Commodity Trading and Risk Management
 

Risk is good, not properly managing your risk is dangerous

Risk is good, not properly managing your risk is dangerous. 

There are four essential tenets for effective risk management in a commodity business:

  1. Full transparency of information across the organisation producing accurate, clear and timely management reporting
  2.  A policy framework that is easily understood, has strong top down support and is uniformly and rigorously enforced 
  3. A well defined risk appetite identifying areas of competitive advantage, inferring risks the business chooses to be exposed to and also being clear about where there is no competitive advantage, inferring risks that require maximum mitigation
  4. An imbedded risk culture and educational program such that people in all roles understand the risk/return pay-off of their decision making

In our experience commodity businesses manage to satisfy each of the above four points with widely varying degrees of success. Many still have highly decentralised data structures which leads to considerable challenge with data transparency and meaningful reporting. 

Policy frameworks are often rather complex, vary by location or are not uniformly enforced by all responsible managers. An unenforced or unsupported policy serves no purpose. 

Many boards may have produced a risk appetite statement but these can often be poorly defined such that the business fails to translate a statement into a measurable limit structure, counterpart exposure or operational methodology which can show a quantifiable link to the original statement. 

Finally there appears to be a lack of sufficient risk management education across commodity businesses. Teaching people how to assess risk/return pay-offs in their own tasks and also how that fits into the overall risk exposure of the business will reduce mistakes and pay for itself many times over.  

A further vital point about culture not covered in the four tenets is that of mistake and blame. 

Bulk commodity supply chains deal with high value , low margin cargoes and mistakes can very quickly escalate to the point where margin is significantly eroded. One of the most destructive cultures that exists is that of blame. It is vital that in a commodity business, mistakes are identified at the first opportunity and immediately escalated to a level where decisive action can be taken to rectify them.

It is vital to foster a culture of openness where it is seen as acceptable to make mistakes and where mistakes are considered opportunities to learn. There should be no condemnation for somebody admitting to a mistake providing they escalate it as soon as it is apparent, consider why that mistake occurred in the first place and also present a plan of action to prevent similar mistakes from happening again in the future. 

This is the process by which we achieve continuous business improvement in operational risk , where a mistake in one place can ultimately benefits the entire organisation in the future.

 

 



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