Entries for August 2011

On July 14, 2011, the CFTC issued an Order providing relief from most provisions of Title VII of the Dodd-Frank Act that were slated to become effective July 16, 2011 to now expire upon the effective date of the final rules or December 31, 2011.  This allows more time for comments and provisions that do not require a rulemaking but reference terms regarding swap entities or instruments that require further definition.

Besides the continued definition around what constitutes a swap and who is a swap dealer/major swap participant, the reporting requirements for transactions are still evolving.  Organizations like DTCC and ICE are angling to become registered Swap Data Repositories (SDR), but terms and format must still be defined.  It's a start to have some terms in place, but a true "data dictionary" and certified format/technology is necessary.

In the proposed rule “Swap Data Recordkeeping and Reporting Requirements: Pre-enactment and Transition Swaps”; 76 Fed. Reg. 22833 (Apr. 25, 2011), Proposed Regulation 46.2 would require counterparties to keep records of a minimum set of primary economic data relating to such swaps.  Of particular note are the open-ended terms for "Data elements necessary for a person to determine the market value", "Other terms for determining settlement value, and "Any other primary economic terms(s) of the swap matched by the counterparties in verifying the swap."  While mandated, there is also currently no source for Universal Counterparty Identifiers (UCI), no standard format for electronic representation of master and credit support agreements (although some exploration with FpML and FIX), and no standard for reference data.

Conclusion

Companies that want to prepare for the new regulatory landscape need to automate their systems and create a centralized electronic system of record for counterparties, agreements, and trades to prepare for evolving SDR reporting requirements.  The current reporting terms in the proposed rules are a good place to start, but the reporting framework should be flexible to include other terms as they become finalized.  Having access to all of the required information NOW not only provides for efficient and effective conformance to the regulation when it is in place, it also allows time to analyze the data and make any appropriate changes to have the optimal netted exposure and liquidity positions when exposed to oversight.

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In a recent article, Reuters ranked the world’s top independent oil and commodity traders, identifying Vitol Group, Glencore International AG, Cargill Inc., Koch Industries, Trafigura, and Gunvor International as the largest. Four of the top six organizations, Glencore, Cargill, Trafigura and Gunvor, rely on Triple Point’s commodity management software to effectively manage their commodities and enterprise risk.

 

Triple Point’s Commodity XL™ provides them with a real-time, enterprise view of position, supply chain, and risk. They use the enterprise, multi-commodity platform to deliver superior business intelligence for proactive decision-making and competitive advantage. Commodity XL integrates physical and financial trading, provides sensitivity analysis, enables "what-if" scenarios, and improves business process efficiency across front, middle, and back offices.

 

Our mission from day one has been to provide the most advanced systems, tools, and models to help clients profitably trade, transport, and store commodities, as well as manage the associated risks. Seeing the top commodity traders in the world benefit from our products reaffirms Triple Point’s position as the leader in energy and commodity management software.

The historic downgrade of the US government debt by Standard & Poor's (S&P) on Friday has shaken the markets worldwide. Brent Crude dropped $10 and suffered the biggest two-day decline since 2009— highlighting just how quickly commodity markets can swing in the heat of a crisis. Rueter's reported yesterday that Brent crude fell to $98.74 a barrel, the lowest intraday price since February 8, and was down from an April peak above $127. This week's market turmoil leaves many asking, what must I do to survive in this global economic uncertainty?

Analysts are warning that oil prices could fall further if a second recession takes hold, but both Merrill Lynch and Goldman Sachs maintain their 2012 price forecasts.

"We believe that WTI crude oil prices could briefly drop to $50 under a recession scenario," Merrill Lynch said in a note, but it maintained its 2012 average forecast for U.S. crude at $102 and its forecast for Brent next year at $114.

"I don't think anyone has a clear picture right now," Brian Hicks, co-manager of the Global Resources Fund at U.S. Global Investors, said Monday, when oil finished the day at $83.10 a barrel. "There are just too many question marks."

Chief among them: How will the debt downgrade affect U.S. economic growth? Will U.S. consumer spending remain low, and will that impact factory production in China? Will Italy or Spain default on their debt, driving Europe into a recession?

In the midst of this week’s high volatility and uncertainty, C-level executives are turning to their risk managers and asking, “What is our exposure if a double-dip recession becomes reality? What happens to our balance sheet if crude drops to $50? How can we drive profit from this record-setting volatility?”  These questions are very difficult, if not impossible to answer with spreadsheets.

Once again, the market is reminding us that it is absolutely critical to have the technology and analytical capabilities in place to run shifting scenarios and understand enterprise-wide commodity exposure.  Do you think that commodity price volatility is going to go away? Or that policy risk and global economic uncertainty is waning? 

In this environment of rapidly changing information it’s vital to at least have certainty that your data is correct. Triple Point’s Commodity Management Solution provides accurate, up-to-the-minute risk intelligence— arming you with the information you need to make decisions with confidence and certainty. And who doesn’t need a little certainty in these uncertain times?

Chemical companies reported mixed results for the 2nd quarter 2011.  Some organizations, such as Dow, disclosed excellent results.  Andrew N. Liveris, Dow’s chairman and chief executive officer, stated “this marked another quarter of tremendous progress for Dow. We delivered significant and broad-based top-line growth, and reached a new quarterly sales record in emerging geographies.”  On the other hand, some businesses were not as thrilled with their reported results.  AkzoNobel’s CEO, Hans Wijers, said “I am not satisfied with our performance in the quarter, despite positive volume and pricing developments.” 

Despite mixed results, there was a common theme across all chemical company earnings releases – they all took pricing actions to manage the rising cost of raw materials.  Dow noted rising raw material prices in its Coatings and Infrastructure, Performance Systems, Performance Products and Plastics businesses.  For example, in Performance Systems Dow cited a 17 percent increase in price, “reflecting actions taken in response to higher raw material costs.”  Hans-Ulrich Engel, BASF’s CFO, hit on the same theme, “We successfully increased prices in many product lines in order to offset higher raw material costs.”

Chemical companies have a large exposure to commodities.  They convert raw materials (oil, natural gas, air, water, metals, and minerals) into more than 70,000 different products that are central to the modern world economy. Management of raw material price volatility is key to their business health.

Passing rising raw material costs to customers through price increases is obviously an important part of a strategy to protect EBITDA.  But how high can a company raise prices before demand destruction starts to take place?  Better commodity management has to also be a key element of any strategy to manage raw material price volatility.  Chemical companies must implement commodity management best practices to optimize margins. Traditional Purchasing Department strategies and processes such as "buy to budget" must be revamped to a more proactive "market-based" procurement and risk management program.



So, here we are, one year later, and still trying to get our collective heads around the complexity introduced by the Dodd-Frank Act.  So, how’s progress? Well, let’s take a quick look at the numbers.  As of July 27th, the CFTC had finalized 11 out of the 47 rules required, only 23% of the way there.  The SEC is fairing at about the same rate of finalization.  Now it is important to note that we’re primarily talking about Title VII of the DFA; other sections of the law haven’t had a stellar rule adoption rate either. This raises the question, “Shouldn’t more of the key moving parts be in place by now?”   


What Is Taking So Long, Anyway?

We’ve recently seen a level of Washington partisanship push us near to default status on our debt, so it should come as no surprise that legislation like the Dodd-Frank Act would inspire a predominantly divisive environment.  There are many bills that were recently introduced in Congress that hope to redact sections of DFA, not to mention the budget cuts that are planned for the regulatory bodies.  More with less seems to be the Congressional mantra.

To add to the legislative distress, President Obama is having a difficult time getting a new director to head up the Consumer Financial Protection Bureau. In mid July, he nominated former Ohio Attorney General Richard Cordray to the post. This nomination came when it was clear that Elizabeth Warren, the bureau’s acting director, was not going to get Senate approval to a permanent post.  Senate Republicans are not likely to back Mr. Cordray’s nomination either.  In fact, they don’t even want a director at all. They would rather have the bureau headed by a bipartisan five-member board.  Without a director, the CFPB cannot enact any rules.

If you caught the Daily Show on Comedy Central last week, there was a segment spoofing the Schoolhouse Rock cartoon “I’m Just a Bill”, where John Oliver portrays a very battered Dodd-Frank Bill.  Yeah, it’s funny, but sadly, it does illustrate some of the real problems that DFA faces, and quite possibly why we are witnessing such a slow rollout.

Hurry Up and Wait

With the CFTC and SEC both acknowledging the need to extend some deadlines along with their power to do so, it is apparent that we won’t see significant OTC regulation until the year end. We will also see much of the implementation moving in through calendar year 2012.  CFTC Chairman Gary Gensler has stated on more than one occasion that it is important to get this right. Overall, I believe, that the CFTC has made reasonable attempts to acquire industry guidance and input throughout the rulemaking process.  Perhaps this is a major contributing factor for some of the delays. I do, however, question the order in which the rules were proposed. I would have thought that the regulators would have tackled the bulk of the definitions first, but that’s just my view.

So, Happy First Birthday, DFA!

(What do you get a one-year old that needs everything?)

 

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.