Event notes: Are local and global players adapting to a “new normal”?28 February 2017
Are local and global players adapting to a “new normal”?
Learn how top trading houses are adapting to today’s low pricing, high liquidity climate
• Explore differences and similarities between regional and global traders’ strategies
• Learn what their plans are for growth in 2017
Panel timings: 9.50-10.40, 28th February.
General topics for discussion:
1) The “Trump effect” on trade: General discussion of geopolitical uncertainty across the world to “set the scene” but perhaps not in too much detail
2) How do trading houses adapt to pricing volatility: Unexpected bull market; prices a fraction of what they were mid-2014 but still rebounding from the crash. Hard to predict. What strategies to mitigate that uncertainty?
3) How do regional & global trading houses compare with one another in their financing strategies: Is new technology closing the gap between global & local players, allowing local firms to have global reach, and global firms to gain local on-the-ground knowledge?
4) Regulation: Which regulations are affecting trading houses – from ones that directly apply to them like MiFID II and KYC requirements, to ones applying to banks but indirectly affecting traders, like Basel III/IV? Are trading houses doing anything differently now from what they were 12 months ago?
Event notes and opinion:
1) The trump effect: From early comments, we do know that Trump is not a fan of trade deals and liberal immigration policy as these are inequitable and unfavourable for the US.
a. The impending actions on US trade policy, infrastructure and defence spending, reversal of environmental policies, and tax cut policy has created uncertainty for international trade, transportation, finance, investments and financial markets. Most also companies fear trade protectionism and restrictive movement of talent thus a wait-and-see approach before making investment decisions.
b. Protectionism will not work in the long run and that any measures taken by the US will lead to retaliation. Tit-for-tat trade war is likely though it will be harmful for everyone including US and its trading partners like China, Germany/EU, Japan, Mexico, Korea, EU, India and other countries will certainly suffering collateral damage.
c. There are plentiful opportunities available outside of US to trade, invest and grow. However, if protectionism becomes a problem the question that will emerge - will countries and companies pursue opportunities outside the US and/or make structural changes to increase the depth of their local markets? Will we see regional and bilateral trade pacts? Is China likely to provide more benefits and open up its economy?
2) Managing volatility and uncertainty:
a. Volatility is good for business - it creates arbitrages, risk and opportunities that experienced trading houses and its managers can capitalise to enhance profitability however uncertainty and lack of direction isn’t good for overall business environment that throws as investments, trade, and new initiatives take a pause. During uncertain times, companies must prospects opportunities to build capability, invest in technology and prepare for change as they throw up opportunities and /or risks.
b. If the Trump agenda of lower taxes, increased infrastructure spending and more protectionist trade policy proves to be inflationary as we expect, US interest rates and bond yields are likely to be headed higher disrupting company policies.
c. The 'Trump effect' will soon be a passé but will create market disruptions, dislocations and arbitrage, risks and opportunities for business. Overall outcome will be good for US economy if Trump administration focuses on structural changes to US economy, developing manpower, R&D, education and skill upgrades and technology (rather disrupt international business) that will have a long term positive impact.
d. New technology like shared economy and resources, uberization, block chain, artificial intelligence and robortization, autonomous vehicles, bio-engineering, space technology, etc. will be a bigger disruption for both corporate and government. These technological changes that are at early stage adaption will have to be managed and leveraged by corporations and countries as change will impact people and customer's behaviours, market expectations, and and create new opportunities and risks.
e. If protectionism grows, countries and companies will have to gear up for any change, build regional alliances and develop other markets, and also take advantage of cost (labour and profit) arbitrage opportunities that US economy will eventually throw up.
f. Corporations and talent will have building capabilities and competencies, adapt an ‘inside out, outside in’ approach, de-risking and/or proactively manage risks and seize opportunities, become agile and nimble, align organisation around focusing on customers, innovation and continuous improvements, engaging and managing talent, building reputation and brand, and seize opportunities and arbitrages in order to prepare for the next phase of opportunities and risks. Building capability, de-rising, deleveraging and investing in technology and talent will ensue long term sustainability of business, managing of risks, and harnessing of opportunities and arbitrages.
3) Hedging strategy:
a. The simple answer is to stay hedged, manage and mitigate risks for back to back or self liquidating or netting traded positions, protect profits and cash flows using appropriate market and credit risk management policies, governance, strategies and VaR methodology.
Price volatility is a function of market sentiment, which is short term in nature. Integrated houses have on-the-ground sight (literally) of the economic and macro fundamentals affecting the specific commodity industry in which they trade or manufacture or mine or extract. Focusing for the longer term by operating our resources/assets well and building strong relationships with customers and suppliers particularly in destination origination markets respectively allow companies to continually strengthen its core business and resulting operating margins. Teams are equipped to take advantage of short term market dislocations in commodities prices within the governance of an effective liquidity and risk management framework that embeds oversight, control and discipline at the most senior level.
b. It is tricky for plantation, extractions, mining and agricultural produce companies to hedge its production hence a combination of short dated rolling hedges or open positions linked to macro-economic environment and competing products (complex) becomes the key to preserve short term profitability/cash flows and at the same time mitigate risk of opportunity loss.
4) Cross border funding: Functional currency, cross border regulations, capital markets access, and/or access to international bank funding are key to cross border financing strategies for local houses.
a. Global houses do have an edge as they are able to leverage global relationships and credit rating for accessing local funding from branches of international bank at competitive rates and/or local capital markets using global umbrella facilities or credit rating. Funding for local SME's is restricted to local banks given their credit quality, relationships, local functional currency, and regulatory restrictions.
b. Having said that, regional players with global aspirations now have in-depth local market knowledge at its disposal from its partners and talent which helps the to play a valuable role in providing access to its local banking partners (like Mandiri bank, BOC, etc.) in bilateral financing opportunities for its global trading activity. On the flip side these regional players also helps global banks to tap access to local banking markets and local banking and business knowledge.
c. Technology partners, bankers, Exim banks/ECA’s, legal counsels, rating agencies, insurance companies, training and conference partners, and international talent etc. have been instrumental in helping companies to gain knowledge and comply with regulations, providing trade related information, solutions and services; provide international banking, financing and risk mitigating solutions and services; provide access to technology, financing, strategies and policies that bridges the gap and create convergence in financing global houses and local SME’s operations.
Banks and insurance company have also helped SME’s leverage on information technology to structure structured-risk-return supply chain financing solutions that have become “quasi-long term low risk financing solution” for SME’s and banks example: reverse factoring, insurance enhanced prepayments, etc.
d. Development of Fintech particularly in global commodity trading will reduce costs of managing financial operations along the logistics chain and ultimately increase the efficiency of fund flows, which means potentially lower cost of funds.
5) Regulatory compliance: Compliance is a given for business and is non-negotiable for business and its reputation. Customers, banks and stakeholders now demand financial, tax, environmental (and carbon neutral), social and sustainability compliance.
a. Regulatory and tax compliance has widened which has increased cost of compliance, investment in technology; cost of funding, expenses and regulatory risks are passed on to business which requires detailed scrutiny of documents. In many local markets there is heightened scrutiny around cross border transactions, transfer pricing, etc.
b. Trading houses that are end-users of global derivative markets are facing increased scrutiny from exchange and market regulators (for e.g. as part of Dodd Frank) though in the post-Trump era this may be alleviated temporarily.
c. Global banking relationships also require us to operate in close step with MIFID, AML and Basel requirements.
d. Sustainable practices enhance competitive advantage, brand reputation and shareholders value.
Learn how top trading houses are adapting to today’s low pricing, high liquidity climate
• Explore differences and similarities between regional and global traders’ strategies
• Learn what their plans are for growth in 2017
Panel timings: 9.50-10.40, 28th February.
General topics for discussion:
1) The “Trump effect” on trade: General discussion of geopolitical uncertainty across the world to “set the scene” but perhaps not in too much detail
2) How do trading houses adapt to pricing volatility: Unexpected bull market; prices a fraction of what they were mid-2014 but still rebounding from the crash. Hard to predict. What strategies to mitigate that uncertainty?
3) How do regional & global trading houses compare with one another in their financing strategies: Is new technology closing the gap between global & local players, allowing local firms to have global reach, and global firms to gain local on-the-ground knowledge?
4) Regulation: Which regulations are affecting trading houses – from ones that directly apply to them like MiFID II and KYC requirements, to ones applying to banks but indirectly affecting traders, like Basel III/IV? Are trading houses doing anything differently now from what they were 12 months ago?
Event notes and opinion:
1) The trump effect: From early comments, we do know that Trump is not a fan of trade deals and liberal immigration policy as these are inequitable and unfavourable for the US.
a. The impending actions on US trade policy, infrastructure and defence spending, reversal of environmental policies, and tax cut policy has created uncertainty for international trade, transportation, finance, investments and financial markets. Most also companies fear trade protectionism and restrictive movement of talent thus a wait-and-see approach before making investment decisions.
b. Protectionism will not work in the long run and that any measures taken by the US will lead to retaliation. Tit-for-tat trade war is likely though it will be harmful for everyone including US and its trading partners like China, Germany/EU, Japan, Mexico, Korea, EU, India and other countries will certainly suffering collateral damage.
c. There are plentiful opportunities available outside of US to trade, invest and grow. However, if protectionism becomes a problem the question that will emerge - will countries and companies pursue opportunities outside the US and/or make structural changes to increase the depth of their local markets? Will we see regional and bilateral trade pacts? Is China likely to provide more benefits and open up its economy?
2) Managing volatility and uncertainty:
a. Volatility is good for business - it creates arbitrages, risk and opportunities that experienced trading houses and its managers can capitalise to enhance profitability however uncertainty and lack of direction isn’t good for overall business environment that throws as investments, trade, and new initiatives take a pause. During uncertain times, companies must prospects opportunities to build capability, invest in technology and prepare for change as they throw up opportunities and /or risks.
b. If the Trump agenda of lower taxes, increased infrastructure spending and more protectionist trade policy proves to be inflationary as we expect, US interest rates and bond yields are likely to be headed higher disrupting company policies.
c. The 'Trump effect' will soon be a passé but will create market disruptions, dislocations and arbitrage, risks and opportunities for business. Overall outcome will be good for US economy if Trump administration focuses on structural changes to US economy, developing manpower, R&D, education and skill upgrades and technology (rather disrupt international business) that will have a long term positive impact.
d. New technology like shared economy and resources, uberization, block chain, artificial intelligence and robortization, autonomous vehicles, bio-engineering, space technology, etc. will be a bigger disruption for both corporate and government. These technological changes that are at early stage adaption will have to be managed and leveraged by corporations and countries as change will impact people and customer's behaviours, market expectations, and and create new opportunities and risks.
e. If protectionism grows, countries and companies will have to gear up for any change, build regional alliances and develop other markets, and also take advantage of cost (labour and profit) arbitrage opportunities that US economy will eventually throw up.
f. Corporations and talent will have building capabilities and competencies, adapt an ‘inside out, outside in’ approach, de-risking and/or proactively manage risks and seize opportunities, become agile and nimble, align organisation around focusing on customers, innovation and continuous improvements, engaging and managing talent, building reputation and brand, and seize opportunities and arbitrages in order to prepare for the next phase of opportunities and risks. Building capability, de-rising, deleveraging and investing in technology and talent will ensue long term sustainability of business, managing of risks, and harnessing of opportunities and arbitrages.
3) Hedging strategy:
a. The simple answer is to stay hedged, manage and mitigate risks for back to back or self liquidating or netting traded positions, protect profits and cash flows using appropriate market and credit risk management policies, governance, strategies and VaR methodology.
Price volatility is a function of market sentiment, which is short term in nature. Integrated houses have on-the-ground sight (literally) of the economic and macro fundamentals affecting the specific commodity industry in which they trade or manufacture or mine or extract. Focusing for the longer term by operating our resources/assets well and building strong relationships with customers and suppliers particularly in destination origination markets respectively allow companies to continually strengthen its core business and resulting operating margins. Teams are equipped to take advantage of short term market dislocations in commodities prices within the governance of an effective liquidity and risk management framework that embeds oversight, control and discipline at the most senior level.
b. It is tricky for plantation, extractions, mining and agricultural produce companies to hedge its production hence a combination of short dated rolling hedges or open positions linked to macro-economic environment and competing products (complex) becomes the key to preserve short term profitability/cash flows and at the same time mitigate risk of opportunity loss.
4) Cross border funding: Functional currency, cross border regulations, capital markets access, and/or access to international bank funding are key to cross border financing strategies for local houses.
a. Global houses do have an edge as they are able to leverage global relationships and credit rating for accessing local funding from branches of international bank at competitive rates and/or local capital markets using global umbrella facilities or credit rating. Funding for local SME's is restricted to local banks given their credit quality, relationships, local functional currency, and regulatory restrictions.
b. Having said that, regional players with global aspirations now have in-depth local market knowledge at its disposal from its partners and talent which helps the to play a valuable role in providing access to its local banking partners (like Mandiri bank, BOC, etc.) in bilateral financing opportunities for its global trading activity. On the flip side these regional players also helps global banks to tap access to local banking markets and local banking and business knowledge.
c. Technology partners, bankers, Exim banks/ECA’s, legal counsels, rating agencies, insurance companies, training and conference partners, and international talent etc. have been instrumental in helping companies to gain knowledge and comply with regulations, providing trade related information, solutions and services; provide international banking, financing and risk mitigating solutions and services; provide access to technology, financing, strategies and policies that bridges the gap and create convergence in financing global houses and local SME’s operations.
Banks and insurance company have also helped SME’s leverage on information technology to structure structured-risk-return supply chain financing solutions that have become “quasi-long term low risk financing solution” for SME’s and banks example: reverse factoring, insurance enhanced prepayments, etc.
d. Development of Fintech particularly in global commodity trading will reduce costs of managing financial operations along the logistics chain and ultimately increase the efficiency of fund flows, which means potentially lower cost of funds.
5) Regulatory compliance: Compliance is a given for business and is non-negotiable for business and its reputation. Customers, banks and stakeholders now demand financial, tax, environmental (and carbon neutral), social and sustainability compliance.
a. Regulatory and tax compliance has widened which has increased cost of compliance, investment in technology; cost of funding, expenses and regulatory risks are passed on to business which requires detailed scrutiny of documents. In many local markets there is heightened scrutiny around cross border transactions, transfer pricing, etc.
b. Trading houses that are end-users of global derivative markets are facing increased scrutiny from exchange and market regulators (for e.g. as part of Dodd Frank) though in the post-Trump era this may be alleviated temporarily.
c. Global banking relationships also require us to operate in close step with MIFID, AML and Basel requirements.
d. Sustainable practices enhance competitive advantage, brand reputation and shareholders value.
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