THE PHYSICAL CHALLENGE
the start. Quality and quantity issues can have a knock-on impact on the invoicing process. For example, if a lower quality of oil to that originally requested is delivered to the end buyer, the value of the oil will be lower than expected, leading to a discrepancy in the invoicing system. This lower value must be accurately tracked through the system and reflected in the final invoice. Under another scenario, by the time the cargo
is delivered to its disport – or final destination – it could have suffered a serious leakage. This lower quantity would also need to be recorded and accounted for at the end of the invoicing process. The valuation of floating stock is another important factor. The difficulty arises when a cargo of oil is midway between its load port and disport markets: and even if its destination is known, that destination can change. The company must take a decision on whether to establish the value based on the load or the disport market, and more importantly, it needs to apply this decision consistently. There can be significant liquidity risks present through transporting cargoes in this way, especially if there is an inability to hedge, or the lack of awareness of the opportunity to do so. This amounts to noteworthy stranded cargo risk. Tax is another complicated issue that must be
addressed by a robust Commodity Trading & Risk Management (CTRM) system. The VAT paid on a physical commodity changes according to the jurisdiction to which it is routed, so extra tax advice will be needed or a tax rules engine that can apply the right rates of VAT depending on location. Companies also need to consider the implications for the balance sheet of holding physical commodities. However, to do so can be beneficial as physical stock held can be used as collateral against trading positions.
CTRM Systems Commodity Trading & Risk Management systems are an
increasing necessity for trading, investing, and managing assets and liabilities in today’s complex commodity sectors. What is more, the technology needs to be sophisticated, robust, adaptable and scaleable. “Commodity trading, transaction and risk management
as a practice is complex – very complex – and for a variety of reasons. Traders and managers in this industry can (and many do) transact in multiple commodities, multiple markets, multiple instruments, multiple assets, multiple currencies, and utilise multiple transportation methods. They make their buying and selling decisions by constantly tracking and analysing price trends, price correlations, supply/demand imbalances, physical system constraints, weather forecasts, and a plethora of other factors, both internal and external to the company,” explains Dr. Gary Vasey, principal analyst with CommodityPoint, and a regular contributor to Commodities Now. Look no further for an example of leading innovation in this discipline than OpenLink Financial, winners of the 2010 Commodity Business Award category for Excellence in CTRM Software. OpenLink’s flagship Endur commodities engine (for front-
through back-office solution for trading) is an example of systems architecture which has expanded the ability of businesses to manage financial and physical trading, logistics, risk, and back office activities in an integrated way. With pioneering solutions for grid, pipeline and bulk scheduling, as well as extensive capability to model risk simulations for physical scenarios using energy scenario management, OpenLink provides businesses with leading edge CTRM tools.
For more information on the Commodity Business Awards:
www.CommodityBusinessAwards.com
Complexity Throughout the Trading Process The raft of fees involved in the delivery process also needs
to be efficiently handled by the CTRM system. These are the non-commodity costs that are incurred during the process of moving cargoes between locations, including port authority fees, insurance and stevedore fees. Nor can the freight implications of delivering physical commodities be ignored, with multiple considerations, ranging from the choice between time and voyage chartering, to securing bunker fuel, all of which need to be rigorously tracked and recorded. Contracts are also a critical consideration,
system that can manage different trading horizons. Contracts can also carry force majeure clauses which brings with it an element of operational risk, the most extreme of which would be failure to deliver physical stock.
... a new system architecture can often represent
the best way to manage the increasing operational complexity that comes with higher trade volumes
with many organisations now looking to manage structured contract portfolios in a consistent manner. Unlike paper commodities, the structured contracts themselves must be physically delivered and settled and require daily contract management to deal with nominations and deliveries via a
In addition, the high number of
non-standard contracts in physical commodities – in part to manage these complexities – leads to extended lead times of months or
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