« Part 3: The Point of No Return
This was the story of a company that destroyed one billion US dollars, value owned by its shareholders, in a matter of months. The last question to be answered is: could this catastrophe have been avoided? This is the most important question if we want to learn lessons from this case and try to avoid similar outcomes in the future.
the risk management process failed in every step and fell short of respecting risk management best practices and standards
The analysis above has demonstrated that the risk management process failed in every step and fell short of respecting risk management best practices and standards. Differently from financial institutions, commodity trading firms are not subject to laws and regulation directly addressing their risk management process. However, these firms can apply risk management standards and best practices which are valid in general. Their proper application in the commodity trading space can assure that risk management is in tune with the strategic goals of the organization.
However, in which way stakeholders can be sure that a company is actually applying risk management best practices and standards while shaping the risk management process? For example, a company management could easily communicate that they are performing state of the art risk evaluation, and inform periodically about the Value-at-Risk and stress testing results. Stakeholders would feel reassured that the company risk profile and risk treatment techniques are in line with their own preferences. Later they could discover that this was a nice staging.
there is a specific provision that could have potentially prevented OW Bunker masking the real dimension of the positions taken in the commodity financial market
Help could come from the existing and incoming new regulation that is reshaping the financial markets, with repercussions on commodity markets and traders. In the plethora of rules, there is a specific provision that could have potentially prevented OW Bunker masking the real dimension of the positions taken in the commodity financial market. In fact, traders in financial derivatives have been requested to promptly report their derivatives deals to centralized trade repositories.
This provision, together with the obligation to promptly reconcile deals with counterparties, should possibly allow to have clear and comprehensive data related to the derivatives deals and the net open position of companies. It is evident that this will not form the entire market prices exposure for most of the companies, as there is not a similar reporting obligation for physical deals. However critical cases, where the hypertrophy in derivatives trading is not justified by the normal course of physical activity, should become easier to detect.
all EU-based counterparties have to promptly report their derivatives deals to central repositories
OW Bunker was a company domiciled in the European Union. Consequently the "European Market Infrastructure Regulation" ("EMIR"), was applicable to OW Bunker. In the IPO prospectus, OW Bunker classified itself as "Non-Financial Counterparty" ("NFC"), which could be proven to be wrong when the true dimension of its derivatives operations will be disclosed. The NFC classification allows to skip or postpone a number of EMIR obligations, but not all. In particular, all EU-based counterparties have to promptly report their derivatives deals to central repositories. This requirement potentially allows public bodies (authorities, central banks, etc.) to have precise knowledge of derivatives positions, exercise control over derivatives activity of every company and stop OW Bunker-style behaviour. The assumption that commodity trading firms trade derivatives in order to exclusively hedge physical exposure should be ascertained case by case.
Although spectacular and dramatic, OW Bunker's case does not represent the unique example of a company exiting the oil market during these months. More are and will come, triggered by the relevant and sudden oil price reduction that started in the middle of 2014. Much lower prices and higher volatility, like strong winds and high waves at sea, are showing the good and the bad ships, and finally force the latter to sink and disappear. The prodigious and efficient mechanism of natural selection is again at work. The only trouble is that on ships such as the OW Bunker's one there are passengers who would avoid the journey, if they knew the full story. OW Bunker boarded more than 20,000 once happy shareholders.