Our Commodity Trading Practice Overview Trading In . - Deloitte

Our Commodity TradingPractice OverviewTrading in challenging times

Trading under challenging market conditionsThe commodity trading sector has witnessed significant changes over the past few yearsenhanced regulatory pressure and a more complex trading environment, traders and finIndustrycostswingrrooberghiHrcnm re de n ittThese challenges are impacting the costs oftrading as banks focus more on marginrequirement as the primary form of collateral.Small market players may experience bankswithdrawing from their trade financeagreements, creating opportunities foralternative financing providers.rgsi n g taenIn crlvievoLower liquidityOurservicesand risk managencemepliantsomcosrctsheigBanks are currently facing regulatory,compliance and capital adequacy challenges.eht oT i g v irenTighter credit environmentCompressedmargins fromcore tradingactivitiesmicnoco‑erokBusiness models are moving towardsunconventional oil and gas production along withexpansion into new geographies. Renewables,nuclear and utility sectors undergoing changingbusiness models.rganisation restructurnd oingts rancchriseax gu lre a tio ng im&esPublicised downscaling illustrated by banksexiting from the commodity markets combinedwith trading houses and new entrants expandingtheir activities.HIndustry changeStrategyProcess & SystemsStrategy and the marketSystems Business plan preparation, review and challenge Trading software/vendor ap Business/trading model design Trading systems delivery an P lanning and roadmaps for new products, marketsand geographies Trade portfolio and system M arket fundamental studies, market entry strategy,development and challenge of market and stressscenariosCommodity transactions and investments Commercial due diligence and negotiation support Contract and portfolio risk reviews Post‑transaction integration D esign, challenge and implementation of hedgingstrategies for transactionsProcess and operations Trading operating model de P rocess optimisation, straigand automationIT Strategy Systems architecture review Trading system health asse IT Programme assurance IT support and delivery ope IT strategy and roadmap de

s. Faced with tighter trading margins, lower volatility across most commodities,nancial institutions have been forced to alter their trading activities.Strategic implicationsGlobal macro‑economic riskAbsolute prices for many commodities fell sharply in thesecond half of 2014, and have remained low.The rise in volatility in oil, at its highest level since thefinancial crisis, has opened up new opportunities in amarket which buys and sells large volumes underintense margin pressure, especially given lower workingcapital requirements. Refocusing of commodity tradingstrategies; adapt to new risk/cost/return paradigm. New opportunitiesto capture optionality. Increase in M&A activity; optimisemargin across the value chain anddivestiture of non‑core assets. Realignment of strategies which arecapital consuming; optimise use ofcapital and risk prioritisation. Implementation of tax effectivestructures across global tradingbusiness lines.Risk and control implications Requirement for effectivegovernance and transition to greatertransparency; meet regulatoryrequirements. Ability to integrate complex andpredictive analytical tools into boththe business and risk managementprocesses.Increasing regulation and evolvingtax regimesMore stringent regulation covering derivative trading andreporting obligations (EMIR, MiFID II, FinfraG, Dodd-FrankAct). Additionally, new requirements for banks capitaladequacy with Basel III.Tax complexity adds to difficulty of making locationaldecisions.ppraisals and selectionnd upgradesms migration and integrationesign and implementationght through processing,wsessmentserating model designevelopment Demand for advanced trading riskmanagement solutions. Balance the need for increasedorganisational efficiency withthe risk of excessive cost cuttingin support functions; reduce costswithout increasing operational risk.IT and technology implications Increased cost pressure on the ITfunction. Limited capital investmentin core systems and infrastructure,and focus on removing cost from theIT organisation including reviewingIT support and delivery operatingmodels. IT focus on regulatory requirements,critical upgrades, systemsremediation, stabilisation andconsolidation, or supporting changesin trading business and operatingmodels. Data management and analytics.Governance & ControlRegulation & ComplianceGovernance, policies and internal controlDerivative legislationREMIT, EMIR, MiFID II, FinfraG, Dodd‑Frank D elegation of Authority review to check if transparentallocation of authority from top level down tooperational business units P olicies mapped to governance, business strategy andrisk appetite L imits structure (volume, greek, VaR PaR, credit) andconsistency assessment against commercial mandates Internal audit co‑sourcingRisk reporting R eporting risk and performance, integration withfinance/accounting processes E nterprise risk management adapted to governanceframework (e.g. book structure, trading accountingtreatment) Readiness assessments Transaction repository (TR) reporting assistance Post implementation reviews S trategy – knock on impact of transacting incommodity marketsCompliance Fraud and market manipulation assessments Compliance with regulatory reporting requirements

The questions our clients are askingUtilities&GaCsCommodity regulation/complianceassessmentCan you help us design the right compliancemodel for our business?lOiRisk practices and committee benchmarkCan you assess and improve our approach tocapital allocation?Digital strategyHow can digital technology better enable ourbusiness?OETRM system implementationCan we improve our trading systems, decreaseour operational risk and enhance our riskmanagement capabilities?s Traders,Could you help us rationalise our risk governanceand committee structure?Market riskCan you validate our VaR model?Define Target Operating ModelCan you help us move our trading business towards industry bestpractice?Review of option pricing modelHow can we benefit through a third party assessment of our internalpricing and valuation methodology?NProcess and control reviewDo we have appropriate risk management practices? Have we set up anoptimal internal control structure?Trade life-cycle benchmarkingCan you benchmark our deal flow processes andprovide focused guidance for enhancement?Commercial and financial due diligenceCould you bring deep industry insight to ourfinancial and acquisition teams?Acquisition searchCan you help us identify a strategic acquisitionopportunity in our key markets?Target Operating Model and roadmapHow do we integrate multiple, acquiredgeneration assets and develop a unifiedportfolio trading approach?Ener gry TradesQuantitative credit pricingCan you benchmark our quantitative credit methodology and give us aroadmap to enhance our overall capabilities?Market entry strategy and commercial due diligenceWhat is the best strategy for entering a new market based on our assetand transacting profile?Badsnks& FunOrganisation structure reviewCould you provide guidance on a potentialorganisation restructuring to create a YieldCo?What additional value can we realise through a potential acquisition?Risk and valuationCan you challenge our commodity priceassumptions?Commodity Risk AnalyticsFinance, Treasury & CreditHedging and optimisationFinance Hedging strategy assessment and risk appetite definition Financial reporting processes and solutions E nd–to‑end design: strategy, quantitative risk exercise, hedgingmodel application, integration between procurement, treasury andaccounting Integration of trading, finance and accounting systemsQuantitative risk methods and modelling Data analysis, forward curve simulation Risk metrics implementation Quant operating model design and benchmarkingModel development and validation Methodology selection and implementation Specification, accuracy and documentation checkMarket data and predictive analytics Modelling market behaviour Risk management and valuation implicationsRenewablesHedge accounting support Hedge accounting and fair value reporting (IFRS 9, 13)Treasury and capital management Treasury related risk management (FX and interest rate) Cash and liquidity management Treasury technologyCredit Exposure management Credit risk governance Analytics and quantitative measurement

Setting prioritiesREGULATORYEMIR, Remit, Dodd-Frank, FinfraG – Regulatory complexityfor transacting in the derivative markets has never beenhigher. Reporting obligations are becoming increasingly complexwhile penalties for non-compliance are substantial. Deloitte hasdeveloped a commodity specific regulatory reporting frameworksupported by a set of agile data management and tools to helpcompanies meet their compliance and regulatory reportingobligations. Our focus is on helping companies establish anefficient, flexible and scalable capability for managing thesechallenges. We maintain a multi-disciplinary team of commercial,risk, compliance, legal and system resources specialists to ensurewe remain current with evolving regulatory requirements and theirpotential impact on trading strategies.TECHNOLOGYMost commodity traders have spent heavily on their energytrading and risk management systems, yet few companies aresatisfied they are actually realising the full benefits of theirinvestment. As trading models evolve, assets are acquired orsold and reporting and risk capabilities change, existing systemscannot keep up. As a result, system work‑arounds or spreadsheetsbecome the predominant alternative solution. Deloitte hasa dedicated commodity technology practice focused onhelping traders design the right technology solution for theirbusiness. We look beyond the core CTRM in the design of agilesolutions leveraging the newest technologies to facilitate fastertrader decision making, enhanced risk modelling capabilities andmore responsive reporting.OPERATIONAL EXCELLENCEUnder ever increasing pressure on margins, commoditytraders have a renewed focus on operational excellence andcost containment. Many leading organisations have borrowedtechniques from lean six sigma as a means of optimisingtransactional process performance while driving out cost.Reducing transactional processing errors, leveraging better useof existing technologies, rationalising commercial strategies andenhancing focus on capital deployment, are all activities currentlybeing undertaken by market participants in the design of leanerbusiness models focused on managing costs and enhancingreturns. Deloitte has helped many commodity traders with thedesign and implementation of new business models. Reducingcosts without comprising the organisation’s risk managementcapabilities is key to our approach.