The volume of trade on Singapore Exchange's new iron ore lump premium swap contract surged nearly eight times to 305,000 mt in October, from 40,000 mt in September, amid declining spot iron ore prices.
SGX's iron ore lump premium swap and futures contracts were launched on August 31, and on the first trading day, the volume cleared for the contracts totaled 140,000 mt.
The lump premium swap contract saw 610 lots traded in October, up from 80 lots in September, while open interest swelled to 470 lots from 80 lots over the same period, latest SGX data showed.
The contract is cash settled using the average of Platts 62.5% weekly spot lump premium assessments in the expiring month.
Meanwhile, the futures volume fell from 845,000 mt in September to 760,000 mt in October, but the open interest in futures rose from 6,450 lots to 6,850 lots.
The combined volume of swaps and futures was 1,065,000 mt in October, up 20% from a total combined volume of 885,000 mt in September.
One lot of iron ore lump premium futures contract is equivalent to 100 mt, while one lot of lump premium swaps contract is equivalent to 500 mt.
But in practice, a Singapore-based trader said market participants trade 10 lots of lump premium swaps, equivalent to 5,000 mt, in each transaction.
"When we want to do bigger volume, swaps is more preferable than futures," he said, which explained why the swaps contract volume went up more significantly compared with futures.
Platts weekly spot lump premiums had fallen to the lowest so far this year at $0.0625/dry metric ton unit on October 28, down 79.8% from $0.31/dmtu assessed on January 7.
As lump supply is increasing in the spot market in Asia, a Singapore-based trader said the swaps contract provides an effective tool for players to hedge cargoes they have at hand.
"Many traders want to offload lump cargoes at the moment, and there is no other way to hedge the premium except for SGX's lump premium contract," the trader added.
The SGX swaps and futures contract were launched on August 31, but some players felt that despite the increase seen in the swap trade volume, liquidity is still a concern.
"Main participants of the contract are traders. There are limitations ... due to not enough parties participating [in the contract]. Some days the trading volume is too low and [so it is] not easy for us to find counterparties," a Shanghai-based trader said.
SGX is utilizing the Platts 62.5% Iron Ore (Fe) China Spot Lump Premium assessment as the settlement basis for its new swap and futures contracts.
