Baltic Exchange and Mercuria await ruling in VLCC index trial

A three-week High Court trial in London ended yesterday, leaving the Baltic Exchange and commodities trader Mercuria waiting months for a verdict on whether shipping's leading VLCC benchmark should have kept publishing after war broke out in the Middle East on February 28. Judgment in the case, now with Mr Justice Andrew Baker, is expected to take several months.

At stake is TD3C, the Baltic's benchmark for crude shipments from Ras Tanura in Saudi Arabia to Ningbo, China — a route that requires passage through the Strait of Hormuz. It is one of the most widely used reference points in tanker freight, underpinning both physical shipping contracts and freight derivatives.

What does Mercuria allege?

Mercuria argues that the disruption following the outbreak of hostilities rendered the benchmark unreliable, with insufficient physical tanker activity to support meaningful assessments. The trading house maintains the Baltic failed its statutory and contractual obligations by continuing to publish rates despite mounting evidence that its contributing shipbrokers could not reliably determine a market price.

The trial produced uncomfortable internal evidence. One Baltic assessor reportedly described the published rates as "utter nonsense", while a contributing broker questioned how a market could be assessed when virtually no vessels were fixing voyages.

Mercuria also challenged the Baltic's reliance on forward freight agreement prices when calculating a benchmark that itself underpins derivatives contracts. The concern: circular pricing, where the derivative effectively prices itself.

In a significant tactical retreat, Mercuria abandoned during closing arguments its demands for retrospective invalidation or suspension of the index.

How did the Baltic respond?

The Baltic, owned by the Singapore Exchange, rejected the allegations vigorously. It argued its established methodology remained appropriate despite extraordinary market conditions, and its lawyers maintain that experienced shipbrokers could still assess freight values using available market intelligence — transactions, vessel movements and derivatives pricing.

The exchange also pointed to continuing vessel transits through Hormuz during the disputed period, disputing Mercuria's contention that there was no meaningful underlying market.

In its own closing arguments, the Baltic accused Mercuria of repeatedly changing its case and suggested the litigation was an attempt to escape the consequences of unsuccessful trading positions. Mercuria rejected any allegation of wrongdoing.

What does this change for freight markets?

Plenty, depending on the verdict. The Baltic has warned that retrospective intervention in a widely used benchmark could create significant uncertainty for freight derivatives and physical shipping contracts linked to TD3C. Traders, shipowners and charterers who priced deals off the index during the disruption could face reopened positions if the court finds publication should have stopped.

The dispute has also exposed uncomfortable questions about the governance of shipping's freight indices — specifically, what a benchmark should do when geopolitical events make conventional market assessment exceptionally difficult. The Baltic has consistently defended its benchmark procedures and regulatory compliance.

Mr Justice Andrew Baker must now determine whether those procedures satisfied the exchange's obligations during an unprecedented disruption to tanker trading. However he rules, the implications reach well beyond two companies and could shape how freight benchmarks are maintained during future market emergencies.