Entries for October 2011

Ford Motor Company reported 3rd quarter earnings and noted how commodity volatility hurt margins during its earnings’ call.

In fact, reported earnings were harmed both coming and going; as commodities rose in price and again as they came down.  Ford’s operating margin was down 1.4% from a year ago, and this “margin decline can be more than explained by higher commodity costs,” stated Lewis Booth, Ford’s Chief Financial Officer.  “Contribution costs, which include material cost, warranty expense and freight and duty, increased.  About 2/3 of the increase is due to commodities.”

Okay… margins hurt by rising commodity prices is a familiar story we see these days with manufacturing companies that haven’t yet adopted advanced commodity risk management techniques and processes.  But, in Ford’s case, their earnings were also hit as commodity prices came down.

“In addition to higher commodity cost compared to a year ago, we recognize the unfavorable mark-to-market adjustments of about $350 million on commodity hedges, driven by a sharp decline in commodity prices.” 

Ford is not applying hedge accounting treatment so they recognize the loss on the financial instrument in the current period.  “These changes in market value do not have an immediate cash impact, although the change in value is reflected in current earnings.”

The exact problems noted in Ford’s earning conference call are the issues that Triple Point is solving for its clients. Commodity volatility has risen dramatically in the past few years and manufacturing companies need to adopt new techniques to manage commodity risk.  Triple Point introduced its Strategic Planning and Procurement (SPP) module to help manufacturing companies better track, measure, and control commodity risk.  In addition, Triple Point provides the most robust commodity hedge accounting solution.   As we’ve said on many occasion, this is not a wait and see problem.  Those that tackle commodity risk now will gain competitive advantage.

Read earnings call transcript - http://seekingalpha.com/article/302387-ford-motor-s-ceo-discusses-q3-2011-results-earnings-call-transcript

After four long years of debate, the CFTC has finally decided to impose position limits on commodity traders in an effort to curtail speculative trading.  The new limits will cover 28 commodities. What does it mean and how will it affect the markets? Ed Meir, an analyst at MF Global, says that it won't have much effect in the short term, but speculates that costs are going to rise for the end-user in the long term.  

If you're looking for a short summary on the new ruling, I highly recommend you watch the video below with Meir.  He does an excellent job of explaining who the new limits are going to impact and has some interesting thoughts on what the CFTC did wrong and why the ruling baffles him. 

Triple Point's EVP, global field operations, Greg Taylor, will speak at the Low Carbon Earth Summit (LCES-2011) taking place from October 19th – 26th at the Dalian World Exposition Center in China.

LCES-2011 is a world-class summit for information exchanges to promote low carbon economy and to cover comprehensive issues from public and private sectors. Taylor’s presentation, “Navigating the Complex World of Supply Chain Management,” will underscore how increased commodity price volatility and global product movements have made sourcing and supply chain management riskier, therefore dramatically increasing the need for sophisticated commodity management solutions.

Triple Point continues to maintain strong momentum in Asia Pacific, signing three new customers in China and Japan in the last 60 days, including Chinese National Offshore Oil Corporation (CNOOC), Bayin Resources, and Marubeni. Other notable Asia-Pacific customers include Su-Raj Diamonds, New Zealand Mint, Diamond India, Incitec Pivot, Prime East and Pacific Carriers, Olam International, and Petredec.

Triple Point has expanded to more than 300 employees across the region to support current and future planned growth.

The Asia Pacific region will play an increasingly important role in the commodities value chain. Triple Point’s strong growth in Asia Pacific underscores the unique depth and breadth of our commodity management solutions for companies looking to mitigate exposure to raw materials, energy, and commodity price volatility.
Posted in: @Triple Point   |   Tagged China Energy Summit, APAC

I was listening to NPR (National Public Radio) Marketplace on the drive home from work last night.  All of sudden, I hear them talking about the Men’s Underwear Index (MUI) and the possible good economic news.  Apparently the MUI is up 5.2% - they didn’t define the 5.2% - 3rd quarter over 2nd quarter 2011, 3rd quarter 2011 over 3rd quarter 2010, etc. – but whatever, it’s still up 5.2%.

I have to admit that I’ve never heard of the Men’s Underwear Index.  I did a quick search today and the premise is that men's underwear sales are stable during normal economic times.  But in harder times, men defer purchasing underwear.  And as wives and girlfriends can attest, men can defer for a long, long time.  The MUI is therefore considered to be a good indicator of turns in the economy.

Former Federal Reserve Chairman, Alan Greenspan, is the person most cited for giving the credibility to the index.  Mr. Greenspan said in an interview many years ago prior to becoming the Fed Chairman (paraphrasing), “If you think about all the garments in the household, the garment that is most private is the male underpants because nobody sees it except people like in the locker room and who cares. Your children need clothes. Your wife needs clothes. They have to change. The children grow. You need clothes on the outside…If you look at the sales of male underpants, it's just been much a flat line, hardly ever changes. But on those few occasions where it dips, that means that men are so pinched that they are deciding not to replace underpants. It is almost always a prescient predictor of trouble.”

So maybe a rise in the MUI is an indicator that the economy is improving.  In either case, the discussion brought a smile to my face on a boring drive home.

Oracle’s annual OpenWorld conference was held in San Francisco last week, and Triple Point’s chief technology officer, Doug Daugherty, took center stage to unveil the results of Triple Point’s Oracle Exadata benchmark study. The study took place over a two-week period in Oracle’s Exastack Lab and demonstrated Triple Point’s record performance levels for the near real-time valuation of massively large and complex commodity trade portfolios.

The Q&A session that Daugherty took part in was mediated by Judson Althoff, SVP of worldwide alliances & channels and embedded sales, Oracle. As one of three featured Oracle Exastack Ready partners, Daugherty described Triple Point’s two-week performance trial with Exadata to an audience of over 4,500 Oracle stakeholders.

Doug reports that there was a lot of buzz at the conference about the newly launched Oracle Exastack Program. Triple Point is excited to be one of the key inaugural members of the program.

• The Oracle Exastack Program helps enable ISVs and other OPN members to rapidly build and deliver faster, more reliable applications.

• Since the Oracle Exastack Program was launched just over three months ago, partners have achieved over 150 Oracle Exastack Ready milestones for Oracle Solaris, Oracle Linux, Oracle Database or Oracle WebLogic Server. This rapid adoption of the program is a testament to the importance and value both partners and Oracle place on these kinds of enablement resources.

• Partners include ADP, Beijing Teamsun, cVydia, Essatto, F5, GoldenSource, INFOPRO, IBIS, Informatica™, I-ON, Lingotek, Neusoft, PhinCon, Smart Developer, Solix, Teleran and Triple Point, among others.

• By deploying their applications on Oracle Exadata Database Machine and Oracle Exalogic Elastic Cloud, ISVs can reduce the cost, time and support complexities typically associated with building and maintaining a disparate application infrastructure - enabling them to focus more on their core competencies, accelerating

By achieving Oracle Exastack Ready status, Triple Point can use available Oracle Partner Network (OPN) resources to optimize its applications to run faster and more efficiently — providing increased performance and value to its customers.

The charge to achieve Exastack Ready status was lead by Triple Point’s Emerging Technolgies Group. The ETG is responsbile with staying abreast of the fast-moving and dynamic technology markets to guarantee that Triple Point maintains its significant leadership position in the use of technology to solve critical business problems. They conceive, design, and prove — with lab-based experiments and scenario simulation — next generation advancements to Triple Point’s Commodity XL™ technology architecture for continued excellence in scalability, high concurrency, and processing performance.

As Doug recently said in a press release regarding the conference, “Triple Point has always prided itself on having the most advanced technical architecture and delivering the best performance and reliability. Achieving Oracle Exastack Ready status is another example of Triple Point’s commitment to maintaining its technological leadership.”

I look forward to seeing how the Oracle Exastack program grows. If the response it received at OpenWorld is any indicator, it looks like it is going to be huge success. Triple Point is proud to be a part of the program and looks forward to OracleWorld 2012.

Whether you work in the front, middle or back office of a company that trades derivatives, life will be changing for you in a big way. Well, that may be a bit dramatic, but really, your current work-flow will certainly be changing. To what degree largely depends on how your company gets branded – swap dealer, major swap participant or end user.   

Trading

Regardless of your company’s Dodd-Frank branding, its approach to derivative trading will most certainly be impacted. Your business processes may need to be adapted to keep records throughout a swap’s existence and for five years following final termination or expiration of the swap. In addition all swap data must be readily accessible throughout the life of a swap and for two years following its final termination. Daily trading records for swaps must be identifiable by counter party. The CFTC has the authority to request ad-hoc reporting from an entity. Your systems will need to support such requests.

If your company happens to fall into the category of swap dealer or major swap participant, you will likely be faced with additional trading room challenges. Your entire transaction history is to be tracked – from the moment of initiation onward.  All of the correspondence related to transaction activity – phone, email, text messaging – is subject to examination at the CFTC’s request. Swap dealers and major swap participants also must maintain a “complete audit trail for conducting comprehensive and accurate trade reconstructions.”[1]

The real-time reporting requirement will no doubt spawn the need to capture information that would not typically be captured in smaller trading operations. Don’t count on the on a status of end-user to exempt you from these requirements. Even if you qualify for end-user exception, depending on your counter party, you’ll need to assert who in fact will ultimately be responsible for reporting the transaction to a swap data repository (SDR).

Risk and Credit

Since the CFTC introduces two tests of substantial position as a daily requirement, you can bet that your risk and credit department will be busy. The first test of substantial position is based on an entity’s current uncollateralized exposure, and the CFTC’s proposed rule sets the threshold at a daily average of $1bn for credit, equity, or commodity swaps, and $3bn for interest rate swaps. The second test is based on an entity’s (PFE) potential future exposure, and is set at a daily average of $2bn for credit, equity, or commodity swaps, and $6bn for interest rate swaps. Moving beyond the thresholds dictated by these tests can push your company into being categorized as an MSP within a particular swap category.  It is important to note that the substantial position tests exclude those trades that are used for hedging or mitigating commercial risk.

In addition, your risk and credit groups will need to prepare a substantial counterparty exposure test.  This test raises the thresholds for current uncollateralized exposure and potential future exposure to $5bn and $8bn, respectively, without any exclusion for positions held for hedging or mitigating commercial risk.

Since the requirement is that all swaps that can be cleared must be cleared, unless exempted, margining becomes a concern. The credit group will need to carefully assess and project margin requirements.  Liquidity management, as important as it has been in the past, will now take on a role in the spotlight.

Hedging

Your hedge accounting group will need to maintain accurate records to substantiate your company’s hedging program.  This will be important if you wish to establish an end user exception for these transactions.  Business processes must assure that the proper documentation and tracking of hedging activity is in place from intent to inception.

Coordination

In a Dodd-Frank world, a successful implementation of compliance depends on an escalated level of communication and coordination between the various groups and systems within an organization.  You must consider it an enterprise deployment – trading, legal, risk, credit, finance, and IT – all must be part of the process and the solution.  Only by evaluating the implications of Dodd-Frank across all these areas will you be able to develop solid compliance plans. 

Although, the rules are still in the making, it’s never too early to start planning and assessing your potential problem areas.  



[1] Commodities Exchange Act – Section 4s(g)(4)

Events

Procemin 10th International Mineral Processing Conference

October 15-18, 2013 | Chile

XXV Brazilian National Meeting of Mineral Treatment and Extractive Metallurgy (ENTMME)

October 20-24, 2013 | Brazil



Opinions expressed on this blog are those of its individual contributors, and do not necessarily reflect the views of Triple Point Technology, Inc.