Commodity producers, traders, and consumers all face a volley of risks such as price exposure, operational and market risks — the risks of supply chain operational issues like traceability, regulatory and compliance, exchange, and interest rates expose the commodity markets to a significant financial risk. Managing Risk is an exemplary aspect and key to success for a trader in commodities. Although we can never eliminate risks, they can be managed and hence reduced using technology. The main reason for risks in commodities is that they trade in futures markets.
Hence, there is a need to transform and aggregate data to monitor exposure properly. It has become more complex because many companies have layered multiple legacy platforms on top of one another after years of operations. The usual trend has been to layer numerous platforms and then integrate them to build CDS rather than growing a central technology hub.
Creating a central system that serves different business units across an organization can help hedge against commodity price fluctuations. Thus advanced platform that can not only do risk analysis but also deal with daily operations in treasury function.
Let’s look at few risks and how technology can help in managing this –
Operational: This includes — Shipment delay, sampling quality problems, etc. With solutions like CMS by BaffleSol, can help you reduce this operational risk –
Providing inventory positions and further logistical movement.
Register physical movements, apply costs and accruals, and perform weight-based adjustments.
Manage information related to containers, trucks, pallets, etc.
Entire history to track transport changes and movements
Currency Risk: Commodities are often priced internationally, hence involve currency risk. Credit risk, margin risk, market risk, and volatility risk are just a few of the many risks commodity companies face every day. With CMS solution, companies can manage foreign currency risk and exposure. The Advanced FX module supports financial postings and functions on hedging, forward rolling, and trade books in multi-currency environments.
Contract Management: For traders, so much information has to be gathered from various places and owners to create a ‘good’ contract, be it forward or future. Standard office software helps but requires significant manual effort to manage offers no visibility to the process. The digitalization of Contract Management using CMS solution allows experts in various fields to collaborate in real-time with marketing teams to create a more reliable and efficient environment to trade and distribute commodities. All contract types: Purchase, Sale, Commission- or Back to Back are being managed within a single application. It also offers different kinds of pricing types for Physical, Future, and Foreign exchange contracts.
Regulatory & Compliance: Regulatory such as the introduction of MiFID II, EMIR, ASC 820, IFRS 9, and IAS 39 need much manual intervention to manage to report, leading to many legal risks. CMS solution offers automated reporting and direct integration to the world’s regulatory entities to save time.
Centralization of commodity trading operations is a determinant. Companies that implement centralized trading technology solutions will improve business risk. BaffleSol’s CMS solution offers the best of worlds, Microsoft ERP and CTRM solutions to keep control in trade, logistics and mitigate risks while being fully integrated into accounting.
The digitalized era brings to the fore new challenges for trading firms. Access to necessary robust systems and processes will provide essential support to risk management activities in the commodity trading business. While risk management is critical, using these solutions, senior leaders and executive teams also get real-time visibility of the company’s net exposures to make better business decisions.
Author: Team BaffleSol