Trading finance chiefs see credit risks
OREANDA-NEWS. Finance chiefs at some of the world's biggest commodity trading firms see regulation, counterparty risk and credit risk as the biggest concerns this year.
Chief financial officers from Vitol, Trafigura, Mercuria and Castleton Commodities International (CCI), speaking at the FT Commodities Global Summit in Lausanne, Switzerland, agreed that uncertainty surrounding the impact of forthcoming regulation was a risk to their operations.
Regulatory changes "may create an adjustment in business models, and how business models are financed," Mercuria chief financial officer Guillaume Vermersch said. CCI's Daniel Hines said counterparty risk was a factor. "Depending what sectors you're in — thinking about exploration and production — we have some exposure to that," Hines said. "And thinking about counterparty risk turning into credit risk, ultimately turning into legal risk, and whether legal contracts you have in place perform the way you expect them to perform."
But Vitol's Jeffrey Dellapina was more optimistic.
"Regulation is a bit of a factor, and I'm pretty optimistic about it. In the end, regulators want liquidity, they want functioning markets," Dellapina said, although access to capital will probably get more expensive.
Trafigura chief financial officer Christophe Salmon said banks are under pressure for thier commodity exposure. Volatility has created risk for trading firm finance departments.
"Volatility, for finance people like us, translates into liquidity management and liquidity risk," Dellapina said. "And for companies in our sector, liquidity risk is obviously probably the most important risk that we need to manage."
Traders have to be "even more paranoid than usual" in order to manage credit risk in a distressed environment, Salmon said.
Mercuria has anticipated some of these potential consequences of the tougher environment, and is ready to handle the potential extra costs, said chief financial officer Guillaume Vermersch. The company's business model is well-understood by banks, and "banks are definitely committed to the sector."
Mercuria is setting up its own in-house clearing facilities on futures and OTCs, instead of using banks, having studied the increased cost of business following new rules on increased capital requirements on lenders. Vermersch also identified credit risk and counterparty risk as potential problems, but did not go into detail on what kinds of counterparties are particularly of concern.
Dellapina said that as Vitol has matured and grown, it is using less bank credit, instead using more finance generated from its own business activities. The lower outright commodity prices have helped the strategy, with companies requiring less capital to finance trade and purchases, he said.
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