There will be much to discuss at SIBOS 2008. Last year, the banking industry was gaining momentum. This year, it is rebuild-ing trust. There is no more important task. As no bank is an island, the first step to-wards bolstering our industry’s credibility is to restore trust between financial insti-tutions. This is more than a matter of re-furbishing balance sheets. It is about build-ing confidence in the financial system by strengthening its operational infrastruc-ture. And it involves overhauling the com-plex web of institutional relationships that make that infrastructure function. Network management has a vital part to play in that agenda. In this SIBOS edi-tion of News for Banks, we show (on pag-es 5 – 6) how we have fine-tuned our own approach to relationship management to get a more integrated picture of our coun-terparties. We believe that our efforts will result in additional opportunities for both ourselves and the institutions we do busi-ness with. Meanwhile, we continue to in-vest in our platform. Offshoring is often sold simply as a response to cost pressures but we prefer to see our service centres in India and Poland as sources of fresh talent (pages 10 –11). For us, the ultimate meas-ure of success in offshoring lies in how far we can hone our effectiveness and, of course, pass on the benefits to our busi-ness partners. Adroit use of technology can also help to build confidence. In the back office, better reporting systems (see pages 7– 8) could reduce the scope for errors and mis-trust. In the front office, an innovative

approach to delivering equity structured products lets advisors create the exact solution that their client is looking for (pages 16 –17). Certain solutions, though, continue to build on tradition. Our annual seminar for partner banks (pages 12–13) is now in its thirty-first year. In a time of upheaval, I like to think that such events help to forge the trust that will underpin our industry’s recovery.

Rebuilding trust

2 Network management The future of custody; the network reloaded; and real-time reporting

9 Analysts in action Research feeds into products

10 Talent-spotter How UBS went offshoring

12 Cloudy outlook The view from Wolfsberg

14 Reserves seminar Where central bankers convene

15 Blue sea thought Indexing the world’s sea freight

16 Made to measure Bespoke structured products

18 In brief News from around the world

Stephan Zimmermann Chief Operations Officer UBS Global Wealth Management & Business Banking

News for BanksUBS Newsletter for Banks and Financial Institutions Autumn 2008

15UBS News for Banks / Autumn 2008

Blue Sea thinkingA new index on sea-freight derivatives helps investors tap into the China story

In the same week that UBS launched its Blue Sea index on freight derivatives, the 203,512-tonne bulk carrier China Steel Team was booked to carry iron ore from Brazil to China. At a record-break-ing $303,000 per day, the freight rate was more than three times higher than the ship’s last fixture, just one month pre-viously. China Steel Team is one of fewer than 600 Capesize bulk carriers in the world. And as the name of this particu-lar one suggests, China’s prodigious appe-tite for raw materials is keeping all of them busy. That’s not surprising, when you con-sider that Baosteel, China’s leading steel producer, needs 150 ship-loads of ore every year to feed its blast furnaces. Statistics like these explain why sea freight rates are rocketing, particularly for dry bulk cargoes such as iron ore or coal. According to Simpson Spence & Young, a consultancy, average dry bulk freight rates reached almost $220,000 per day in May, up from $80,000 or below in January and a previous long-term average of $15,000 – $20,000. Capacity shortage is responsible for part of this squeeze but a lack of tonnage is not the whole story. Even if the 185 or so Capesizers on order could be delivered tomorrow, ports and cargo terminals are too choked with ship-ping to allow them to load and unload

The sea may be calm but the freight rates are volatile

Solutions

on time. The upshot is a rising trend in freight rates, coupled with spectacular vol-atility; the benchmark Baltic Exchange sea freight index for dry commodities sagged by more than a third between November last year and mid-January 2008 on fears of a US recession, although it has since bounced back. That volatility, of course, has already attracted banks, hedge funds, and other financial institutions. So far, would-be investors have looked to the existing mar-kets for sea-freight derivatives, which are based mainly on futures and forwards on the principal reference indices. What was lacking, however, was a packaged instru-ment that offered a balanced exposure to a representative spectrum of the dry-bulk freight market. It was this gap that UBS sought to fill when it launched its Blue Sea Index on May 22.

Congestion factorUBS Blue Sea is the first fully integrated in-dex to be benchmarked on the most ac-tively traded dry-bulk forward freight agreements. FFAs are non-standardized over-the-counter forward contracts based on one of several underlying freight indi-ces. They are agreed between two parties for a specific route, for a specific delivery rate and a specific vessel type. The index

also incorporates a “Port Congestion Fac-tor” that takes into account the effect on freight derivative prices of loading or un-loading delays in more than 60 iron ore and coal ports worldwide. The index is aimed primarily at investors who are interested in freight as a generic asset class. In addition, shipowners and charterers could use the index to hedge their total exposure to freight rates. For this purpose, sub-indices are also available. These are based on the three categories of bulk carriers that comprise the main index, namely the Capesize giants and the hand-ier-sized Panamax and Supramax types. It’s too early to say which types of investor will make the most intensive use of the new index. But Blue Sea has cer-tainly captured the attention of industry experts. Lloyds List, the longest-standing daily newspaper for the maritime industry, commented as follows: “This new UBS initiative deserves to be watched as it may introduce a new level of sophistication to the freight derivatives market by opening it up to investors who are not necessarily freight professionals. The Blue Sea Index is indeed blue sky thinking.”

Ilija Murisic UBS Investment Bank, Hybrid Derivatives Trading ilija.murisic@ubs.com

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