How Trafigura manages risk
How Trafigura manages risk
Trafigura operates in dynamic markets that involve a wide range of risk, whether operational, financial, political, 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 credit-mitigating 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, geopolitical 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 differential 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.
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 (read more on the Governance page here) .
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.
Compliance and responsible conduct
Trafigura's Code of Business Conduct, supporting Group compliance policies and our 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.
Compliance Committee and Head of Compliance
Trafigura’s Chief Compliance Officer oversees the implementation and development of the Group’s compliance programme. They report 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.
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 that 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
ESG Committee, Commercial ESG and Operational HSEC Steering Committees
The newly-established Board ESG Committee provides Group direction for ESG policy and approach. As set out in the Governance section of page 40, the Committee promotes Board-level engagement with and input into the Group’s material ESG risks and strategy.
The Commercial ESG Steering and Operational HSEC Steering committees are mandated by the Board to promote best practice, oversee the management of environmental, social and governance (ESG) risks, and health, safety, environment, and community (HSEC) risks at the Group’s operations and ensure that Trafigura’s Corporate Responsibility Policy and Business Principles are adopted, appropriately adapted and implemented across the organisation.
Audit Committee and Internal Controls Department
The Internal Controls Department supports management across the Group to continually assess risks and controls for governance, trading, IT and operational 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 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 department 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.
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.
Continued access to capital
Trafigura’s activities require substantial amounts of capital.
We source, store, blend and deliver commodities around the globe.
We invest in terminals, logistics and physical infrastructure to improve the efficiency of our trading operations.
Our diversified funding model allows us to continue to operate effectively and successfully in all market conditions. Its scalability and structure protects the business from market shocks and provides flexibility and the ability to capitalise on opportunities as they arise.
We have put in place a global programme of flexible, short-term facilities to finance our day-to-day operations and a programme of longer-term, corporate facilities to finance our asset acquisition and other corporate requirements.
Available funding exceeds our everyday requirements. This provides headroom for unusual market conditions. We also maintain substantial cash balances to ensure that we will always meet day-to-day capital commitments, even in unexpected circumstances.
Our approach to funding
Diversification improves competitiveness and access to capital
We diversify both the sources and the structure of our financing to minimise risk and maximise operational effectiveness. We raise funds in a variety of markets in the US, Europe and Asia-Pacific. We have lending arrangements in place with 140 banks around the world. We are therefore not constrained by credit restrictions for specific financial institutions, sectors or regions. We raise capital with a range of repayment schedules, from very short-term facilities to maturities greater than 10 years. This spreads our exposure across the yield curve.
Match-funded, collateralised lending reduces credit risk
As a matter of policy, we match the type of financing to the business requirement. We have established a three-pillar funding structure to put this into practice. We use short-term financing for trading. These loans are secured against the underlying physical commodities. Lines are marked-to-market each week so the level of financing tracks the value of the underlying collateral as prices change. We raise longer-term debt to finance fixed assets and investments.
Transparency promotes stability
As a private company relying on debt to finance its operations, Trafigura’s performance is closely scrutinised by a large group of banks and investors worldwide. We comply with the financial covenants attached to our syndicated bank facilities. Members of the finance team regularly meet with our lenders' representatives. These meetings often include operationally focused personnel (from Credit, Compliance and Trading Desks) who provide additional insight into our business model. As an issuer of publicly listed debt, we also meet the transparency requirements of our bond investors. Our interim and full-year reports are published online. We hold regular calls and presentations to update investors and to respond to specific queries directly.
Trafigura funding model
Our three-pillar funding structure
All transaction-based lending is fully collateralised. We fund day-to-day trading mostly through one-to-one (i.e. bilateral) agreements with individual banks and borrowing bases with syndicates of banks. Most transactions start with a bank issuing a letter of credit on behalf of Trafigura in favour of a commodity supplier to secure due payment. The bank takes security over the physical commodity being purchased. When payment is due, Trafigura draws on a transactional loan to pay the supplier, such loan being secured against the commodity. The loan is marked-tomarket weekly until maturity so that the amount being financed always corresponds to the value of the underlying commodity. Once the commodity is sold to the end-buyer, a receivable is created and assigned to the bank until the cash settlement is used to repay the secured loan. Alternatively, the loan can be repaid earlier if the receivable is sold to one of the trade receivables securitisation programmes sponsored by Trafigura.
Trafigura manages two trade receivables securitisation programmes through separately capitalised special purpose vehicles: TSF and Argonaut.
The programmes further diversify Trafigura’s funding sources and, thanks to TSF's investment-grade ratings from Moody’s and S&P, are cost-effective financing mechanisms. Most trades are financed on a trade-by-trade basis with transactional secured loans, but Trafigura can fund an eligible receivable once an invoice has been issued by selling it to a programme. Securitising our receivables accelerates the rotation of existing credit lines, since transactional secured loans can be repaid faster with the programmes' proceeds.
Corporate credit facilities
Trafigura invests in fixed assets to support its trading activity. We finance these with long-term debt adhering to our policy of matching assets with liabilities. We issue debt securities and negotiate lending facilities in diverse markets. Funding sources include bonds, perpetual bonds, revolving credit facilities, private placements and term loans.
Public credit ratings
Trafigura does not hold a public rating and does not seek to obtain one. The Group focuses on strengthening its balance sheet through long-term value creation.
We obtain our funding from stakeholders who understand our business model in detail and whose investment decisions are not driven by ratings. We have significantly expanded our sources of financing over the years by maintaining a sustainable credit standing that is consistent with an investment-grade profile.
Likewise, the absence of a rating means that Trafigura’s business and investment decisions are not taken on the basis of maintaining a particular rating level, something which becomes particularly important at times of high market volatility.