Can Commodity Houses really unify their People, Process & Technology Landscapes & what about an “All of Industry Approach”?

Commodity companies have historically struggled to build and leverage a unified set of systems for commodity trading and finance outcomes. While some have found success, others have encountered significant challenges that have hindered their ability to realise the full potential of a unified system.

In-House

One approach that commodity companies have taken is to build a custom in-house system that is designed to handle both trading and finance outcomes. The idea behind this approach is that by building a system that is customised to the specific needs of the company, they can achieve a higher degree of integration and automation than would be possible with off-the-shelf software. While this approach can be successful for some companies, it also has some significant drawbacks. One of the main challenges is the cost and time required to develop and maintain a custom system. In addition, custom systems can be difficult to scale and may lack the flexibility to adapt to changing market conditions or new regulatory requirements.

COTS – (Commercial off-the-shelf)

Another approach that commodity companies have taken is to implement a commercial software solution that is specifically designed for commodity trading and finance. These solutions typically offer a high degree of integration between trading and finance functions, and can be customised to meet the specific needs of the company. While these solutions can be more cost-effective than building a custom system, they can still be challenging to implement and require significant configuration & customisation to meet the unique needs of the company.

Process Complexity

One of the biggest challenges that commodity companies face when trying to implement a unified system is the complexity of the trading and finance processes involved. Commodity trading is a highly complex and dynamic process that involves multiple parties, multiple commodities, and multiple geographies. Additionally, the finance function involves a range of different activities, from accounting and financial reporting to risk management and cash management. Bringing these functions together into a single system requires significant coordination and collaboration between different departments, as well as a deep understanding of the unique requirements of each function.

Despite the challenges involved, some commodity companies have been successful in implementing a unified system for trading and finance outcomes. These companies have typically taken a structured approach to the implementation process, with clear objectives, well-defined requirements, and a focus on collaboration and communication between different departments. They have also invested in training and support to ensure that users are able to effectively use the new system.

The key to success is a structured and collaborative approach to implementation, with clear objectives, well-defined requirements, and a focus on training and support for users. By following these principles, commodity companies can improve their chances of success when implementing a unified system for commodity trading and finance outcomes.

Whole of Industry Approaches

A bit of History

Prior to the development of blockchain and AI technology, there have been industry-wide attempts to develop integrated operations, trading and financial systems in the commodity industry. One notable example is the development of the Global Trading System (GTS) by the Intercontinental Exchange (ICE).

The GTS was launched in 2002 as a global platform for trading and clearing energy and commodity futures and options. The system was designed to provide market participants with a single, integrated platform for trading, clearing and risk management across a range of energy and commodity products. The platform also offered market participants access to real-time market data, analytics and reporting tools.

The GTS was a significant development in the commodity industry, as it allowed market participants to access a single, integrated platform for trading and clearing multiple products. Prior to the development of the GTS, market participants often had to use multiple platforms and systems to trade and clear different products, which was time-consuming and complex.

Despite its potential benefits, the GTS faced some challenges in terms of adoption and competition from other platforms. One of the main challenges was getting market participants to switch to the GTS from existing platforms, which often required significant investments in technology and infrastructure. Additionally, the GTS faced competition from other platforms, such as CME Group’s Globex system and NYMEX’s ClearPort system.

Overall, the GTS was a significant development in the commodity industry, as it provided market participants with a single, integrated platform for trading and clearing multiple products. However, the GTS faced some challenges in terms of adoption and competition, and was eventually merged with the ICE trading platform in 2010. Nevertheless, the development of the GTS paved the way for future industry-wide attempts to develop integrated operations, trading and financial systems, such as blockchain and AI-based platforms.

Looking Forward

There have been some attempts in the commodity industry to develop industry-wide solutions for trading and finance outcomes, but these have had varying degrees of success. One notable example is the development of blockchain-based platforms for commodity trading, which have been developed by consortia of industry players.

In 2018, a consortium of leading global commodity traders, including Mercuria, Trafigura, and Koch Supply & Trading, partnered with financial institutions ING, ABN Amro, and Societe Generale to develop a blockchain-based platform called komgo SA. The platform is designed to streamline and automate commodity trade finance processes, including letter of credit issuance, trade finance and other document handling. The goal of the platform is to improve transparency, efficiency and security in the commodity trade finance process, and to reduce the need for manual intervention and paperwork.

Another example is the development of Vakt, a blockchain-based platform for energy trading. Vakt was developed by a consortium of energy companies, including BP, Shell, and Equinor, in collaboration with blockchain technology firm, Vakt Global Ltd. The platform is designed to digitise the energy trading process, from trade confirmation and settlement to delivery and invoicing. By digitising the process, Vakt aims to reduce the need for manual intervention and paperwork, improve efficiency, and reduce the risk of errors and fraud.

While these industry-wide solutions have shown promise, they also face significant challenges. One of the main challenges is getting all industry players to agree on a common set of standards and protocols, which can be a significant barrier to adoption. Additionally, there may be concerns around data privacy and security, as well as the potential for market disruption and job losses.