Commodity Risk Management. Commodity Risk Management. Platts FCStone Commodity Services (Europe) Ltd. May 13.

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1 Commodity Risk Management Platts FCStone Commodity Services (Europe) Ltd. May

2 Disclaimer and Notices Commodity Risk Management 2 FCStone Commodity Services (Europe) Limited is regulated by the Central Bank of Ireland. Incorporated and registered in Ireland at 5th Floor, Portview House, Thorncastle Street, Dublin 4. Registered number Past performance may not be a reliable guide to future performance. Mention of specific commodities should not be taken as a recommendation to buy or sell these commodities. Commodity Trading is risky and FCStone Europe assumes no liability for the use of any information contained herein. Past financial results are not necessarily indicative of future performance. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to accuracy. References to and discussions of OTC products are made on behalf of INTL Hanley, LLC, and OTC products are only available to eligible counterparties (similar to a large undertaking under EU Regulation) Any examples given in this presentation are strictly hypothetical and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. Neither this information, nor any opinion expressed, constitutes a solicitation to buy or sell futures or options or futures contracts, or OTC products. Reproduction without authorisation is forbidden. All rights reserved.

3 Agenda-Creating a strong Futures Market Brief Overview of INTL/FCStone Examine Purpose of using financial tools How tools are developed What is the strength of futures market now How can it become stronger Summary 3

4 INTL FCStone INTL FCStone Inc. is a Fortune 500 company, providing customers across the globe with execution and advisory services in commodities, capital markets, currencies, asset management and more. INTL FCStone is a customer-centric organization that provides a comprehensive array of products designed to manage risk and enhance margins for corporations, including the producers, processors, and end-users of nearly all widely traded physical commodities; commercial counterparties who are end-users of the firm s products and services; governmental and non-governmental organizations; institutional investors; brokers; commercial banks; and major investment banks. FCStone, LLC held segregated customer assets of over $1.2 billion as of September 30, 2012, and traded 29.5 million contracts in fiscal year INTL FCStone traded more than $47 billion of physical commodities in INTL FCStone ranked #39 on the 2012 Fortune 500 list of the largest U.S. corporations. 4

5 33 offices employees 20,000 customers in more than 100 countries 5

6 Risk Management Consultant Futures Commission Merchant OTC Derivative Platform Principal & Commodity Financier 6

7 Why do we need Futures? Hedging-But what is hedging? 7

8 Purpose of hedging Control Volatility Manage Budgets Secure Margin 8

9 How to manage commodity volatility? Physical management Procurement activities Advance purchase Storing or selling of inventories Securing long term contracts with suppliers / customers Financial Management Using futures markets to lock in a price Using options to create or cap exposure Using options to create a floor or bottom on exposure Using OTC markets to custom make financial products that meet your needs exactly. Using a combination of the strategies listed above! 9

10 Hedging Theory Hedging is used to manage the effects of price volatility on businesses Hedging typically utilises financial markets to offset risks faced in your physical purchases and/or sales Cash Market Losses (Gains) = Futures Contract Gains (Losses) 10

11 Market Types Futures Exchanges Over the Counter (OTC) Markets 11

12 What is a Futures Exchange? Marketplace where buyers and sellers meet to agree price on specific commodity contracts and terms: The exchange acts as a buyer to every seller and a seller to every buyer Exchange is a means of price discovery on specific commodities Highly Regulated 12

13 1 st Stages of development of tools Industry expresses interest in tools due to volatility or Margin Risk Exchange consults with industry Consensus on contract specifications is reached Contract lists Hopefully trades!! 13

14 Difficulty for Exchanges Consensus of Industry participants It is a balance of what is correlated enough and what will attain enough liquidity! 14

15 No GOOD If highly correlated But only suits the risk of a small few players Liquidity will not develop! 15

16 Primary concern Should be on the use of products for the Industry market users 1. Producers 2. Blenders 3. Consumer 16

17 2nd Stages of development of tools Industry trades contract Liquidity improves More Participants Open Interest and Daily volumes increase Managed Money looks to market! Hopefully trades!! 17

18 One issue with Financial products Lack of Liquidity 18

19 Industry has to concentrate on product Use basis of this product as the trade of physical This will have more trading in 1 product Easier to enter and exit trades Better returns Less risk 19

20 20 Commodity Risk Management

21 21 Commodity Risk Management

22 Corn World Volumes 845m tonnes Traded on 3 contracts Chicago/Dalian/NYSELiffe Biodiesel 20m European capacity! 22

23 Advantages of Managed Money It increases volumes Brings more diverse interests to trade the market Improves liquidity Improves the bid/offer spread and thereby margins for end users 23

24 What do Money Managers want in a Open Interest market Facility to put in Stops Prices at all times 24

25 Summary Hedging tools are important We have had a lot of success Liquidity is an issue Need to rationalise no of contracts Pool liquidity Get Money Managers involved 25

26 Thank You Liam Fenton Managing Director FCStone Commodity Services (Europe) Ltd. 5th Floor Tel: Portview House Fax: Thorncastle Street liam.fenton@intlfcstone.com Dublin 4 Ireland 26