Risk management and funding model

Risk management: How Trafigura manages risk

Trafigura operates in dynamic markets that involve 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.

Trafigura has developed rigorous risk management and governance systems to address the full range of risks to which it is exposed. These systems apply multiple lines of oversight to ensure compliance with all applicable laws and regulations, and a high standard of ethical behaviour by all employees at all times. The Group actively manages and mitigates, wherever possible, the identifiable or foreseeable risks inherent to its activity – for example, systematically hedging exposure to flat prices and extensively using insurance and financial tools such as letters of credit.

The diversification of our business, trading a wide range of commodities with varying and uncorrelated market dynamics across a large number of countries and geographical regions, is an important factor in reducing the Group’s overall exposure to any individual market, price, political or other 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.

By extending our trading capabilities, we are diversifying the business, resulting in lower overall exposure and higher risk-adjusted performance.

Compliance and responsible conduct

Trafigura's Code of Business Conduct, Corporate Responsibility Policy and Business Principles set out the high standards of responsible and ethical behaviour required of every employee, individually and collectively. Every employee receives a copy of the Code and applicable key policies, which includes mandatory training as a condition of employment.

In 2020, 556 new-start office-based employees were trained on the Code. Anti-money laundering training, and anti-bribery and corruption training were also delivered, to 1,201 and 1,079 employees respectively*.

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 that 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 2020 Responsibility Report.

Board of Directors and Management Committee

The Management Committee and the Board of Directors directly oversee the trading divisions and operating companies. Trafigura has a flat corporate governance structure featuring short and direct channels of communication and control (see separate page on Corporate governance).

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 risk in an appropriate manner.

The Management Committee is responsible for the day-to-day management of the Group's operations and investment portfolio and provides direct oversight of the Board's risk management strategy.

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

Market and price risks

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 and chairs 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 that 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 and credit risks

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.

Operational and ESG risks

HSEC Steering Committee and Corporate Affairs

The HSEC Steering 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.

Control risks

Audit Committee and Internal Controls Team

The Internal Controls Department supports management across the Group to continually assess risks and controls for the governance, trading, IT and support processes. Results of these activities are reported to the Audit Committee accompanied by action plans to strengthen controls and further mitigate risks where required. Internal Controls also manages the annual framework cycle activities as part of the process undertaken by external auditors to 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.

Funding model: Finance to meet diverse business needs

Our funding strategy matches sources of funding to financing requirements. We have developed diverse financing strategies that maximise scalability, flexibility and business resilience.