FIS, the derivatives broker and LCH.Clearnet Ltd (LCH.Clearnet) will launch an OTC clearing service for the fertilizer swap market on 16 October 2009 in a move that will increase transparency and liquidity and greatly reduce counterparty risk.
The global physical fertilizer market had an estimated annual turnover of $500bn in 2008 with some 1bn tonnes of raw materials and products traded annually. The addition of clearing will increase trading capacity, improve operational efficiencies and facilitate optional post-trade anonymity, making the product more appealing to participants from outside the industry – particularly financial institutions.
Initially, four swap products will be offered on cleared basis. These are: Yuzhnyy and Nola Urea, Tampa DAP and Nola UAN, representing the most liquid nitrogen and phosphate markets. More products will be introduced in due course. Fertilizer swaps can be traded standalone or combined with freight or other commodities for full risk management.
John Banaszkiewicz, managing director of Freight Investor Services said: “With prices over the last 12 months peaking at $850 for Urea NOLA and plunging to a spot level of $260 [see accompanying graph], fertilizer swaps are vital in managing risk against volatile price movements. These products have strong correlation with world grain and gas prices, which will attract more players into the market now that clearing has been introduced.”
Henk Van Dalfsen, chief executive officer of Transammonia Fertilizer Division said: “This is an excellent opportunity for the industry. Clearing fertilizer OTC swaps will enhance its position among various commodities. It will bring new participants to the market and will help pave the way to more liquidity for those looking to hedge their exposure and for those trading fertilizer swaps in a portfolio of energy related products.” Richard Sutherland, vice president of Mosaic said: “Mosaic has been trading fertilizer swaps for the past three years and now the availability of a cleared contract will enable us to protect the value of assets and will also result in improved transparency for the buyers and sellers, particularly beneficial to the producers.”
Isabella Kurek Smith, director, energy and freight at LCH.Clearnet said: “We are proud to be working with FIS to develop the cleared contract. Their industry expertise has strongly supported the development of clearing in this important and growing market. The service will bring the benefits of risk mitigation and reduction of counterparty risk to industry participants and our members. LCH.Clearnet is pleased to be able to launch this contract as a natural extension to our successful FFA clearing service, and we look forward to expanding our clearing services in the grain, freight and iron ore markets.”