CTRM’s vs the Real World

Why do these two behave like an old couple? They can’t live without each other, but are in constant disagreement.

Anyone active in the commodities industry has experienced an ongoing battle between satisfying their in-house system and describing the reality of a transaction.

Commodity trading and risk management software (CTRM) has become increasingly important, to monitor and mitigate inherent transactional risks. It is expected to cover the different stages of any possible transaction in the most reliable and efficient way. It combines the available data of each trade from a commercial, operational and financial point of view.

What such software packages don’t do is to automatically describe real life events. While it is extremely important to have a clear internal view, to make educated decisions and draw future strategies, it is equally important to bear in mind that:

• Most items of data in these systems have come from a manual input or processed by manual actions — CTRM’s reduce manual work, but don’t eliminate it
• Once in a computer system, information looks precise and gets treated as accurate and complete
• However, the “real world” outside is inherently messy, imprecise, and subject to multiple interpretations

Another major source of uncertainty comes from the fact every company uses different software, and very often the system capabilities (or lack thereof) will lead to implementing company specific internal processes and workarounds, aimed at satisfying the requirements of different departments.

As a consequence, basic concepts such as ownership of the cargo or the split of costs between parties are subject to discussion even within organisations and are not as obvious as they should be.

For a Commercial, the moment the cargo is sold, it needs to be identified as such. However, Operations will need to see the cargo until delivery. Treasury will follow the transaction until payment is received. And accounting will only regard it as done once a final financial result of the whole operation is determined and all financial aspects have been satisfactorily checked and reconciled. Each data point recorded in these systems reflects the best compromise between departments.

Add on top the many real-life complications such as contradictory clauses between Incoterms, the contracts issued and varying regional accounting rules, and it is easy to picture how two companies will have a quite different judgement of the terms of each transaction.

When on the topic of multiple contracts, note that there can be several for a single trade. It’s quite common for both parties to send each other separate paper contracts, each unilaterally signed, and each said to govern the whole transaction. However, these paper contracts will not set the same terms. Even though the main commercial clauses tend to be equivalent, everything else may differ. In other cases, alternative contract versions may be sent back and forth for weeks after the deal is concluded.

To add to the complexity, it is currently rare to have information in real time. Since there is no connection between the numerous external parties involved over the life of a transaction and the internal stakeholders within any specific organisation, the information reaching the appropriate groups will inevitably need to be queried, gathered, input and finally processed. Querying and gathering information will be done via phone, email and sometimes chat. Then it is input manually in the respective trading systems, which hopefully will then process the information automatically.

A new transaction or the ETA of a cargo may take more than a week to reach all departments involved within two companies who are transacting together.

Technology such as blockchain, if used correctly, is able to eliminate this dichotomy between the fast-paced and competitive external environment, and the slow and cumbersome (but important) internal treatment of the business.

At TradeCloud we aim to provide a digital bridge connecting the external and internal communication. By generating a mutually digitally signed contract immediately upon acceptance, we provide one agreed version of the truth. TradeCloud can provide the same data to both parties for further internal inputs, which can be automated and eliminate human error or interpretation. This digital contract is the perfect starting point for post-trade communications, which (supported by blockchain) can be simultaneously internal and external, finally creating a digital connection between all external parties involved and internal departments.

We call it the TradeCloud Commodities Web.

For more information, please visit www.tradecloud.sg

Contact: info@tradecloud.sg