves to tighten controls over financial benchmarks may drive business abroad.

The European Commission is reviewing mandatory reporting of trade data to set benchmarks, following an almost three-month consultation prompted by the investigation into the manipulation of the London interbank offered rate. Some maritime companies would leave for Asia if that included shipping, the 268-year-old Baltic Exchange said in a submission last month, a copy of which was received by Bloomberg.

Regulators are investigating claims that more than a dozen banks and financial firms altered submissions used to set benchmarks including Libor to profit from trades on interest- rate derivatives. UBS AG, Royal Bank of Scotland Group Plc, Barclays Plc, Citigroup Inc. and Deutsche Bank AG are among the banks that have been probed. The Baltic Exchange’s assessments for the physical cost of shipping are self-regulated.

“Any attempt to impose a regulated responsibility for contributions risks either driving businesses out of the jurisdiction or reducing the quality of contribution,” the Baltic Exchange said in its submission. “Government intervention in the production or distribution processes (which are not subject to any consistent complaint) would be potentially devastating, with unpredictable consequences.”

Regulatory Tsunami

The Baltic Exchange publishes prices for 61 routes based on the estimates of more than 50 shipbrokers worldwide. Forcing brokers to contribute prices would cause fewer of them to do so and the cost of complying would also rise, it said in the submission. Rival assessments were started last month by the Shanghai Shipping Exchange, the submission said.

The Baltic Exchange faces a “tsunami of regulation” into how its indexes are compiled, Philippe van den Abeele, the chairman of a group of users of the benchmarks, said in September. Van den Abeele is managing director of Castalia Fund Management (UK) Ltd., a London-based adviser to a shipping hedge fund.

Possbile criminal sanctions for providing a misleading contribution to benchmarks, even by mistake, would deter many shipbrokers from contributing to the Baltic indexes, damaging its commercial model, according to the submission.

Mandatory reporting of data used to calculate indexes isn’t needed for shipping, an industry that didn’t seek greater transparency and is happy with the benchmarks the Baltic provides, according to the submission.

Half of Tanker Bookings

About 200 ship broking companies are based in London and account for about 50 percent of all ships booked to carry crude and oil products and as much as 40 percent of other vessels carrying commodities such as ore, coal and grains, according to a 2011 report by TheCityUK a London-based group representing financial services in the U.K.

The Baltic Exchange is at the heart of the maritime service sector that employed 12,000 in 2010 and generated GDP of 1.5 billion pounds ($2.4 billion), according to TheCityUK.

The Brussels-based European Commission, the 27-nation European Union’s regulatory arm, will publish an overview of the responses to its consultation early next year, to be followed later in 2013 by draft legislation, Stefaan De Rynck, spokesman for Michel Barnier, the EU’s financial services chief, said in an interview today.

Copyright 2012 Bloomberg.

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