How we manage risk

Trafigura operates in dynamic markets that pose a wide range of risks, whether financial, political, operational, social or environmental.
A rigorous and conservative approach to risk management is therefore an integral element and central focus of Trafigura's business.

As a rule, the Group actively manages and mitigates wherever possible the identifiable or foreseeable risks inherent to its activity – for example, in systematically hedging exposure to flat prices and in extensively using insurance and financial tools such as letters of credit.

It has also ensured a degree of diversification in its business (trading a wide range of commodities with diverse and uncorrelated market dynamics in various geographical regions) that in itself reduces the Group’s exposure to risk. Unlike many financial assets, physical commodity markets provide many opportunities for risk diversification. The premium paid for copper in China, for example, has little to do with the pricing relationship in LPG between the US and Europe.

Diversification results in lower overall exposure and higher risk-adjusted performance. As we extend our trading capabilities, we are diversifying the business further.

To manage the full range of risks to which it is exposed, the Group has developed a system with multiple lines of oversight.

Trafigura’s risk management system is based on the starting premise that Trafigura complies with all applicable laws.

As reflected in our Chairman’s statement at the start of this report, ensuring compliant behaviour is both the personal and collective responsibility of all employees at Trafigura. This high standard of behaviour expected of our colleagues is enshrined in our Code of Business Conduct which every member of staff must attest to receiving and understanding.

Compliance Committee and Head of Compliance

Trafigura’s Chief Compliance Officer oversees the implementation and development of the Group’s compliance programme. He reports to the Chief Operating Officer and the Trafigura Compliance Committee. The Compliance Department operates in partnership with the front office to ensure our controls are relevant and effective. The Department works to continually improve its practices in an environment of evolving technology, regulations and stakeholder expectations. Our compliance training programme continues to expand, ensuring employee awareness of key external and internal requirements.

Further details on our compliance practices can be found in the Responsibility section of our website and in our Responsibility Report.

Management Committee and Board of Directors

The trading divisions and operating companies are overseen directly by the Management Committee and the Board of Directors. Trafigura has a flat corporate governance structure featuring short and direct channels of communication and control.

The Board of Directors has principal oversight responsibility, sets the risk management framework, determines the overall risk appetite of the business, and ensures that the appropriate structures and processes are in place to handle each category of risks in an appropriate manner.

Further lines of oversight consist of a series of corporate functions that establish policies and processes for managing different categories of risk, as well as providing analysis, advice and implementation support.

Market Risk Management Committee and Chief Risk Officer

Trafigura systematically hedges all index price exposure incurred as a result of its trading activities within a framework set by the Board of Directors and implemented by the Market Risk Management Committee and the Chief Risk Officer (CRO).

The CRO reports directly to the Chief Operating Officer (COO) and the Board of Directors. The CRO is a key member of the Market Risk Management Committee, which includes company directors and senior traders. The Committee meets at least weekly to manage overall exposures, assess the impact of changing market dynamics and limit risk exposures and concentrations.

Trafigura’s ongoing programme of investment in risk management systems includes a reporting system which automatically notifies the risk management and trading teams whenever a book nears its risk limits.

The CRO works proactively with trading teams to analyse changing market conditions and ensures that hedging strategies are focused on current market dynamics. Rigorous methodologies for managing market risk are used across the company. The CRO’s risk team employs advanced statistical models that capture the non-normal dynamics which are an important feature of commodity markets.

The risk team focuses on aggregate risk, paying particular attention to term-structure and intra-commodity spreads. Risk concentrations are continuously reviewed in the context of changing market dynamics. The CRO manages strategic hedging activity dynamically to reduce risk concentrations and limit company-wide exposure.

Finance Committee and Finance Department

The Finance Department supports the activities of the whole Group and is involved at the earliest stage of transactions and projects. Overseen by the Finance Committee, it is responsible for assessment of financial risk and has the capacity to veto any transaction. Within Finance, the Credit Department’s key role is to safeguard the balance sheet. It performs fundamental credit analysis, assessing credit risk associated with the Group’s counterparts, setting internal limits, monitoring exposures and overseeing documentation.

HSEC Steering Committee and Corporate Affairs

This committee is co-chaired by a member of the Board of Directors and the Head of Corporate Affairs and comprises senior representatives from across the Group. It is mandated by the Board to promote best practice, oversee the management of health, safety, environment and community (HSEC) risks and ensure that Trafigura’s Corporate Responsibility Policy and Business Principles are implemented consistently across the organisation.

Internal Controls Team

The Internal Controls Team supports management across the Group in annually assessing risks and controls for the governance, trading, IT and support processes. Results of these activities are reported to the Board of Directors accompanied by action plans to strengthen controls and further mitigate risks where required. Internal Controls manage these annual framework cycle activities and external auditors validate the existence of the Trafigura Internal Control System every year. Additionally the team performs site reviews to assess how local management manages risk and to identify opportunities for improvement, and advises on process design for new IT applications.