Nonsense Rate: Court Battle Exposes Turmoil Behind Baltic Tanker Benchmark

"Nonsense rate." That is what Christopher Loveday wrote on March 23 in an internal Baltic Exchange spreadsheet — a protest lodged inside the 282-year-old institution that produces the world's benchmark price for shipping oil. Two days later he wrote "still a nonsense." On March 31, filling in his section of the sheet that underpins billions of dollars in freight derivatives, he wrote "b/s rate."

Those notes surfaced in a London legal battle between the Baltic Exchange and oil trader Mercuria Energy Group, offering an unusually direct view of how the Iran war played out inside a key corner of the global oil market. Closing arguments are due this week; the judge may take months to rule.

What does the case concern?

Mercuria wants the court to declare the Baltic was wrong to keep publishing the TD3C index — the cost of hiring a very large crude carrier (VLCC, a ship carrying about 2 million barrels) on the route from Ras Tanura in Saudi Arabia to Ningbo in China — from March to July, the initial phase of the war. Its demands have shifted repeatedly since the suit was filed in April.

The Baltic argues its decision was justified and that any breach of its obligations belongs with its regulator, the Financial Conduct Authority, not private litigation. It declined to comment while the trial continues.

TD3C matters because derivatives hang on it. Forward freight agreements (FFAs, shipping derivatives contracts) underpinned by TD3C were worth 17.4 billion euros ($19.4 billion) in the first six months of this year. Mercuria was the largest user, holding between 25% and 50% of total open interest, according to its freight trader David Schickler, generally short as a hedge on its tanker fleet's earnings. When TD3C soared at the war's onset, Mercuria's positions faced heavy losses while its ships could not sail through Hormuz to capture the high rates. Mercuria once claimed losses likely in the hundreds of millions of dollars but has dropped that figure from recent filings. Asked by Baltic counsel whether the effect was a "disaster," Mercuria trader Renaud Hauspy replied: "It has not been positive."

Who expressed doubts, and when?

When the US and Israel attacked Iran on Feb. 28, tanker traffic through the Strait of Hormuz all but ceased. Baltic CEO Mark Jackson, who has led the exchange since 2017, commissioned a draft notice suspending all rates on Hormuz routes, he said in his witness statement. But on a March 4 panelist call, brokers said they would keep submitting assessments. TD3C continued.

Loveday — a 28-year shipbroker veteran who joined the Baltic in 2019 and oversaw the nine-broker panel producing TD3C — stopped inputting his own sense-checking estimates. His boss noticed only after a complaint triggered a compliance review. "I don't see how we can possibly report here," Loveday wrote on March 20. A colleague took over as TD3C assessor in early April. Loveday told the court he had thought the index should have been suspended from the war's start.

Others agreed. One staffer said in early April the rate was "starting to lose credibility"; another said he would have "zero confidence" in it elsewhere. On the March 16 panel call, one panelist called the assessment "complete nonsense, the whole thing." One panelist refused to submit assessments for weeks; two others submitted identical values for weeks at a time. In April, an assessor described the company internally as "so rotten at the moment."

Why did the derivatives market matter?

In early March the Baltic issued guidance saying that in "extraordinary circumstances" panelists could judge the physical market by looking at FFA prices — derivatives underpinned by TD3C itself. One trader wrote: "You are literally leaving your index open for direct abuse. It's like having a criminal write his own sentence." When a panelist noted using FFAs, CEO Jackson told a colleague the information should not "get out," though he told the court he only wanted to avoid further debate and conceded the remark sat poorly with the Baltic's motto, "Our Word Our Bond." The guidance still stands, a senior assessor confirmed. Expert witnesses for both sides said FFAs "should not be used as the sole determinant" of a physical assessment.

The Baltic's head of benchmark production, Matthew Cox, asked on a mid-April call whether TD3C would have been suspended absent the FFA open interest — and answered that any other index would have been. He later told the court he was wrong to suggest all other suspension criteria had been met.

"Any commodity market needs reliable benchmarks and freight is integral to that," said Halvor Ellefsen, a London-based director at Fearnleys Shipbrokers UK Ltd. The Baltic's head of compliance, in post since April 2022, has received four formal complaints — all since the war began, all about TD3C, the latest from Mercuria on August 12. Hormuz traffic has rebounded toward prewar levels on non-Iranian exports, with Sinokor accounting for more than 50% of southern-route transits since early July per an Ambrey report — but the underlying assessment difficulties, as the filings show, have not visibly been resolved.