There has been a lot of discussion recently about how the credit function will undergo revolutionary changes in the next few years.  This highlights what Triple Point has been saying for the last 12 months, “Uncertain regulations in both the US and Europe will significantly increase the cost of trading and require the credit department to take a strategic position in optimizing portfolios.”

Rather than a revolution, we talk about the ‘New Rules for Credit Risk’.  By following these rules organizations can be ready today for whatever regulatory or economic changes occur in the future (revolution or not), safe in the knowledge that they don’t have to overhaul their IT systems. 

‘New Rules for Credit Risk’

  1. Margining: The impact of clearing OTC swap transactions is huge. According to Richard McMahon, Vice-President, Energy Supply and Finance at the Edison Electric Institute, the annual cashflow impact could be between $250 million and $400 million per company.  A credit department’s primary focus will need to shift from counterparty assessment to margining and collateral. This can only be achieved with robust collateral management.
  2. Reporting:  Enterprise-wide analysis and reporting to both the company and regulator will need to be a key priority, and with the ability to be performed within minutes of a transaction. Flexible reporting will prepare for today’s uncertain fiscal and regulatory environment.
  3. Exposure Monitoring & Management:  Monitoring cash flow risk and exposure is critical. Increasing capital requirements make it more important than ever to mitigate risk and seize opportunity. Rather than monitoring positive exposures (amounts owed to the company by counterparties), the credit function will need to monitor negative exposures (what the company owes exchanges and clearing houses).
  4. Analytics:  Changing and uncertain times have proved that many of the basic risk analysis and measurement techniques are not adequate and companies need access to more forward looking information. Credit analytics does just that. It provides a consistent framework to forecast, evaluate, and respond to future credit events.
  5. Internal Scoring  Don’t rely solely on credit rating agencies.  Collating and managing counterparty information, and applying custom scoring techniques, is critical for any organization that wishes to protect itself from defaulting counterparties. 

Don’t just cross your fingers and hope catastrophe won’t happen. Start following the rules today and safeguard your organization against credit risk failure.


In recent years, the world agricultural markets have seen a surge in prices and volatility brought about by several factors including poor harvests, sustained demand, increased use of agricultural products for fuel, increased activity on commodity markets and soaring oil prices causing fuel and fertilizer costs to rise. As a result, Growers, Originators and Producers are starting to adopt CTRM systems, typically used by energy companies, in order to gain the real-time business intelligence they need to make optimal decisions around trade execution, position management, and physical logistics.

Triple Point has been helping traditional energy and commodity trading companies manage the unique complexities of their commodity trading and risk management business for over a decade. In order to help Agriculture companies identify the most critical components of a CTRM solution for their business, Triple Point has compiled a checklist of the key functionality Agriculture companies should look for when considering CTRM tools.

Here are seven to consider:

1.    
Trading – A CTRM solution should provide complete control over trading operations and enable traders to better manage current positions and gain real-time information to take advantage of market movement. It should integrate physical and financial trading, improve trading efficiencies with deal entry templates/blotters, provide sensitivity analysis, and enable "what-if" scenarios.

2.     Price Risk Management-  Look for sophisticated analytical tools for portfolio stress testing and sensitivity analysis to run what-if trades. These tools should enable you to analyze real-time position and exposure — market, volumetric, credit, delivery, and FX risk — at granular and rolled-up levels for optimized price risk management.

3.     Chartering and Vessel Operations- Commercial chartering and vessel operations are a crucial part of the agribusiness supply chain and must be seamlessly integrated into the CTRM system.  At a minimum, the system should allow  you to manage all chartering, post-fixture activities including freight risk management, and financial aspects of commercial vessel operations in a single system.

4.     Scheduling- Schedulers must be able to plan, conduct, and optimize complex physical movements in real time. The system should manage the logistical complexities and streamline the supply chain operations required to transport bulk commodities. It should handle all transactions from straight forward physical trade matching, to complex itinerary scheduling involving multiple trades, commodities, methods of transportation, and inventory movements.

5.     Counterparty Credit Risk Management- Recent financial and debt crises demand the ability to proactively measure, manage, and mitigate the risk arising from counterparty default. The CTRM solution should address the entire credit risk process and provide a full range of credit analysis and operational tools in 3 key areas: exposure, collateral, and counterparty management. The most advanced solutions also provide credit analytics.

6.     Hedge Accounting- A key component of any CTRM solution is the ability to manage the daunting set of requirements under hedge accounting regulations, including the detailed testing, documentation, and reporting that must be performed in order to qualify for hedge accounting status. Make sure that the solution provides full compliance with ASC 815 (FAS 133), ASC 815-10 (FAS 161), IAS 39 (IFRS 9) and similar national hedge accounting regulations.

7.     Fair Value Disclosure- The system must provide the tools and framework to define, measure, and manage fair value levels and meet all disclosure requirements for ASC 820 (FAS 157) and IFRS 7 compliance.

Triple Point’s Commodity XL for Agriculture can help you meet all of these requirements.  If you would like to learn more about Triple Point’s CTRM solution for Agriculture companies click here.
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.

Continue Reading »



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?)

 

In January of 2008, Triple Point acquired Softmar, the leading provider of software to manage chartering and vessel operations, including freight risk management. As the freight derivatives market grows in sophistication — so must the range of strategies used. The acquisition enabled Triple Point to immediately provide our customers with solutions to optimize freight management and deepened our solution suite to offer market-based, commodity supply chain management across sourcing, transportation, inventory, operations, and product marketing. In today’s complex and ever-changing commodities markets, the most successful companies are those best prepared to identify risk and model its dynamics, measure and quantify the impact of risk across the enterprise and on financial results, and manage and mitigate risk with an integrated platform that enables better and more proactive decision-making.

Recognized as an industry leader in managing end-to-end shipping operations, we were honored to be invited by Professor Manolis G. Kavussanos and Dr. Ilias D. Visvikis  to participate in a book published by Incisive Media, titled: Theory and Practice of Shipping Freight Derivatives. Our Managing Director of Chartering and Vessel Operations, Michael Lolk Larsen, authored the chapter which examines electronic trading software requirements for the freight derivatives market.

Although roughly 90% of the world’s traded goods by volume are trans­ported by sea, industry surveys show that approximately 80% of companies are still attempting to man­age commercial vessel operations and freight risk through the use of spreadsheets! This creates layers of information that are not transparent to other business units, leading to greater operational risk. Triple Point’s chapter examines how sophisticated software, such as our flagship Chartering and VesselOps™  solution, enables ship owners, charterers, and operators to successfully man­age freight risk holistically by integrating physical and paper markets. It provides an overview of the freight de­rivatives market and examines the interconnected relationship be­tween chartering, vessel operations, and freight risk management. I highly recommend the book as essential reading for all members of the shipping and financial communities. You may purchase the book here.

About the Book

Freight rates and their fluctuation constitutes the most significant source of shipping risk. This increasing recognition has brought with it a significant amount of derivative products, which have begun to offer more effective, flexible and cheaper ways to manage risk. The book provides practical coverage of shipping freight rate derivatives, detailed by leading expert practitioners in the field, and offers best practices from different points of view.  I highly recommend the book as essential reading for all members of the shipping and financial communities. You may purchase the book here.

Other chapters in the book include:

  • The Structure of the Freight Derivatives Markets
  • Credit Risk and the Benefits of Clearing Services
  • The Ship Owner’s and Charterer’s View and Practice of Freight Derivatives
  • The Bankers’ Perspective of Freight Derivatives
  • Accounting and Tax Perspectives
  • Setting up a Freight Rate Risk Management Department

I was recently interviewed for the Commodities Now special CTRM supplement by Guy Isherwood, Editor-in-Chief.  I’m sure some of you aren't readers of Commodities Now (by the way, it’s an excellent publication) so I thought I would make the interview available via the blog.

Guy Isherwood [GI]: What new trends have you noticed in the commodities industry?

Michael Schwartz [MS]: The United Nations issued a press release a few weeks ago stating that the world population, which is close to 7 billion right now, will surpass 10 billion by 2100. Many analysts had believed that population growth would stabilize at around 9 billion globally. It’s amazing to think that the population was 800 million in 1800 and we’re on our way to 10 billion 300 years later. Along with the exponential growth, many non-OECD countries are adopting western life-styles and appetites.

Add to the mix that commodities are becoming harder and more costly to get out of the ground, whether it is oil from tar sands in Canada or iron ore from less developed regions like Zambia. The net effect is that there is a long-term trend of higher commodity prices. In addition to higher prices, we will see more and more volatility caused by a tighter demand/supply equation.

From our perspective, we are seeing companies that have traditionally not been our customers start to adopt the same sophisticated commodity management systems that commodity trading organizations have deployed from Triple Point for years. These new industries include consumer products, chemicals, big-box retail and automotive. High prices and volatility in the raw material markets that these organizations depend on are not a wait-and-see problem, it’s the new reality.

[GI]: You mentioned that Triple Point is working with clients in the food and beverage, consumer products, and manufacturing industries. Can you comment further on what is driving interest from these companies?

[MS]: Higher commodity and energy prices coupled with greater volatility can harm profitability, shareholder value, and credibility with analysts for these companies. Organizations that use large amounts of raw materials and energy recognize that increased commodity volatility is not a short-term phenomenon but a fundamental change in the markets.

A CP executive recently told me that his company views increased raw material volatility as a 20 year issue, not a 2011 problem. Executives in these types of firms are increasingly aware that they can lose market share to competitors with a better strategy for managing commodity and energy prices. For organizations to be successful, the approach used by the purchasing department must be revamped from static “buy to budget” to a more proactive “market-based” procurement and risk management program. The traditional methods of handling rising raw material and energy costs, such as substituting cheaper materials in products and raising prices, might prove necessary but do not take advantage of commodity management best practices to optimize margins – and that’s why early adopters are turning to Triple Point.

[GI]: What extra demands are being made on managers for risk control, and how does Commodity XL™ address them?

[MS]: First and foremost, there are huge levels of price risk in the financial and commodity markets. It’s been reported that we’re seeing three or four ‘100-year risk events’ every year, and we’re almost certainly going to see more extreme events that are outside normal expectations.

Secondly, the recession has made everyone take a much closer look at credit. Credit risk managers used to triage potential counterparties into three groups – definite yes, definite no, and everyone in between. Now everyone is either rejected or sent for assessment. Finally, the markets are more closely regulated. Whether it is hedge accounting, fair value disclosure or the pending Dodd-Frank legislation, there’s no denying the growing importance of standards that require additional transparency into valuations and accounting methods.

Commodity XL™ is the only real-time commodity management and risk system that handles the four key areas of financial exposure set by the Committee of Chief Risk Officers on a tightly integrated platform: market/price risk; operational risk; regulatory risk; counterparty credit risk.

And this is not marketing hype – we’ve created the only true commodity enterprise risk platform by acquiring the leading credit and regulatory software solutions and integrating them into the Commodity XL platform. The solution breaks down individual information silos to get a clear picture of global exposure and firm-wide risk. The Management Dashboard™ business intelligence module provides executives with easy access to an accurate picture of the company’s total exposure.

[GI]: How do you see Dodd-Frank affecting energy organizations?

[MS]: A key challenge is the provision within the Dodd-Frank Act that applies to central clearing of OTC derivative trades (with Europe’s MiFID II legislation soon to follow). Dodd-Frank is a response to the credit crunch, but applies to energy organizations that use derivatives to hedge and reduce risk. The proposed legislation includes an end-user exemption clause for genuine hedging transactions. In order to take advantage of the exemption, firms need to test, document and report on a trade-by-trade basis.

Companies must be able to accommodate the accounting and auditability requirements as part of a complete, end-to-end solution. We’ve been saying for years that organizations can’t manage a commodity trading business on siloed-systems or spreadsheets – the new regulations might be the impetus that finally moves some companies off antiquated systems and unreliable tools.

[GI]: Gartner has named Triple Point Technology a leader in its Magic Quadrant (MQ) for E/CTRM solutions for the past three years. What are your thoughts about the MQ?

[MS]: Gartner is retained by 10,000 companies for its advice, and is top in its field, so it’s absolutely an honour for Triple Point to be consistently recognized as a leader.

What I find most interesting about the CTRM market is that it is evolving in a similar way to other major software markets where there are two leaders for enterprise solutions, like SAP and Oracle in ERP, and other vendors who fill niche areas. If you look at the CTRM Magic Quadrant over the last three years, it’s clear that Triple Point and OpenLink have become the leaders.

Gartner bestows leadership based on ‘completeness of vision’ and ‘ability to execute.’ When I started at Triple Point six years ago, there were five vendors of similar size. It’s been a testament to our market vision and execution that we’ve grown to three times the size of our competitors in those six years.

[GI]: What are some Triple Point highlights from 2010?

[MS]: In 2010, Triple Point launched new solutions for commercial chartering and vessel operations, freight risk management, trade confirmation management, cargo inspection, and strategic planning and procurement. We also announced several major enhancements to our European power and gas solutions.

Triple Point reported record revenue and 52% year-over-year EBITDA growth in 2010. We signed 105 new license transactions and added 41 new customers to bring our total number of customers to 260 companies. 2011 is shaping up to be another record year on all fronts.

We are investing in the success of our customers with several programs designed to encourage strategic alignment. Triple Point has appointed a Chief Customer Officer (CCO) with a commitment to serve customer relationships. Under the purview of the CCO, we’ve added a formal process for client satisfaction surveys and a Customer Driven Development program.

The commodities markets will always be volatile, presenting both huge opportunity and risk. In an industry that is both fast moving and complex, Triple Point will continue to provide its customers with the best solutions, product innovations, training and customer service to gain and maintain competitive advantage.

Pacific Carriers Limited, the global shipping and logistics subsidiary of Kuok (Singapore) Limited, has licensed Triple Point’s chartering and vessel operations software to manage supply chain cost and enterprise risk for its dry bulk commodities business.

Pacific Carriers Limited is a leading dry bulk operator with a growing fleet of product tankers, as well as offshore support vessels. It is a wholly-owned subsidiary of Kuok (Singapore) Limited, one of South-East Asia’s largest commodity houses trading in scrap steel, agricultural commodities, fertilizers, and chemicals.

With continuing growth in global commodity supply chain operations, the ability for organizations to control the cost and risk of transporting freight, including freight rate volatility, is key to managing overall supply chain cost and enterprise risk. Triple Point’s chartering and vessel operations software enables organizations to comprehensively manage freight rate risk, chartering, and post-fix operations on an integrated platform.

“For companies exposed to raw material, energy, and commodity price volatility, the need for a sophisticated commodity management solution to manage the buying, selling, risk, storage, processing, and transportation processes has never been greater,” said Peter F. Armstrong, president and CEO, Triple Point. “We are honored to add a customer of Pacific Carrier’s stature to our growing client base.”

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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.