The Modern Commodity Trading Lifecycle: How Technology is Transforming Business Processes
Sinara explains how she is leveraging her software expertise to overhaul and modernize business processes that have traditionally focused on outdated and less efficient manual touchpoints
One of the companies participating in the London Metal Exchange’s LME October week is Sinara, a company that has undertaken a lot of work around metals trading systems at different stages of the trading life cycle.
Sinara has also built systems that manage trade processes for agricultural commodities, for example, agricultural futures, wheat contract management, and trade finance.
Commodity traders are realizing that they can take advantage of technological advancements to digitize the commodity trading lifecycle. Technological innovations enable a more connected value chain with more communication and collaboration, smarter decision-making, faster implementations, better access and greater flexibility. But essentially, technological innovations enable them to improve business processes and increase value. Software specialists such as Sinara are using technology to help transform and modernize a set of business processes that, even today, tend to be more paper and phone-centric, or have many points of manual contacts.
The start of the business lifecycle
Whether placing a buy or sell order, the process can be improved early in the commodity trading lifecycle. Traditionally, you could place an order over the phone with your broker, for so many tons of copper, for example. But, according to Hamish Adourian, Head of Sales and Marketing at Sinara: “Brokers and exchanges are under heavy pressure to modernize business processes. There’s a whole new generation of traders waiting for new web and mobile apps, and brokers and exchanges are trying to introduce these kinds of digital tools,” he explains. “For more established businesses that already process large volumes of financial transactions, the challenge is to manage them while transforming their technology to compete with fintech startups.”
For these startups, there is a lot of interest in bringing commodities to exchanges that have traditionally been traded over-the-counter. They are looking for more efficient digital ways to trade these commodities where there has not been much transparency until now.
“Nobody really knows what the volumes are, and there’s no set price,” says Adourian, “as is the case with exchange-traded metals like copper or aluminum, for example. So there are a lot of challenges in bringing these kinds of products to the new digital market. »
Effective use of collateral is an important aspect of starting the commodity derivatives trading process. Investors and brokers want to minimize margins in order to have free collateral to make more trades. “But market pressure to cut margins has to be balanced by regulatory pressure for higher margins,” says Adourian. “This is where different algorithms and pricing models such as value-at-risk have come into play to try to improve collateral allocation,” he adds. “And companies are exploring how they can implement this into their business systems.”
Reduced settlement times
Due to manual or paper-based processes, settlement is an area where there are traditionally long delays. The intense market volatility at the start of 2020 due to the Covid-19 pandemic particularly highlighted the problems caused by delays in settlement times, which meant that traders were unclear about the status individual trading or on their overall positions.
“The execution of the transaction until its completion can often extend over a period of several days,” explains Adourian. “Transferring funds and property, especially if you are in different countries, would require sending actual documents. So there is a lot of pressure to reduce settlement times. A really important area where Sinara sees a lot of interest is the technology to do this in a fast and secure way, where trust is always maintained between buyer and seller.
Prove ownership and provenance
For trade finance purposes, it has been difficult to prove ownership of more established products, where there has been a lot of paper-based activity in the past. “Companies want to digitize the title of their merchandise and then transfer it securely to a bank, so they can take out commercial loans faster,” says Adourian. “There’s a lot of work to be done to transform this kind of business process and a lot of interest in creating new technologies that can support this.”
And then there is the environmental, social and governance aspect of trade finance. Some banks will only consider making a loan based on a commodity if they can be assured that its provenance is completely safe. Maintaining the virtual paper trail of a product’s origin becomes very important. “If you’re buying anything that’s been mined, in particular, like gold, they want to make sure the working conditions for miners are safe and legal, for example,” Adourian says. And, with the introduction of green contracts, there is also the carbon footprint to watch.
“For example, a commodity trader may need to prove that their aluminum was melted using low-carbon processes. Companies are therefore looking for ways to show the market and reassure traders that their products are safe. Companies like Sinara are helping to provide the technology needed to make all these new business initiatives happen.
Secure delivery and release
The end of the commodity trading life cycle is the most physical aspect of delivery. A trader may have purchased wheat, which is stored in silos in France or Belgium, for example, and wishes to release it safely and have it delivered to another warehouse or place of consumption. Managing this securely requires thoughtful solutions.
“The process needs to be hacker-proof, so the warehouse can be absolutely sure that it is delivering the goods to the right person and the right delivery company, and that they are going to the right place. And all this must be followed. There are now digital tools to manage this process efficiently, whereas in the past they had to send signed documents back and forth and it took a long time to be able to release the goods,” says Adourian.
No need to build from scratch
Sinara works with businesses to truly understand the requirements and then creates a software solution that can support them in any area they seek to address, whether it’s improving business efficiency or creating something new for the market. Whether it’s a new web tool, a new mobile application, a new pricing tool or a new algorithm, for example, Sinara has a set of predefined components for the derivatives trading life, which it can use to accelerate the delivery of these new solutions. . Adourian adds, “We’re not building from scratch, although it’s always bespoke solutions, and companies reap all the benefits.”
Sinara will also work, if necessary, with the company to integrate any new solution with the THIS systems already deployed and in use.
Sinara has a caveat about the technologies available to handle commodity trading. “There is a lot of talk about how blockchain technology can help solve many of these issues, such as maintaining digital paper trails, provenance, etc. That’s all well and good, but companies need to be careful when buying technology and only then start thinking about how to integrate the technology into the solution they want to build. They should first think about the business process and what they need to accomplish, then consider whether blockchain is what they need. There may be other technologies that could offer better and more cost-effective solutions rather than jumping on the blockchain bandwagon.