Singapore Exchange to launch world’s first OTC iron-ore swap clearing
20 Apr 2009
Singapore Exchange Limited says it will launch the world's first clearing of over-the-counter (OTC) iron-ore swap contracts starting from Monday, 27 April 2009.
Singapore Exchange Limited has already signed an agreement with The Steel Index of London that will provide its reference price for the settlement of the iron ore swap contract to be cleared electronically on the SGX AsiaClear system.
The iron-ore swap contract size will be of 500 metric tons each and it will be cash-settled based on the average of The Steel Index (TSI) iron ore reference prices in the expiring month.
The Steel Index (TSI) is the premier source of independent, reliable, weekly steel and iron ore price information based on actual transactions of over 375 companies.
Iron ore is the main raw material used in steel production and the movement of its prices is widely used as an indicator of the global economy's demand for steel.
Risk management tools such as iron ore swaps are important in managing volatility in iron ore prices and swap contracts are typically used as hedges against future price risks.
China being one of the main consumers of iron ore, has a major say in the world price and miners and steel companies from all parts of the globe sit down and negotiate the annual price on 1 April to fix the price for the whole year.
The international iron ore market has always been dominated by the big miners from Brazil and Australia as well as steel makers from China, Japan, South Korea and India and the swaps mechanism will help them since the price of iron ore has always been volatile impacting the steel industry.
Deutsche and Credit Suisse had also launched iron ore swaps in May last year, where the settlement was done by cash but the Singapore Exchange OTC swap will be cleared electronically on the SGX AsiaClear system with AsiaClear taking the counterparty risks
Ms Elena Sng, senior vice president, AsiaClear and Clearing and Commodities Business at SGX said, ''OTC iron ore swaps have become an important instrument to industry participants. AsiaClear can now meet the risk management needs of these participants. This is a natural extension of our OTC product suite including forward freight agreements and energy contracts.''
Steven Randall, managing director of The Steel Index said, ''We are proud to partner the Singapore Exchange by providing our iron ore index for its iron ore swap settlement. I am confident that with SGX's capabilities in OTC clearing, this product will further enhance the iron ore derivatives trading and risk management activities in Asia.''
"As an active market participant in the OTC iron ore swap trading, we recognise the credit issues in the global financial markets. The launch of the SGX iron ore swap clearing will increase market participation and facilitate the growth of an active iron ore swap market,'' said Raymond Key, global head of metals trading of Deutsche Bank.