globalCOAL RB Index Methodology v.1j


Download the methodology 87kb (Effective 1 April 2017)

Quick links:
Executive Summary | Introduction | Scope of the RB Index and Definitions | Monthly RB Index Calculation | Weekly RB Index Calculation | Governance | Amendments to the RB Index | Industry Comments | Appendix: Frequently Asked Questions


1. Executive Summary

This document outlines the methodology for the calculation of the globalCOAL RB Index ('RB Index' or 'the Index') – a reference price for thermal coal delivered on an FOB basis at the port of Richards Bay in South Africa.

The underlying data for the RB Index is derived from trading activity on the globalCOAL online trading platform, in globalCOAL's Phys RB1 (FOB RBCT Low Vol) contract ('Phys RB'). The calculation is based on a combination of:

  1. Bids and offers posted on the platform
  2. Transactions executed on the platform

In order to ensure the reliability and sturdiness of the index and prevent manipulation, a number of filters and qualifiers are applied to qualify the data for inclusion. Moreover, the formula is structured in a way that enables the transaction component to weigh more heavily in the calculation as transacted tonnage increases.

The following methodology details the scope of the globalCOAL RB Index, and offers a fully transparent description of the calculation of each component in the final Index.

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2. Introduction

The index methodology – unique in its approach in the coal market – was developed in November 2001 in collaboration with the industry. The RB Index provides an independently established, transparent and reliable reference price for spot FOB Richards Bay thermal coal.

globalCOAL publishes the RB Index weekly and monthly. Its inputs – namely physical transactions, and bids and offers – are also published transparently and available in realtime.

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3. Scope of the RB Index and Definitions

The RB Index represents the Spot Price of the Index Month for Phys RB coal contract under FOB delivery terms at the port of Richards Bay in South Africa. These terms are defined as follows:

'Index Month' refers to the period for which the Monthly RB Index is calculated. The Index Month begins on the first business day following the last Friday of the previous calendar month, and terminates on the last Friday of the calendar month.

Example: If the last Friday in January is the 25th, the February Index Month begins on Monday 28th January.

'Listed Public Holidays' do not qualify for inclusion in the Index calculation. They are defined here as New Year's Day, Easter Friday, Easter Monday, Christmas Day and Boxing Day.

'Spot Price' is defined here as the price for coal being delivered in the prompt two months following the current calendar month.

'Phys RB' refers to the contract for the purchase and sale of low vol physical coal FOB Richards Bay falling within the parameters defined in the RB1 RSS for globalCOAL's Standard Coal Trading Agreement (SCoTA).

'Richards Bay' refers to the coal handling facilities located in the Port of Richards Bay, South Africa.

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4. Monthly RB Index Calculation

The globalCOAL Monthly RB Index is calculated as the simple average of each Weekly RB Index which falls in the Index Month.

The globalCOAL Monthly RB Index is published on the last Friday of each calendar month after 17.00 London time. If this day falls on one of the Listed Public Holidays, the Monthly Index will be calculated on the first day preceding that Friday which is not a Listed Public Holiday, and the value will be rolled over for publication on the last Friday of the month.

The Monthly RB Index is calculated in US Dollars (US$) per metric tonne to two decimal places (rounding fractions of 0.005 and higher up, and rounding fractions below 0.005 down, to the nearest US cent).

globalCOAL is responsible for making each RB Index value available and currently publishes these on its website at www.globalcoal.com.

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5. Weekly RB Index Calculation

5.1 Overview of the Weekly RB Index

The Weekly RB Index has the following features:

  • Is calculated using two categories of applicable data:
    • Firm bids and offers in Phys RB for any delivery period entirely contained within the prompt 2 months following the current calendar month, which are submitted to globalCOAL's online coal trading platform. The prices must be for a minimum quantity of 50kt and posted for a minimum of 15 minutes from Monday to Friday between 08.00 and 17.00 London time1 (excluding Listed Public Holidays);
    • Transactions in Phys RB for any delivery period entirely contained within the prompt 2 months following the current Index Month, which are executed via globalCOAL's online coal trading platform. The transaction must be for a minimum qunatity of 5okt and carried out from Monday to Friday between 08.00 and 17.00 London time1
  • Data collected on a Listed Public Holidays will be excluded;
  • Is calculated and published every Friday after 17.00 London time, using applicable data collected during that day and the previous 4 calendar days ("Data Week");
  • If a Friday falls on one of the Listed Public Holidays, the Weekly RB Index will be calculated on the first day preceding that Friday which is not a Listed Public Holiday, and the value will be rolled over for publication on the Friday;
  • Is calculated in US$ per tonne to two decimal places (rounding fractions of 0.005 and higher up, and rounding fractions below 0.005 down, to the nearest US cent).

1 This window ensures equal representation of Asia-Pacific and European activity on the platform.


5.2 The Two Components of the Weekly RB Index

The Weekly RB Index incorporates a bid-offer component, and a transaction component.

5.2.1 The Weekly Bid-Offer Component
  • The Weekly Bid-Offer Component is calculated as the simple average of the Daily Bid-Offer Components calculated for each day of the relevant Data Week
  • In a typical week without Listed Public Holidays, the Weekly Bid-Offer Component is the simple average of the week's 5 Daily Bid-Offer Components
5.2.1.1 The Daily Bid-Offer Component
  • The Daily Bid-Offer Component is calculated as an average of the best qualifying, filtered bids and offers
  • Firm bids and offers qualify for Index inclusion if they are:
    1. For any delivery period entirely contained within the prompt 2 months following the current calendar month
    2. For a minimum qunatity of 50kt and
    3. Posted for at least 15 minutes on globalCOAL's platform between 08.00 and 17.00 London time (excluding Listed Public Holidays)
  • If there are no qualifying bids and offers, the Daily Bid-Offer Component calculated on the previous business day will be used
5.2.1.2 Filtering Daily Bids and Offers
  • The following series of filters are applied to the applicable bid and offer data to ensure reliability and prevent manipulation:

The number of bids and offers used in the Daily Bid-Offer Component calculation will be the lowest of:


Filtered number of applicable bids = The lowest of... Filtered number of applicable offers =The lowest of...
10 10
OR OR
The number of applicable bids which have a price falling within 4%
of the price of the highest applicable bid 2
The number of applicable offers which have a price falling within 4%
of the price of the lowest applicable offer 2
OR OR
20% of the number of applicable bids (minimum 1, then rounding fractions of 0.5 and higher up and fractions below 0.5 down) 20% of the number of applicable offers (minimum 1, then rounding fractions of 0.5 and higher up and fractions below 0.5 down)
OR OR
The filtered number of offers so that the number of qualifying bids and offers will always be equal The filtered number of bids so that the number of qualifying bids and offers will always be equal

2 The 4% band was agreed in conjunction with the market as an appropriate range


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The Daily Bid-Offer Component is then calculated by averaging the prices of the filtered number of the highest qualifying bids, and the prices of the filtered number of the lowest qualifying offers, and taking a simple average of the two numbers.


Example: Calculating the 21 January Daily Bid-Offer Component as part of January RB Index


Applicable Bids and Offers Posted 21 January:

BID (US$/t) OFFER (US$/t)
March 78.50 80.00 March
March 78.25 81.50 March
February 77.50 82.00 February
February 77.00 83.00 February
March 76.75  
March 76.50  
February 75.40
February 74.00  
Total Bids: 8 Total Offers: 4

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The number of bids and offers qualifying for the Daily Bid-Offer Component is the lowest of:


METHODOLOGY RULE BIDS OFFERS
Max number of prices to be included 10 10
Number of prices falling within 4% of the best bid and best offer 7 4
20% of the number of bids and 20% of the number of offers (minimum 1) 2 1
An equal number of bids and offers 1 1

Therefore the following bids and offers qualify for today's Daily Bid-Offer Component:


BID (US$/t) OFFER (US$/t)
March 78.50 80.00 March
Average = US$ 79.25

5.2.1.3 Calculating the Weekly Bid-Offer Component

The Weekly Bid-Offer Component is the simple average of the Data Week's Daily Bid-Offer Components.


Example: Calculating the Weekly Bid-Offer Component as part of January RB Index


Daily Bid-Offer Components this week and rolling daily average


Date ABSOLUTE ROLLING AVERAGE
21 January 79.25 79.25
22 January 78.19 78.72
23 January 77.68 78.37
24 January 77.01 78.03
25 January 76.80 77.79
Weekly Bid-Offer Component = US$ 77.79

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5.2.2 The Weekly Transaction Component

The Weekly Transaction Component is calculated on the last business day of each week, typically a Friday. It is the volume-weighted average price of all qualifying transactions executed during the Data Week.

Reminder: Qualifying transactions fulfil the following criteria:

  • Are executed on the globalCOAL online trading platform in Phys RB;
  • Are for any delivery period entirely contained within the prompt 2 months following the current Index Month;
  • Are for a minimum quantity of 50kt;
  • Are executed Monday to Friday between 08.00 and 17.00 London time.

Example: Calculating the Weekly Transaction Component as part of January RB Index


Applicable Trades this week:

DETAILS EXPIRY PRICE VOLUME
Phys RB February 80.50 50kt
Phys RB March 79.25 75kt
Phys RB March 79.75 75kt
Phys RB March 79.00 50kt
Phys RB March 79.50 50kt
Volume-weighted average = US$ 79.67

Clarifications on particular cases:

  • A Calendar Transaction is never included in the calculation of the Weekly Transaction Component as it does not fall within "any delivery period entirely contained within the prompt 2 months following the current Index Month"
  • A Quarterly Transaction is never included in the calculation of the Weekly Transaction Component as it does not fall within "any delivery period entirely contained within the prompt 2 months following the current Index Month"
  • A Time Spread Transaction is never included in the calculation of the Weekly Transaction Component as the price for each individual leg of the spread trade is subjectively determined.

5.3 Calculating the Weekly RB Index

The Weekly RB Index is calculated as a volume-weighted average of the Weekly Bid-Offer Component and the Weekly Transaction Component:

  • The Weekly Bid-Offer Component is weighted at a fixed volume of 150,000 tonnes; 3
  • The Weekly Transaction Component is weighted according to the total number of tonnes of that week's applicable transactions.
 

Index Calculation
(B * 150,000) + (T * X)
(150,000 + X)

Where: B is the Weekly Bid-Offer Component in US$ per tonne
T is the Weekly Transaction Component in US$ per tonne
and X is the total tonnage of the trades included in the Weekly Transaction Component


Example: Calculation of the Weekly RB Index:

(77.79 x 150,000) + (79.67 x 300,000)  =
(150,000 + 300,000)

(11,668,500 + 23,901,000)  =
450,000

US$ 79.04

The calculation therefore allows for the weighting of the Weekly Bid-Offer Component to proportionally decrease as the executed tonnage increases.


3 A weighting of 150,000 tonnes (equivalent to a cape size vessel) was selected in consultation with the market to ensure that small physical transactions could not unduly influence the Index.


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6. Governance

globalCOAL is authorised and regulated by the UK's Financial Conduct Authority (FCA).

Under FCA rules, globalCOAL is required to have:

  • Transparent and non-discretionary rules and procedures for fair and orderly trading ;
  • Objective criteria for the efficient execution of orders;
  • Transparent rules regarding the criteria for determining the financial instruments that can be traded under its systems ;
  • Transparent rules, based on objective criteria, governing access to its facility.

Bids and offers are monitored to ensure that they are not manipulative or misleading and do not contravene applicable law. Trades are monitored to check whether they are executed within an acceptable range and in accordance with globalCOAL's regulatory obligations, including those relating to market abuse. If the Compliance Oversight Officer of globalCOAL deems that a bid or offer is non-compliant or a trade is 'off-market' or otherwise in breach of globalCOAL's policies, that bid, offer or trade may be excluded from the Index calculation and the parties referred to the FCA.

Market Members may report errors in relation to inputs into the Index (for example, a mis-trade) or challenge the Index output. Error reports and Index challenges will be referred to the Compliance Oversight Officer. Where appropriate, the Compliance Oversight Officer may send it on to the Compliance Committee for review.

The Index will not be amended at the behest of any party (including personnel at globalCOAL), except where this relates to a report of suspicious activity, manifest error, mis-trade, or other similar activity which has been reviewed and upheld by the Compliance Oversight Officer. All other requests for amendments or pressure to amend the Index from any party will have no influence in the determination process and may be reported to the relevant regulatory authorities if deemed appropriate by the Compliance Oversight Officer.

Should an error report or challenge be upheld through this process, globalCOAL will endeavour to amend the Index as soon as possible. Market Members will be informed by email and a notification will be included in the Coal Market Report.

For further information on the criteria used by the Compliance Oversight Officer to monitor transactions please contact compliance@globalcoal.com.

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7. Amendments to the RB Index Methodology

globalCOAL reserves the right to make amendments to the methodology in the future.

globalCOAL's Compliance Committee shall review the Index methodology at least annually and reserves the right to change it at any time.

Where globalCOAL proposes to make any change to the Index Methodology that the Compliance Committee considers to be material, it shall:

  1. Notify Market Members of its intention to change the Index Methodology, the change proposed, the rationale for the change and the date from which the change would apply;
  2. Invite Market Members to submit comments to globalCOAL on the proposed change;
  3. Make public a summary of any comments received from Market Members and a summary of globalCOAL's response except where a comment is likely to reveal the identity of a Market Member who has requested confidentiality.

Prior to making a material change to the Index Methodology, Market Members will be notified of the change by email, and an updated methodology will be published on www.globalcoal.com.

globalCOAL will consider amending or ceasing the Index if it is no longer representative of the underlying market or the required volume of underlying inputs cannot be ensured. Prior to taking any such action, gloalCOAL will consider the impact on forward positions and open interest, and consult the market as required.

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8. Industry Comments

globalCOAL was created by leading international coal consumers and producers to promote standardisation and transparency in the coal market. All stakeholders' comments, feedback and questions are highly valued. Please contact us at:

globalCOAL
London Office
T +44 (0)207 776 5904
F +44 (0)207 776 5902

globalCOAL
Singapore Office
T +65 6311 4570
F +65 6223 2448

frontoffice@globalcoal.com

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9. APPENDIX: Frequently Asked Questions

Q. Are index-linked Phys RB transactions included in the RB Index calculation?

A. No, they are not. Only Phys RB transactions executed at fixed price and bids and offers for such a contract are included in the calculation.

Q. What are RB2 and RB3 and are they included in the RB Index calculation?

A. RB2 and RB3 are other SCoTA specifications for FOB Richards Bay thermal coal Transactions and bids and offers for these contracts are not included in the calculation of the RB Index. The RB Index is only calculated from transactions, and bids and offers, in Phys RB1 (FOB RBCT Low Vol) coal contract ('Phys RB').

Q. Are Phys RB EFP transactions included in the RB Index calculation?

A. Yes. The price at which the EFP transaction is executed is included in the index calculation, prior to it being broken down into its physical index-linked and Futures legs.

Q. What safeguards are there against strategies to move the index through off‑market trades?

A. As globalCOAL is authorised and regulated by the Financial Conduct Authority, any off-market trades will be reported to the regulator. Please see our compliance statement in section 6.

Q. Is the Index calculated on UK Bank Holidays?

A. Only five holidays a year are excluded from the RB Index calculation: New Year's Day, Easter Friday, Easter Monday, Christmas Day and Boxing Day. Other UK Bank Holidays are considered to be normal business days for the purpose of RB Index calculation.

Q. What delivery periods from the previous calendar month qualify for inclusion in the Index Month?

A. Despite being in a different calendar month, those dates are part of the February Index Month. Therefore, the qualifying transactions will be those with a delivery period falling "within the prompt 2 months following the current Index Month" – namely March and April. A February Phys RB trade executed between January 28th and 31st would not count towards the February Index.

Q. Does the same apply to the bid/offer component calculation?

A. In order to qualify for the calculation, bids and offers must be for a delivery period falling "within the prompt 2 months following the current calendar month". In the case of bids and offers posted on January 28th, 29th, 30th and 31st, the qualifying delivery periods will be February and March. For bids and offers posted in February, the qualifying delivery periods will be March and April.

Q. Are there any restrictions on the level of the prices that can be posted on the globalCOAL screen?

A. Yes. globalCOAL generally imposes a 'price collar' on bids/offers which can be posted on the globalCOAL screen. globalCOAL uses the ICE Initial Margin Rate as a basis for setting these collars. The price limits are adjusted daily and may be adjusted intra-day in the event of unusual price movements.

Q. Are voice bids and offers included in the RB Index calculation?

A. No. To be considered applicable data the bid or offer needs to be posted on the globalCOAL electronic trading platform as a firm price for a minimum of 15 minutes

Q. Does the tonnage associated to a bid or offer affect its weighting in the Index calculation?

A. No. The Daily Bid-Offer Component is a simple average of the best bid(s) / best offer(s) qualifying for inclusion in the Index calculation. The prices are given equal weighting.

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Download the methodology 87kb (Effective 1 April 2017)