Iron Ore Swaps

Over the last five years, the iron ore swap has emerged as the leading instrument for hedging and risk management for producers and consumers alike.

FIS was instrumental in developing this market, encouraging the development of the swap, its acceptance by major trading houses and expanding the availability of clearing. Iron ore is one of the biggest dry bulk commodities traded and shipped. Annual iron ore production is around 2bn tonnes with seaborne trade in 2012 estimated at 1.2bn tonnes and worth approximately $154bn.

The price volatility noted even before the beginning of the financial crisis clearly illustrated that the mechanism for fixing an annual benchmark price was no longer fit for purpose. In its place, buyers and sellers have moved to a physical sales programme with prices fixed monthly and quarterly, in addition to spot sales and some annual contracts. The emergence of short-term trading and index-linked pricing presents a huge opportunity for producers and consumers, banks and traders to manage their price risk and exposure.

The first independent brokerage for iron ore swaps, FIS continues to provide 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 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 are quoted up to 24 months forward. The availability of clearing at LCH.Clearnet, CME, NOS and SGX AsiaClear ensures that the iron ore swap is designed to meet the needs of the market, through elimination of counterparty risk and future regulatory requirements.