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FMC Votes to Move Forward on Cruise Line Passenger Financial Protections and Rules for Service Contracts that Link Rates to Freight Indices

September 8, 2011

NR 11-15

Contact: Karen V. Gregory, Secretary (202-523-5725)

During its meeting today, the Federal Maritime Commission voted 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. In a separate action, the Commission also voted to initiate a rulemaking to provide flexibility and certainty to ocean carriers and customers who use service contracts with rates linked to freight rate indices.

(1) Proposed Rule Strengthening Financial Protections for Cruise Line Passengers: Under the Commission’s regulations, cruise lines must file evidence of financial responsibility to ensure that passengers can obtain refunds if their cruises are cancelled. In a 3-to-2 vote,1 the Commission decided to issue a proposed rule that 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.

Chairman Richard A. Lidinsky, Jr. stated: “I’m pleased that we have moved forward with a proposed rule to better protect consumers while making our regulations fairer. No passenger who has a cruise cancelled should lose his or her deposit or prepayment. The Commission looks forward to additional input from the public and cruise industry on these proposals."

(2) Rule Modification for Service Contracts Linked to Freight-Rate Indices: The Commission voted unanimously today to move forward with a recommendation by the Container Freight Index and Derivatives Working Group to initiate a rulemaking to give more leeway for ocean carriers and shippers to use service contracts with rates linked to freight rate indices. To date, the Commission has received more than fifty service contracts that reference freight indices.

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 indices 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 free of questions over whether those indices are “widely available to the public” or “well known.”

Chairman Lidinsky stated: “I’m 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. This is another example of the Commission implementing President Obama’s guidance to eliminate regulations that are unnecessary or overly burdensome."

The Federal Maritime Commission is the federal agency responsible for regulating the nation’s international ocean transportation for the benefit of exporters, importers, and the American consumer. The FMC’s mission is to foster a fair, efficient, and reliable international ocean transportation system while protecting the public from unfair and deceptive practices.

1 Commissioner Joseph E. Brennan and Commissioner Rebecca F. Dye dissented.