After running a successful CTW Online for the commodity trading community last May thanks to some state-of-the-art event networking technologies, the Commodities People team was confident the first all-digital ComRisk would be memorable as well. They were right, as the two-day event on October 12 and 13 gave us lots of opportunities to talk shop – but there were also some very interesting presentations and live sessions. In the report below, we’ve tried to cover a few of them for those of you who have missed it.
As the world has been hit by this unprecedented event, the need for communicating, exchanging, partnering up and keeping the conversation going has never been so crucial. That is why ComRisk has now taken place as a virtual event to allow the community to meet up and discuss around key topics despite the ongoing travelling and meeting restrictions. Those key topics include the covid-19 impact on markets, counterparty risk and stress testing, the latest developments in risk technologies, best practices around operational risks, and more. Over 40 panels and presentations were prepared by the world’s leading minds in commodity trading, covering all business areas.
The virtual exhibition area aimed to showcase all the leading industry offerings under one roof at one time and allowed online visitors to ask questions face to face with suppliers, during the Q&A part of presentations as well as in one-on-one settings.
Nothing has shaken up the markets quite like the covid-19 outbreak in a very long time. Falling food and fuel demand from the pandemic has led to weakening prices across the complex, as well as logistical complications. As the pandemic continues, the impact on consumption and overall uncertainty ahead is a major force in risk management as well. No surprise then that the impact of the pandemic was the big issue in the ComRisk keynote, titled ‘Lessons learnt in risk management’ and given by Jagdish Parihar.
Keynote: lessons learnt in risk management
Parihar talked about the complete unpredictability of this global ‘black swan’ event, unexpected to even the strongest of risk models. Over the last one hundred years, we’ve had 8 or 10 events equal to the current pandemic, said the Managing Director & Chief Risk & Compliance Officer of Olam International. He therefore talked about the impact of such a largely unprecedented occurrence, that even now we tend to underestimate. ‘We will be able to handle the next one a lot better, but for the current situation we were simply not prepared enough, there’s a (too) narrow window of risk potential effectively foresighted.’
As a result, trading variables such as defaults, delayed payments, special emphasis of what is now part of business as usual, changes every week. Counterparty risk limits should be altered accordingly, Parihar stated, while also taking into the account the dilution of risk management due to working from home. The risk wasn’t properly recognized, so taking stock of the position of the company as an entirety should be on an emergency level. The approach to the current landscape should be nimble, flexible, innovative, cost-conscious and above all very dynamic and responsive. “It requires a different quality of leadership.”
Support your locals
In the context of lessons learnt, what are some of expectations for the near future? ‘For years we’ve been talking about globalization and a borderless world, but more recently we’ve seen a reinvention of social capitalism and a localized focus, bringing local business to the forefront. The more local approach may be more sustainable and profitable in the long run.’ In other words, globalization may not be the strategy in the years to come.
Secondly, working from home has required a major transition, asking for digital capabilities of a different order. That digital transformation is likely to accelerate, while a contingent workforce will be favorable over a permanent one. ‘We’ll see more investments in digital technology rather than people going forward.’
The macroeconomic context for commodity trading
To organically follow-up on the opening keynote, the first major presentation was given by Lukasz Bielak, Head of Financial and Market Risk at KHGM Group. We say follow-up, because his talk focused on understanding the bigger picture of the current market(s) to better manage risks, in line with some of the findings and wisdoms of Parihar during the keynote. Now, KHGM is mainly active in mining, enrichment, metallurgy and refinery, so risk management models are not quite comparable to say soft commodities or the macro economy as a whole. Investors accept the market risk exposure of mining companies but don’t accept bankruptcy risk, Bielak said. The company uses derivates to manage excess market risk of the company, so in that sense we are back in the world of soft commodity trading as far as general parallels go.
Given the approach of ‘KISS’ (‘Keep It Simple, Stupi’d), Bielak focused on macro markets that have an effect on all economic markets. Fundamentals of every market are of course very important, but a lot of time lately has been spent on the macro picture, as covid-19 has impacted all business with great severity, and is therefore a major factor in predicting.
Series of unknowns
According to the IMF the global GDP in 2020 is going to fall by nearly 5 percent. When we try to forecast next year, or 2-3 years ahead, we know that the GDP horizon is a huge question mark. The late summer had some optimistic markets, but given the ‘second wave’ and its implications, it’s all too unsure. ‘We have a series of serious unknowns’, Bielak stated, and the fact the coronavirus is not withdrawing is just one of them. The US elections are scheduled for November (‘usually a volatile influence’), the Brexit situation is set to arrive at an extremely volatile finalization, and monetary policy from central banks is still very aggressive – where will that lead us? Meanwhile, the World Uncertainty Index (IMF published) is reaching record heights with no definitive solutions in sight.
These and other changes lead to a structural shift in the labor market, as Parihar noted as well. Industrial production in the US for instance has been hit hard (‘massive hit to labor market’), with no clear picture of the next phase(s), which all in all is another huge factor in the uncertainty picture. Furthermore, trade wars and inflation will remain on the radar for a while longer, and will obviously also be influenced by election outcomes in November.
Implications for risk management
What are some of the implications for the risk management process? First of all, there’s a much higher and much more difficult to predict volatility of market risk factors. The normal distribution is not a proper assumption for the near future.
Furthermore, there is a significantly bigger than usual uncertainty of business models both on cost (supply) and revenues (demand) sides. Then there are the unknown consequences of substantial government aid programs on national debt ratios and financial stability. The unlimited monetary actions carried out by central banks are distorting mechanics of asset valuation processes. There are many difficulties in assessing real credit risk of counterparties. Luckily, Bielak concluded, there are also upsides – like the acceleration of the energy transformation process. But all in all, these are very volatile times.
Effectively managing risk with technology
Next up were Iain Grieg, director at Brady Technologies, and Kevin Brunton, CFO of Koch Minerals and Trading, talking risk management and technology and how to cope with all those uncertainties. The elephant in the room was covid-19 once more, but through the lens of the rapid change and disruptions brought forth by the pandemic in terms of finding a controlled environment fostering agility to cope.
Market volatility drives the pace for an efficient platform so that knowledge experts can focus without losing the key variables. But how should we then manage the balance between risk due to uncertainty and agility? ‘Seek to select the right partners, develop virtual cycles of mutual benefit and push a platform through SaaS agreements that holds all data secure and keeps all parties accountable.’ Secondly, we should strive for flexible products – products that enable automation. Put data accessibility in the hands of the user and not in IT. The key is having a stable platform, with real-time positions, that allows for scalability so you are able to duplicate information without losing efficiency.
It is reminiscent of what Erik van den Flier said when we talked to Agroforce’s managing director about what it is a CTRM solution should provide; “Of course, there are the obvious characteristics; any software solution should feature any and all variables and properties related to commodity trading; it needs to be auditable, which is to say banks should be able to verify it as a reliable product; and you should be able to link it, directly or indirectly, to your accountancy system in order to reduce manual maneuvers there as well. But the key component for me is that the system matches all the intricacies of the industry. Your software should reflect that and have all those variables and requisites built-in to allow you the freedom and flexibility necessary to do your job as a commodity trader.”
There’s a strain on IT groups to always develop, always come up with the next step, especially now with all the increased volatility, said Brunton. ‘It’s always a balance to find the right mix, with or without Covid. It has forced us to talk about IT dependence differently. If that would have happened 5 years ago, IT would not be ready.’
There are lessons in that for the way forward. ‘Evaluate your technology landscape and define what the ball & chain is. Rid yourself of technical debt (eg. lack of technical standards, not embracing the cloud, failure to upgrade and keep up, lack of vendor strategy, lack of data and archive strategy) and keep up with all the current possibilities. Risk was historically the reason to not adopt cloud-based SaaS, but it has become the way of the future in terms of data security, data optimization and scalability Improvements.
Enterprise & risk management
‘Good afternoon in Singapore, good morning in London’, said Deven Chitaliya, Senior Vice President, Central Risk Office at Olam International, as he welcomed us into the first presentation of the Tuesday schedule, neatly underlining the international aspect of the conference. As a senior official for Risk at Olam for over ten years now, he talked about the most important risk questions as captured in the Risk Paradigm that guide the role of a CRO;
- how do we define boundaries for ‘risk appetite’?
- how do we set limits in tune with that appetite?
- How do we set hurdle rate expectations based on risk intensity?
- How do we allocate capital and reward managers based on risk adjusted returns?
Risk management seen from the point of view of an ERM process is a continuous loop that takes the route of risk identification, risk assessment, risk analysis & reporting, the quarterly review (key changes and a plan for mitigation), communication & change management and back to risk identification. That ongoing process covers 11 major risk categories…
- Political & Sovereign
- Regulatory & Compliance
- Capital Structure & Financing
- Natural Perils
- Strategic Risks
- Other (including IT and cyber security)
… in turn covering over 50 total risks. Trading for instance covers everything from price risk to option greeks and liquidity risks). They are different for various sectors and industries, of course, but they form the main map.
The main question you should continuously ask: have you summarized all the potentials risks facing your company? ‘Defining those risks AND ensuring that they are well understood is key, but also: how rigorous are you in your assessment? How are you rating and how do you adjust them dynamically?’ Because copy/pasting the previous quarter is not going to fly.
System selection risk
As with the recent European Sugar Virtual Conference, we’ll close out the coverage of the event by highlighting the presentation given by our own Managing Partner, Jan van den Brom. In a Tuesday afternoon session with Gary Vasey (Partner & Managing Director of ComTech Advisory) and Peter Moore (Head of Product Management at FIS), he spoke about the pros of a commodity-specific CTRM system versus a multi-commodity approach.
CTRM solutions are by default complex and rich in functionalities to support all the flexibility that characterizes the industry. Agiblocks CTRM provides a large number of detailed features and functions, in many cases specialized for a certain commodity or commodity group. It should come as no surprise then that Van den Brom was the advocate for a commodity-specific system. It’s his analogy though that we’d like to share here, stemming from a simple question: ‘Can I drive from Amsterdam to Paris using a globe?’
Spoiler alert: Yes. Yes, you can drive from Amsterdam to Paris using just a globe. Or it’ll give you all the general guidelines, at least. It will show you to drive south. It will show you to keep the ocean to your right, and steer clear of the water. It will give you a universal overview of the situation, as well as an approximation of the distance. But let’s be honest, wouldn’t you rather use Google Maps and actually get to where you are going with any sense of direction, efficiency and time-sensitivity?
Navigating to and especially through Paris is a challenge all on its own of course, but that’s beside the point here. So now imagine you’re not just driving from Amsterdam to Paris in one car, but are instead managing a whole fleet of cars. Or what about being an air traffic controller monitoring all in- and outbound traffic between the two cities? The global approach becomes less and less favorable, doesn’t it?
Capturing all underlying details is simply a necessity for success. You need the data, and it needs to be reliable to respond to the real situation. It needs to be supported by quality mechanisms, available in real-time and capturing everything from pricing/hedging to trading factors and specific functions and features. And that’s where a commodity-specific system comes in, to match the intricacies of the industry. Or, not to put too fine a point on it, that’s where Agiblocks comes in. But don’t just take our word for it…
Experience our CTRM software solution for free and get a front-row seat to all the benefits Agiblocks has to offer with our free demo. The full range of Agiblocks functionality is available within the demo environment. Familiarize yourself with the tools and features of our powerful and agile software solution and find out how you can make the daily practices of commodity trade and risk management more efficient. Join us!