The importance of industry focused features and functions in Commodity Trade and Risk Management software (CTRM) was once more confirmed in 2018.
Agiblocks CTRM software supports the agricultural and soft-commodity industries. In 2018 a large number of Cocoa, Coffee and Sugar traders and processors chose to use Agiblocks as the CTRM platform to support their trade and/or procurement operations. The confidence of these companies motivates Agiboo to go the next level when it comes to industry specific support in the years ahead.
Industry Specific Support in Agiblocks CTRM
The need for these industry specific features for industries are mostly caused by the physical nature of the commodity or the structure of the exchanges. Our experience learns that without specific industry support users are almost required to have separate administrations on the side of their CTRM. These on the side administrations, mostly calculation and registrations in excel, are usually causing inaccurate representation of trading positions, market to market valuations and/or financial accounting mismatches.
There are many examples, sugar for instance, is rather unique in the way that the commodity on one exchange (NY) traded can be converted to an other commodity on a different exchange (London). Cocoa beans are unique because they can be processed into products such as cocoa butter and cocoa powder which have their own hedge ratios. In addition cocoa is traded on different exchanges and on these listed in different currencies, creating an arbitrage position between them. On the physical side; coffee and cocoa are sometimes being traded in bags whilst settlement is based on weight. These are only a few examples, but it is essential that a CTRM support these peculiarities of specific commodities. Supporting those details can make the difference, they are often an important contributor to operating efficiencies, and can make the difference between a successful CTRM implementation or a failure.
Agiblocks 2018: Further strengthening industry support
Agiblocks was already supporting a vast amount of industry specific functionality such as Arbitrage, Partial pricing, White premium, Ratio hedging, Contracting tolerance and franchise etc. The recognition of this by the existing and several new clients in 2018 allowed Agiboo to further develop CTRM features and functions which are essential to specific industries. In 2018 the feature basis was significantly strengthened, to highlight a few, we take some of the latest release:
Cross Currency Pricing
Previously in Agiblocks, “To-be-fixed ” or also called differential contracts, could only be priced in the same currency as the futures market to be used for price fixation. After creating a full pricing or fixation a user could select or confirm a different settlement currency for the contract and agree and fix a conversion rate. Agiblocks would then generate a “Forex hedge requirement” that notified the user that the forex exposure could be hedged and allowed the user to allocate a forex contract to the physical contract.
We have extended this functionality with an optional new feature called “Cross Currency Pricing”. This gives traders the option to fix a pricing in a different currency than the futures market for that pricing. A trader can use a different forex fixation for each individual futures pricing / fixation. So if the Cross currency pricing feature is enabled on your Agiblocks system, a Trader can agree with their counter-party a pricing currency in which pricing on the contract will be effectuated and such independently of the settlement currencies. The latter is convenient in for example the cocoa trade, but also used when you deal with trade in high inflation environments e.g. raw sugar from Brazil. The Cross Currency Pricing functionality allows you to address the forex environment in pricing to hedge against these exposures when required and to allocate the pricing and /or hedge results to the physical contract.
In some commodity trade markets, such as Cocoa trade, it is common to agree weight terms & conditions with the seller. Regardless the term, there will be weight differences upon delivery of a parcel and often it is a challenge to calculate the impact on the final settlement invoice. For example when goods are purchased based on shipped weights, then there can be a significant difference with the contracted weight and the weight of the goods that arrives at destination. Usually the buyer of the goods is somewhat protected against excess of weight losses, through the so called the franchise percentage. When it has been determined that the franchise percentage has been exceeded, i.e. the arrived weight of the shipment is less than the shipped weight minus this franchise percentage, the buyer has the right to invoice the seller for the value of the weight by which the franchise was exceeded.
In Agiblocks, a franchise percentage can be configured for certain weight terms & conditions. This franchise percentage is then offered as default the at the contract capture. When a record is being made of the actual arrival of the goods, Agiblocks notifies the user whether differences in weight are inline with or in excess of the contracted conditions. When the Agiblocks configuration has the option to generate franchise invoices activated, it will not only show you the calculations for franchise for the user, it can also automatically create a franchise invoice. For companies using the financial integration, the impact of the franchise adjustment is also taken into account when accounting for the cost of goods sold!
Besides weight there might also be other factors determining the final settlement between buyer and seller. For example in the Cocoa trade the FCC (Federation of Cocoa Commerce) prescribes a specific calculation for the actual arrived quantity. It only considers the weight and number of bags that arrived “sound & full”. With the aim to have the most accurate weight information processed through Agiblocks, a new, optional field\function called “Arrived Weight” has been added to Weight terms master data. The function calculates, at recording of the execution, the average weight of those sound and full bags and multiplies it with the total number of bags that was shipped to arrive at a weight to be used for settlement.
Trading commodities in bags usually brings a lot of requirements in capturing information on these bags, not only at their initial recording at arrival, but also during the time that the bags are stored in warehouses and at their dispatch to a client. Usually this information finds it’s origin in the Weight-notes provided by warehouse keepers. The new Agiblocks Weight-notes functionality allows logistic users to record Weight-note information on a delivery (arrival) and split portions of a delivery into various inventory lots and also to merge these inventory lots later-on. A process typically used when a parcel of stock is (partially) reconditioned. While this process could be done in previous versions, changes to the execution section of a delivery form now make adding Weight note information and splitting lots much easier, but more important, the tracking and tracing of the various splits to the original contract or parcel has become more user-friendly as well.
The above are just a few highlights of new industry specific functionality in Agiblocks CTRM. Besides industry specific improvements Agiboo has spend significant efforts to make Agiblocks fully IFRS 15 and 9 compliant allowing our customers to use the near-real time and full permanence accounting interface to be used for hedge accounting and compliance reporting. Please read the separate blog about this functionality on this website.
We grow with our clients and our clients grow with us
Agiboo will further focus to support the agricultural and soft commodity industries in 2019. We aim to bring further efficiency in trading and operations of our clients and to embed even more industry and commodity specific functionality to Agiblocks. We help our customers in achieving their challenges and enable them to capitalise on the benefits of information technology.