Entries for March 2011

PwC released a survey that examined Treasury department’s reaction to the financial crisis, covering both the initial collapse of liquidity and the economic downturn that followed.  The survey contained responses from 585 Treasurers, representing 330 multinational companies, from 26 different countries, covering all industry sectors. 

The area of the survey that most interested me is when Treasurers were asked where they could add the most value over the next five years.  The number one response by a good margin was risk management.

There were four key risk areas identified in the survey: commodity risk, FX risk, IR risk, and counterparty risk (mainly with banks).  “The crisis period was not only characterised by an unexpected constriction in the availability of liquidity, but also by unprecedented volatility in FX rates and commodity prices.  These market movements have kept treasurers and the wider financial community guessing as to where indices are going next.”

As we’ve said in this blog before, commodity risk is very different than FX and IR risk because of the physical supply chain aspect.  “Perhaps more than other financial risks, the hedging of commodity risks need to be coordinated with the business to incorporate the effects on the physical supply chain and ultimate supply and demand dynamics.”  Right, but how do you actually achieve this coordination in the real world when buying groups for various commodities are located in multiple geographies around the world and the Treasury is at corporate headquarters?  Are emails, phone calls, text messages and spreadsheets the answer?  Does anyone think this is a best practice when real-time information is required in a volatile world?

The survey also covered how Treasurers are moving towards more active and aggressive hedging programs.  “It appears that the previous standardised approaches are increasingly seen as not being up to dealing with the volatile markets during the crisis.”  However, if an organization is going to be more aggressive in its commodity management strategy it better have a good understanding of the underlying markets, employ a team with the appropriate skills and have the software infrastructure to succeed with these new strategies.  “In-depth knowledge of the market and informed judgment are required if companies are to benefit from attractive market movements without moving the business beyond its approved risk appetite. This has spurred increasing professionalism in the quantitative techniques used to manage commodity price risks.”  “It seems that the need for flexibility and specific functionality in capturing commodity exposures are considered by many to be beyond the capabilities of traditional TMS and that companies consequently have to either develop their own in-house system or simply rely on Excel sheets for the management of these risks.”

A PwC comment sums up what Triple Point has been seeing in non-energy and commodity trading industries – “The evolution in commodity risk management practices does not appear to be keeping pace with the rapid escalation in price volatility and is still some way behind more established treasury activities.”

Early adopters are implementing Triple Point’s market-leading commodity management solution and gaining a competitive advantage over organizations that wait. 

All I have to say is don’t wait too long…

Click here to download the PwC survey

Triple Point Technology announced today that HPCL-Mittal Energy (HMEL) has licensed Triple Point's Commodity Management Solution to manage crude supply and product marketing, logistics, and regulatory risk including compliance with IAS 39 disclosure and reporting. Triple Point continues its rapid expansion across the Asia-Pacific region (APAC) with new customers in energy, manufacturing, precious metals, transportation, and food and beverage.

HMEL is a joint venture between Hindustan Petroleum Corporation Limited and Mittal Energy Investment Pte Ltd -- a Mittal Group company and owner of the world's largest steel company. HMEL was established to operate a major oil refinery in India, producing high value petroleum products.

HMEL selected Commodity XL™ to provide real-time visibility into market position and exposure and to support supply chain logistics and inventory management.

In addition to HMEL, notable Triple Point customers in Asia Pacific include: DCP Trading Shanghai (base metals, Hong Kong), IFFCO (agriculture, Malaysia), Petredec (LPG trading, Singapore), Prime East (commodity logistics, Hong Kong), New Zealand Mint (precious metals, New Zealand), Incitec Pivot (chemicals, Australia), BPCL (Oil, Mumbai), Reliance Industries (Oil with users in Mumbai, Singapore, London, and Houston), and State Bank of India, HDFC Bank, and ICICI Bank (precious metals, India).

"Asia Pacific is a strategic market for Triple Point, and with offices in Singapore, Pune, Sydney, and Chennai, and over 200 staff in the region, we have the infrastructure in place to provide our current and future customers with competitive advantage," said Michael Schwartz, chief marketing officer, Triple Point. "We welcome HMEL to our Asia-Pacific family and look forward to working with them for years to come."

As the Dodd-Frank deadlines rapidly approach, most of us wonder where the CFTC is regarding the rulemaking process. Are they done?  Do we know what’s to be expected?  Well, the short answer is – no, not exactly – at least not yet.

Although, the CFTC has pulled off what many would consider a herculean effort, promulgating proposed rules in 28 of the 31 areas that require their consideration under Dodd-Frank, they’re not quite close to doing an end zone dance.  

They have quite a stack of proposed rules on the table, and are now faced with the arduous task of getting them finalized.  And it’s all going to happen before July 15th, 2011 the designated drop dead date - right? Not necessarily. A good indication that the CFTC may not have all the pieces together by the target date came from CFTC Chairman Gary Gensler himself at an address given before the Futures Industry Association on March 16, when he cited that Congress gave the CFTC flexibility as to setting of the implementation or effective dates of the rules. He also indicated that the CFTC would likely undertake a phased approach to implementation, possibly based on asset class, market or market participant.

The hopes are to finalize many of the high profile rules this spring, such as the process for mandatory clearing, entity definitions, registration requirements, large trader reporting and the enigmatic end-user exception.

End-User Exception

 There’s perhaps no rule that has had more discussion, rumor and concern than the end-user exception. That certainly qualifies it as high-profile.

The end-user exception does provide the ability to opt-out of clearing swap transactions if one of the counterparties to the swap:

1.      is not a financial entity
2.      is using swaps to hedge or mitigate commercial risk;
                     and…
3.      notifies the Commission how it generally meets its financial obligations regarding those swaps.

As the end-user proposed rule stands, there is little offered in the way of loosened reporting requirements. In fact, the proposed regulation would require non-financial entities to notify the Commission each time the end-user clearing exception is elected by delivering specified information to a registered SDR (Swap Data Repository) or, if no registered SDR is available, to the Commission itself.  That means each time a transaction is used for hedging purposes it must pass along several more pieces of information along with the usual bits that would normally be required of cleared transactions.  The proposed regulation also appears to require board approval on a transaction-by-transaction basis for swaps opted out of the clearing requirement.  This does not seem at all practical for most organizations and really requires some further clarification.

However, the real elephant in the room for the CFTC, regarding the exception, has been margin. Until recently, they have been circumspect when asked if margin requirement rules would apply to end-users. In remarks before the House Agriculture Committee on February 10th, CFTC Chairman Gensler stated that "Proposed rules on margin requirements should focus only on transactions between financial entities rather than those transactions that involve non-financial end users." 

This is good news for bona-fide hedgers, who consider a clearing exemption without a margin exemption entirely inadequate.

Where’s The Money?

The CFTC is concerned about its ability to provide oversight to swaps market given the current state of its budget which is at $169 million.  With the possibility of the Congressional Republicans’ plan to cut their funding by $56.8 million, Chairman Gensler questions the ability of the CFTC to fulfill their responsibilities dictated by Dodd-Frank. This is clearly at odds with President Obama’s proposed 2012 budget of $308 million for the agency. The President’s’ budget increase would be funded by fees charged to the entities that the agency regulates.

On March 17th, Chairman Gensler took the CFTC’s case before a U.S. House Appropriations subcommittee, where he pleaded for a budget increase saying that “without oversight of the swaps market, billions of taxpayer dollars may be at risk.”

I recently had the opportunity to sit down with Carlos Lebrija, VP of Solution Development at Triple Point, to discuss Triple Point's unique partnership with SAP and highlights of the recent Commodity SL 7.3 release.

Q: What is Triple Point’s partnership with SAP?

Carlos: Triple Point and SAP co-developed a commodity trading, risk, and operations software platform — Commodity Management™ — which utilizes best-of-breed components from both SAP ERP and Triple Point’s Commodity SL™. Commodity SL is the only solution endorsed by SAP in the commodity trading and enterprise risk management area.

Q: How did the partnership with SAP evolve?

Carlos: Through a very rigorous due diligence process, SAP picked Triple Point to partner with form all other major competitors in the CTRM space.  That speaks volumes not only to our solution, but also to the people in our organization that helped influence that decision. Over the years, our work together has only gotten tighter, the result of which is Release 7.3.

Q: Describe the early days on the project…

Carlos: In the early days of 2005, it was just a handful of people from Triple Point and SAP working via multi-hour, multi-screen, multi-whiteboard conference calls.  Today, there are over 70 people across both organizations working to service and bring innovation to Commodity SL customers and prospects every day.

Q: What makes Commodity SL 7.3 so significant?

Carlos: The 7.3 release provides full front-to-back integration — incluging master data, physical trades, logistics and settlement — for the first time. Commodity SL is now on equal footing with the Commodity XL platform.

Q: What are the high points of Release 7.3?

Carlos: As we laid the foundation of Commodity SL, we learned more and more about SAP and how it worked. This enabled us to develop tight integration with SAP methodology, dramatically reducing integration risk. In 7.3, the integrated solution now fully supports the most crucial elements of a complete physical trading scenario, including provisional pricing; secondary costs; a logistics model that matches SAP’s document structure; user-friendly message monitoring; and an incredibly robust technical infrastructure with automated log reprocessing, to name just a few.

Q: Now that Commodity SL is a full-blown solution, what’s next for Industry Solutions?

Carlos: We always have a few tricks up our sleeve…

Learn more about Triple Point's Commodity SL for SAP >>

George Carlin once told a great story about how he "put a dollar in one of those change machines and nothing changed.”  Wouldn’t it be nice if we could control change.  In today’s volatile world we never know when to expect it, where it will come from or what it will bring ­- we just know it’s coming.

The Dodd-Frank Act, the most sweeping financial reform since the 1930’s, is coming and it will bring dramatic changes to the face of energy and commodity credit risk.  New rules on central clearing, position limits and margining have the potential to significantly increase the cost of hedging and reduce the availability of credit.  Many of the details are still uncertain, but the 5 simple rules below will help you prepare for the Dodd-Frank Act and other inevitable changes. 

  1. Internal Scoring.  Don’t rely solely on credit rating agencies.  Your own internal model can be more accurate.
  2. Monitoring.  Monitor your cash flow risk and exposure. Increasing capital requirements make it more important than ever to mitigate risk and seize opportunity.
  3. Margining.  Do not use spreadsheets for collateral management. Robust collateral management is now a necessity. If you have a significant number of counterparties, it is time to eliminate spreadsheets. With the proliferation of margining they are no longer adequate and cannot provide active and accurate cash management.
  4. Reporting.  Build flexible reporting infrastructure that prepares for today’s uncertain fiscal and regulatory environment.
  5. Analytics.  Perform liquidity analysis with analytics. Companies who understand the impact of capital and margin requirements on their liquidity will have a competitive advantage.

We can’t control change, but proactive companies with a flexible trading and risk infrastructure will be best prepared to avoid the pitfalls and take advantage of the new opportunities that come with change.  Is reporting cash exposure a piece of cake? Do you know without a doubt your IT systems will meet new regulations? Is your margining process working great for you?  If not, maybe now is the time for change.

World Fuel Services Corporation (NYSE: INT) has selected Triple Point’s flagship commodity management platform to support trading, scheduling, counterparty credit risk, and regulatory risk for its global fuel marketing operations.

Headquartered in Miami, Florida, World Fuel Services is a global fuel logistics company, principally engaged in the marketing, sale, and distribution of marine, aviation, and land fuel products and related services. World Fuel Services sells fuel and delivers services to its clients in 200 countries and at over 6,000 locations, including airports, seaports, tanker truck loading terminals, and other customer storage locations.

"Price volatility is driving the rapid adoption of sophisticated, enterprise risk platforms by energy and commodity companies," said Peter F. Armstrong, president and CEO, Triple Point. "Triple Point has become the solution of choice amongst fuel marketers, and we look forward to supporting World Fuel Services now and in the future."

World Fuel Services licensed Commodity XL™ for Oil, Gas, Emissions, Credit Risk, Hedge Accounting, and Fair Value Disclosure. The company also purchased Triple Point's interactive business intelligence module, Commodity XL Management Dashboard™ and Commodity XL PhysOps 'Visual Cockpit'™ to help schedulers plan, conduct, and optimize shipments in real time.

Ocean TankersOcean Tankers has licensed Triple Point’s chartering and vessel operations software to manage all pre- and post-fixture activities for its wet bulk shipping operations. Ocean Tankers specializes in the transportation of petroleum and related products and provides worldwide coverage.

Incorporated in the Republic of Singapore in 1978, Ocean Tankers has over 2.3 million DWT (Deadweight tonnage) of carrying capacity and services a wide network of customers, including oil majors, state-owned oil companies, and international trading houses. The company manages a fleet of 83 vessels, ranging from small coastal vessels to large ULCCs (Ultra Large Crude Carriers).

“Shipping is a key element of an efficient and effective commodity supply chain, and Triple Point provides the only commodity management solution with the functional depth and breadth to handle voyage estimating, post-fix operations, bunker procurement, and freight risk management in its shipping platform,” said Michael Lolk Larsen, managing director, chartering and vessel operations, Triple Point. “Triple Point is proud to include Ocean Tankers as a customer, and we look forward to supporting its growing operations.”

Triple Point is successfully claiming market share with a diverse group of commodity participants, energy companies, industrial manufacturers, CP companies, and ship owners/operators that have selected Triple Point to manage the supply and distribution of commodities via ocean-going vessel, including: Bunge, Louis Dreyfus, Transgrain (Nidera), Olam International, Glencore, Gunvor International B.V., Hindustan Petroleum-Mittal Energy, SAB Miller, Petredec Limited, Prime East Shipping, Berge Bulk, Beluga, United Arab Chemical Carriers (UACC), and U-Sea Bulk.

Hamburg Bulk Carriers (HBC) has licensed Triple Point’s chartering and vessel operations software to manage pre- and post-fixture activities for transporting dry bulk commodities, including coal, aluminum, petroleum coke, fertilizer, cement, clinker, scrap, grain, steel, pig-iron, and ore.

 Founded in 1999, HBC transports an average of 6 million tons of cargo a year. In recent years the company has chartered over 500 vessels from Handysize to Panamax size.

“Triple Point’s chartering and vessel operations software provides HBC with the functional depth and breadth to profitably manage operations, including voyage estimating, post-fix operations, and bunker procurement,” said Michael Lolk Larsen, managing director, chartering and vessel operations, Triple Point. “Triple Point is proud to include HBC as a shipping customer and looks forward to supporting future growth."

Triple Point is successfully claiming market share with a diverse group of commodity participants, energy companies, industrial manufacturers, CP companies, and ship owners/operators that have selected Triple Point to manage the supply and distribution of commodities via ocean-going vessel, including: Bunge, Louis Dreyfus, Transgrain (Nidera), Olam International, Glencore, Gunvor International B.V., Hindustan Petroleum-Mittal Energy, SAB Miller, Petredec Limited, Prime East Shipping, Berge Bulk, Beluga, United Arab Chemical Carriers (UACC), and U-Sea Bulk.

Posted in: @Triple Point
CommodityPoint, an independent analyst firm, issued a research report studying the integration risk between CTRM and ERP systems.  The paper does a good job of capturing the issue:

"The point is simply that just from a cost and effort point of view, any interface or point of integration including between the CTRM software and accounting software or an ERP solution is risky, costly and time consuming and this ignores other aspects of integration risk such as the inability to deploy proper workflow and controls across the application suite; the need for manual reconciliations, maintaining the same data (e.g. contract data) in multiple locations without a proper system of record and many additional limitations."

In addition to analyzing the issue, the research discusses Commodity SL, Triple Point and SAP's co-developed solution that eliminates the integration risk.  The research hits the nail on the head as far as the value of the joint solution:

"Triple Point and SAP have developed and offer a seamless solution for commodity management which offers significant benefits for its users over and above the traditional approach of procuring a commercial CTRM solution and then interfacing it to SAP for financials. It virtually eliminates the integration risks and issues discussed above while providing significant benefits for the business. End users are offered a completely integrated suite of business systems where the complexities of ‘gluing’ the applications together is the responsibility of the vendor and where, should any issues arise, there is a single point of contact to get those issues rectified.

As the only SAP endorsed product with over 150,000 hours of co-development time invested, Commodity SL offers SAP users a best-in-class solution to their commodity management requirements that remains unique in the market today and provides significant value to those already heavily invested in SAP."

Click here to read the entire research report.

The United Nations Conference on Trade and Development (UNCTAD) estimates that the shipping industry transported over 7.7 thousand million tons of cargo, equivalent to a total volume of world trade by sea of over 32 thousand billion ton-miles. However, managing complex cargo movements of crude and bulk commodities — across pipelines, storage facilities and vessels — remains a very manual and often disjointed process.

I recently had the chance to sit down and talk with Patrick Rooney, President and CEO of Navarik, to discuss how a cargo inspection solution can help reduce operational risk and increase straight-through processing.

Q: What are the typical cargo inspection solutions that companies use today?

Patrick: Because the majority of inspection data flows between external inspection firms and trading organizations (oil companies, trading firms, investment banks) most data associated with physical cargo transfer is gathered manually by spreadsheets, disparate systems, e-mail…even voice mail.  These manual processes make it difficult to standardize and automate the cargo inspection process, resulting in great operation risk and cost.

Q: What are the issues/risk of using these manual processes?

Patrick: The trading of bulk commodities has accelerated in recent years.  There is a need to standardize terminology and exchange of data between systems to facilitate straight-through processing and accelerate the settlement of trades.  In a world where liquidity is being squeezed from the system; it has become increasing important to fully leverage the capital resources you have in play.  To the extent that you can shorten settlement time, you essentially need less capital.

Q: How does implementing a cargo inspection solution drive efficiencies and mitigate operational risk?

Patrick: By standardizing and automating the process of cargo data inspection, you dramatically reduce the manual effort required to process inspection data.  Another key driver is timely business intelligence. It allows Cargo Assurance to recover more losses from counterparties and helps operations, schedulers, and traders make more profitable decisions when selecting vessels, terminals, and suppliers.

Q: Navarik has seen rapid growth over the last two years.  What are the driving forces?

Patrick: By targeting the largest international oil companies, we’ve been able to gain BP, Chevron, and Shell, as well as a major OPEC member, Venezuela, as customers.  Our reach extends to over 4,000 users worldwide, including major inspection firms.  Billions of barrels of oil are transported by sea every year.  The value of the cargo and inherent operational risks and market volatility means companies are looking for ways to improve physical operations, reduce risk, and protect profit margins.

Q: What is Navarik’s focus going forward?

Patrick: We believe the broader oil market will follow the lead of majors in moving to our commodities inspection platform.  Additionally, the entire bulk commodity shipping industry offers an attractive opportunity for our partnership with Triple Point.  Together we’ll be able to offer a proven cargo inspection solution to not only existing oil customer, but customers in dry bulk commodities as well, including metals, potash, grain, and coal.

Q: What is the value of the Triple Point/Navarik relationship?

Patrick: I believe you succeed with outstanding people as a starting point, and that’s something we’ve seen at Triple Point. So when we look at our teams working together to offer the marketplace a truly integrated platform for straight-through processing — from deal execution, to physical operations, to deal settlement — I think that’s pretty special and something no one else is offering.

Interested in learning more about joint offering from Triple Point and Navarik?  Read Triple Point’s Commodity XL for Inspections Powered by Navarik brochure.

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.