• Background to risk management as a credit component

    Banks increasingly insist on risk management as a credit component. As every trader or exporter knows, depending on just the futures markets for this can be quite restrictive (specifications, timing, financial requirements). Using futures does not always fit the bill for traders or their banks, or simply might not be possible. As a result more and more 'off market' risk solutions are being created by the banks themselves, tailored to the individual client's requirements. Such individual packages can include facilities for the automatic financing of margin calls, for example, when an exporter sells PTBF 'buyer's call' to an importer or roaster on the bank's 'approved list' and wants to hedge (sell futures) to protect their base price.

    For larger deals and more important clients the main commodity banks often create such risk solution packages in-house. They do not necessarily offset these against the futures markets but rather do so independently 'over the counter', sometimes even in-house. This may also be done at the request of the importer or roaster rather than the exporter. This can be important for exporters who otherwise may be unable to trade directly with large roasters who insist on buying PTBF 'buyer's call'. The golden rule here is that the more the bank is involved in a transaction, for example if it is financing both the exporter and the receiver, the easier it will be to have access to such tailored credit or risk management packages. But banks will never provide such facilities for transactions with unapproved buyers: should there be a default the bank's loss could be double.

    Obviously all this comes at a cost but at the same time it enables exporters at origin to compete on a more equal footing with the international trade. Once they can hedge their price risk, they will also be able to sell directly to roasters who habitually purchase 'buyer's call'.

    The audit trail must always be clear and dependable, though. Much depends therefore on the quality of the control systems that are in place, their ability to prevent fraud, and whether or not the fraud risk is insurable.
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