Risk Management

Managing commodity risk across the supply chain

Published: Sep 2011

Environmental pressures, extreme weather events, uneven supply and demand and the political landscape – all causes of volatility in the commodity markets and all potential risks for treasurers to manage. OpenLink’s front to back office treasury and risk management system (TMS) gives corporations the tools and the knowledge to measure, manage and mitigate those risks.


Commodity prices can have a significant impact on a corporation’s performance, and recent market volatility is a cause for concern. Prices of foodstuffs, such as wheat, have spiked in recent years for unexpected reasons – dry Russian summers and Indian export bans, for example – whilst others like cocoa and key industrial materials such as oil have risen and fallen again on the back of political turmoil in north and west Africa. Meanwhile, the backdrop to this is growing demand for a huge range of materials from China and other emerging market giants.

The breakdown of corporate ‘silos’ means the treasury function is increasingly responsible for monitoring overall risk exposures, including commodity risk. As a result, integrated solutions which monitor risk exposures and their impact on the business are required. Furthermore, the ability to take action to mitigate and hedge these exposures should be available within the same centralised system to ensure maximum efficiency.

Chart 1: Commodity futures prices


Chart 1: Commodity futures prices, Rebased

Source: www.fao.org

The right tools for the job

OpenLink offers a single treasury and risk management product, which benefits from a high level of versatility. Configurable for all operations, whether the focus is in financial and capital markets operations or the commodity and energy markets, OpenLink’s system is used to manage physical and financial commodity transactions throughout their entire lifecycle, including:

  • Advanced analytics for physical and financial risks, covering forecasts, raw materials, credit ratings of suppliers, operating expenses, budgets and hedged positions to build a comprehensive picture of risks and exposures.
  • Adaptability and flexibility as treasurers respond to increased regulation and reporting requirements. Dodd-Frank rules, forexample, will impact companies doing US business by moving the trading of derivatives used for hedging onto exchanges.
  • A straight through processing and transaction management environment allowing complete transparency and auditability for each and every aspect of a corporation’s commodity transaction lifecycles. The centralised and fully integrated nature of the system creates a clear, clean audit trail, detailing every aspect of trades made and any other actions taken.

The platform gives visibility over the whole supply chain process, end-to-end. At a time of volatility in the commodities market, that can only be of great assistance to the treasury department.

Unstable volatility

Chart 2: Bulk commodities
Chart 2: Bulk commodities

Source: www.fao.org

Chart 3: Dairy commodities
Chart 3: Dairy commodities

Source: www.fao.org

Chart 4: Raw materials
Chart 4: Raw materials

Source: www.fao.org

Implementation and customisation

The solution can be delivered in a number of ways, via ASP/hosted, or locally installed by the client. Most customers typically deliver the application to users via a thin client (eg Citrix), giving them the ability to provide global users with access to the application, via either mobile devices (eg iPad) or computers. This allows easy access, and controls are implemented from within the application – the customer has the ability to select which users have access to which specific functionality without needing to involve the vendor, allowing them to grow their use of the system as their business demands it.

Designed to boost automation in the treasury, OpenLink’s platform integrates with ERPs and other systems to minimise manual data entry and re-keying. The aim is to provide decision makers with the information they need to add value to the business. For companies with less need for constant updates and smooth automation, the system also allows data and other information to be uploaded/downloaded on a regular basis, as required, in either an ad hoc or automated fashion.

Diagram 1: OpenLink’s solutions for treasury management


Portrait of Richard Childes

Richard Childes


What are the major challenges treasurers are facing in the commodities space today?

Every business that produces goods has exposure to the volatile commodities market – whether it is grains, oil, metals – all of these corporations are at risk. In some markets, like the airline industry, the rising costs can be passed onto the consumer in the form of, for example, fuel surcharges. But that is not always an option: basic foodstuffs cannot be increased in price as commodities become more expensive without a major impact on society. This is not just about profit and loss for traders – these price changes have a very strong impact on real people.

We allow treasurers to manage the firm’s risks across asset classes, enabling them to better monitor risk and view exposures, all within the setting of their business forecasts and budgets.

All transactions can be shown alongside the business forecasts and exposures in real-time, allowing treasurers a clear view of their current positions and the status of all trades.

Treasurers want really useful, high quality output from their systems, rather than having to spend time re-keying and managing inputs. OpenLink can interface with a huge range of systems, from ERP to deal execution systems, all as part of a flexible framework, allowing data to be sucked in or pumped out easily, in real time if required, and in the required formats. There are as few re-keyings as possible, saving time and minimising potential for error.

OpenLink can be used as a platform for hedging and trading. For example, the trade orders can be entered in OpenLink, interfaced through to and executed in an online dealing portal system like FXall or 360T and reported back into the OpenLink systems in a completely automated manner.

All transactions can be shown alongside the business forecasts and exposures in real-time, allowing treasurers a clear view of their current positions and the status of all trades. That covers all asset classes treasurers need to see – fixed income products like money market funds, interest rates, swaps, options, equities, futures; right through to hard and soft commodities, energy, power, gas, and so on, within the same system. The required categories can be selected and shown in real-time, whilst unnecessary ones can be hidden from view.

In one deal ticket, OpenLink’s system can capture all of the inputs required. To take the example of a business manufacturing and packaging a product, those might include the power and raw materials to make the required packaging and also the conversion of the raw materials for the finished product, as well as transportation inputs and associated costs. All of those constituent parts can be monitored through the whole process and hedged appropriately, through a single transaction, allowing the business to manage forecasts and budgets based on end products, rather than constituent parts.

Constituent parts can be monitored through the whole process and hedged appropriately, through a single transaction, allowing the business to manage forecasts and budgets based on end products, rather than constituent parts.

What are the system’s additional key features?

Market and credit risk checks are available as standard in real-time. Counterparty limits can be checked both pre- and postexecution, giving users the ability to see where limits are still available for the particular trades, and on execution you can block trades with counterparties which are very near their limits, if required. Any number of combinations of limits can be configured by users.

All of the downstream, back office processing is managed – the resets happening on, say, floating commodity trades can happen automatically as trades move through their lifecycle. Payments and confirmations, invoice reporting and forecast updates can also all be managed in the system, enabling centralised viewing of the firm’s positions in real-time.

Suiting each treasury’s needs

A common criticism of software as a service (SaaS) systems is that they are very much ‘what you see is what you get’. “That might suit some treasurers, and keeps costs down for the vendors, but is an inflexible approach to providing treasury solutions,” says Richard. OpenLink’s service, however, is completely configurable. For example, a company which does not need the capability to hedge energy does not have to buy the licence for that aspect of the service. If their requirements change, they simply need to contact OpenLink to ask for a licence key to be sent over. The functionality is then enabled with no technical installation required. As this is one complete system, no feature is inaccessible and all features integrate with each other smoothly and seamlessly.

Indeed, the cross asset-class nature of the system means this configurability is vital to usability. A treasury is unlikely to need all of the commodities, equities and other instruments so they can be removed from view, meaning that the system is not cluttered and does not look more complicated than it needs to be.

“The system can be pared down to just one button which takes you to everything you want, or you can have, say, five buttons depending on the role you are performing at the time,” explains Richard. “When new features are licensed they can be configured to the treasurer’s specific needs and aims at the time.”

“During the implementation phase, treasury staff are taught how each relevant task is conducted, when and why, how to control the tools and how to use the permissions they have.”

Training the trainers

To get the most from any system, internal resources must be used – but OpenLink makes sure these resources are put to the most efficient use. During the implementation phase, treasury staff are taught how each relevant task is conducted, when and why, how to control the tools and how to use the permissions they have. This is a vital step, allowing the treasury to stand alone without needing regular help from OpenLink once the system goes ‘live’. It also means that the treasury can further add functionality/configuration as the business develops.

User support groups exist too, with online ‘intercoms’ where customers can talk to each other to discuss common questions. OpenLink has established similar forums for specific groups of users with certain sets of requirements, so the wider community can become involved in a directed and easy to use way.

Support is still offered directly by OpenLink, though, with customer teams based in Vienna and New York. Customers can interact with these teams via web portals, email or phone. Every customer is assigned an account manager who has a strong knowledge of their implementation, the uses to which the system is usually put, and the most popular features. This strong and detailed relationship allows the most appropriate member of the OpenLink team to be assigned to any specific issue the corporate would like to address.

In addition, “OpenLink allows treasurers to manage risks across the whole supply chain, monitoring exposures alongside cash flow forecasts and hedged positions to give maximum visibility – at a time when these capabilities have never been more vital.”

Founded in 1992, OpenLink is a provider of cross-asset trading, risk management, related operations processing and portfolio management software solutions for the commodity, energy and financial services markets globally.

OpenLink’s client base of more than 460 customers worldwide includes 12 of the top 25 largest commodity and energy companies by market capitalsation, eight of the largest financial institutions and 11 of the largest central banks, as well as major hedge funds, commodities companies and public utilities.

Headquartered on Long Island, New York and with offices in New York City, Houston, London, Berlin, Vienna, São Paulo, Sydney, Singapore, Moscow and Toronto, OpenLink has more than 1,000 employees worldwide.

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