Airfreight Futures Market Takes Flight As Short Term Volatility Bites - Adoption Of TAC Index Data By Baltic Exchange Reflects Industry’s Need For Mechanism To Manage Price Risk For Shippers And Carriers

Freight Investor Services, in collaboration with air freight price data provider TAC Index has passed another major waypoint in the development of the index-linked physical and air freight derivatives markets.

FIS has been working since 2018 to develop acceptance of derivatives and index linked contracts within airfreight and believes 2020 offers an opportunity for freight businesses to manage their price risk and lock-in costs or revenues regardless of volatility. FIS traded the first Air Freight Forward Agreements (AFFAs) in August 2019 and the derivatives market is open for every business with air freight risk exposure.

“The COVID-19 pandemic has thrust air cargo into the spotlight in the short term, however the inability of airfreight businesses to adapt to price volatility and uncertainty have been persistent features of the market historically,” said John Banaszkiewicz, Managing Director, Freight Investor Services. “In what is a turbulent time for supply chains globally with China to Europe rates rising 147% from February to April, the opportunity now exists for next-generation price risk management.”

The benefits of financial risk management extend from contract and margin security that can withstand ’business as usual’ and systemic fluctuations in the airfreight market. The ability to hedge price risk can significantly reduce the long-term risk of air freight assets and businesses well into the future.

The Baltic Exchange will partner with TAC Index to publish its first index of air freight prices along major air trade lanes. The Baltic Exchange already provides benchmark assessments for the maritime markets which are used to settle billions of dollars-worth of derivatives and physical trades every year.

The Baltic Exchange will undertake a rigorous review of the TAC Index’s methodology and processes with a view to establishing a governance structure which will make the index compliant with UK’s Financial Conduct Authority’s rules for benchmarks. A subsidiary of the Singapore Exchange (SGX), endorsement by the Baltic Exchange opens the pathway for IOSCO approvals and cleared market trading.

“The timing is right for the airfreight sector to start hedging its risk in volume and with support from several key physical market businesses, the premise for liquidity is strong,” adds Peter Stallion, FIS Airfreight Derivatives broker. “Building on what has been achieved so far, FIS will look to use 2020 to drive market-wide support and involvement, facilitating trading that supports the goals of businesses as we move into a highly uncertain decade.”