Back in 2015 users and brokers sat with the Baltic Exchange to discuss how to implement the new 180 5TC Baltic Cape Index. There was some difficulty in reaching a consensus; mostly related to the complexity of migrating open interest on options versus the comparative simplicity of swaps/futures. In the end it was decided to stop reporting 172 routes on 31 July 2015 and to establish a fixed differential for the 172 from the 4 TC elements of the 180 over the preceding 12 months (-$1,120). It was further agreed that from 2 January 2017 a new fixed differential for the 172 would be created from the 5 TC elements of the 180 over the 12 months prior to 31 July 2015 (-$1,064).
The logic at that time was that the open interest on options did not extend beyond 2017 and that this workaround would satisfy users of swaps /futures and options. To date, the volume of 5TC transactions or 5TC pricing is relatively slim and the options open interest has been extended beyond Jan 2017 (to end 2019) using the 4TC thereby neutralising the effect of the deferred differential introduction. Whilst some users may be happy to carry on with a 4TC 172 derived contract, the uncertainty of which contract will survive and thrive has unquestionably dented liquidity in the options market and has probably both confused and deterred potential new entrants into the swaps/futures market.
The FFABA is keen to see volume develop in the 180 5TC to establish some certainty and to grow liquidity in both options and swaps/futures. The pending change to the differential means that now is as good a time as any to initiate this shift and we would encourage all users to start pricing 180 5TC contracts in the expectation that this will become the contract of choice next year.