The U.S. Federal Maritime Commission on Thursday voted unanimously to initiate a rulemaking to give more leeway for ocean carriers and shippers to use service contracts with rates linked to freight rate indexes.
To date, the FMC said it has received more than 50 service contracts that reference freight indexes.
Under the commission's current rules, service contracts can only reference outside terms, such as a rate in a freight index, that are 'contained in a publication widely available to the public and well-known within the industry.'
The proposed rule change would allow contracts to reference freight indexes or other outside terms, so long as they are 'readily available to the parties and the commission.' As a result, ocean carriers and their customers will be able to use freight index rates in their contracts without concern about whether the indexes employed meet the requirement that they be 'widely available to the public' or 'well known.'
FMC Chairman Richard A. Lidinsky Jr. said he was "pleased that the commission is moving to provide the market with certainty and flexibility to experiment with index-linked contracts and derivative hedging strategies. When employed responsibly, these can be useful tools for managing risk when ocean freight markets experience volatility."
The rule change was recommended by a Container Freight Index and Derivatives Working Group that was created earlier this year by the FMC
Lowry Crook, FMC's chief of staff who heads that working group, said service contracts reference freight indexes such as the China Containerized Freight Index, the Shanghai Containerized Freight Index, the Drewry Freight Insight Index, and the Transpacific Stabilization Agreement Index.
He noted "until recently, the TSA index was not published, and access to historical rates for other index was limited to those who paid significant subscription fees."
The working group questioned whether the requirement for the index to be widely published "is unnecessarily restrictive, and whether its scope is required by the Shipping Act. After consideration, we recommend that the commission adjust the rule to provide more flexibility and certainty for parties who wish to use index-linked service contracts."
Crook said the group will also recommend a similar change to the parallel rule that applies to Non-vessel-operating common carrier Service Arrangements.
The FMC also voted 3-2 to issue a proposed rule to strengthen protections for cruise line customer deposits and prepayments, and to reduce financial responsibility requirements for small cruise lines.
The proposed rule will increase the maximum coverage requirement from $15 million to $30 million per cruise line. This update responds to inflation and the growth of the cruise industry since the current $15 million cap was set in 1990. The proposed rule would also relieve smaller cruise lines by giving them credit for existing additional forms of financial protection. Finally, the proposed rule invites comments from the public on alternative methods of strengthening financial protections and providing relief for smaller cruise lines.
Commissioners Joseph E. Brennan and Rebecca F. Dye voted against the proposed rule, though for different reasons.
Brennan said he was 'very unsatisfied with the proposed rule. If it is issued today and adopted in two months, the commission will be able to say that it has doubled the coverage cap, which might look good in the press. But that headline becomes less splashy when you realize that the FMC will still be leaving 84 percent of passenger payments uncovered on an industry-wide basis."
"The FMC will effectively be saying to cruise passengers: 'Be satisfied with a refund of 16 cents on the dollar. If you want to have the rest of our money back, go try your luck in the bankruptcy court.' This will unjustifiably continue to leave cruise passengers extremely vulnerable. It is well-known that unsecured creditors (passengers, in this case) commonly receive nothing in bankruptcy proceedings," he said.
Dye objected to the ruled for a number of reasons, and said "our priority should be to reduce current regulatory burdens and create a business environment conducive to job creation."
She said "the only really effective passenger indemnification requirement is based on the actual risk that a cruise ship passenger will not be reimbursed for cruise ship nonperformance" and said "an effective regulatory system should also take into consideration all available sources of indemnification, and avoid the one size fits all approach." ' Chris Dupin