FEATURE: Could a Clearing House for Bunker Trades Solve the Industry's Credit Problems?

One solution to the mounting credit and legal risks faced by both buyers and sellers in the bunker market could be to set up a clearing house for marine fuel trades, according to brokerage NSI.

A clearing house is a financial intermediary designed to reduce the risk of either side of a trade failing to honour its obligations. An institution of this kind could take much of the risk and uncertainty out of bunker trades, Paul Hardy, head of business development at NSI, wrote in a note to clients Thursday.

"This model has been used for various derivatives and financial instruments since the 19th century, whereby the highly financially regulated and compliance-focused clearing house essentially takes on the risk for the particular trade," Hardy said.

The use of such an institution would make banks much less wary of financing bunker trades. But the challenge would be to find the funds to establish a body that could take on the majority of the bunker market's risk.

In Hardy's proposal, for taking on that risk the clearing house would take a small margin from the supplier to cover potential quality claims and other pitfalls, and then return it after the time window for these risks has passed. The buyer would pay a similar margin to cover the risk of it defaulting, with the amount variable according to an assessment of its finances and the transparency of its accounts.

These margins would be drivers for sellers to improve bunker quality and buyers to improve transparency, Hardy argues.

Banks in Retreat

The problem is an increasingly urgent one, with banks steadily retreating from commodity trade finance in general and bunker supplier financing in particular over the past year. Repeated headlines about fraud, financial mismanagement and sanctions breaches will not have endeared the bunker industry to its lenders.

A rapid rise in crude prices in the event of a prompt recovery from this year's COVID-19 crisis would also add to the industry's credit problems.

At last week's IBIA Convention, a bunker trader CEO suggested that while new sources of credit would emerge, they would increasingly come with strings attached.

"The exiting liquidity will need to be filled in with alternative means of funding; at this point of time, the candidates are sovereign wealth and FinTech," the CEO said.

"But we do not see there is a like-for-like capacity to replace them.

"Even with the alternative lending, they will seek compliance, will seek transparency, and will seek a strategic plan for how to apply the energy transition into individual businesses."

More Marine Credit Reports Needed

The establishment of a clearing house would rely on support from marine credit reporting agencies to provide it with the information necessary to determine risk levels, Hardy said.

"Of course, there would need to be a centralised infrastructure for assessing risk, but there are already very reputable credit reporting companies in the market with expertise to do this," Hardy said.

"There would also need to be a centralised platform to capture the deals.

"In the meantime, we continue to do it the old-fashioned way -- assessing the risks on behalf of the owners, and reducing the risk of delivery and cost of credit at all times."