In volatile markets, active and smart management of freight and asset price risks is a core part of the value creation in NORDEN.
Active risk management plays a key role in NORDEN’s goal to generate attractive risk-adjusted returns in fluctuating markets. It is NORDEN’s policy to only assume material risks within the commercial aspects of its trading and shipping operations, i.e. freight and asset values. Other risk factors are mitigated to the extent possible. Our market presence, combined with strong relationships with customers and tonnage providers all over the world, gives access to market liquidity and insight that most of our competitors do not have. This access to market liquidity and insight, combined with in-house research and sophisticated trading models, is used to create further margins by taking calculated risk where we take positions in the market by booking vessels and cargoes.
Strengthening of Risk Management
NORDEN’s risk management capabilities have been significantly strengthened in recent years with the establishment of both a Risk Committee under the Board of Directors and a separate Risk Management team. The purpose of the Risk Committee is to assist the Board of Directors in its oversight of the Group’s overall risk-taking tolerance and management of market, credit and liquidity risks. The Risk Management team consists of 6 people with backgrounds within mathematics, physics and finance. The responsibility of the Risk Management team is to identify, quantify, monitor and report risk use and limits to the Board of Directors, the Risk Committee, Executive Management and Senior Management.
New risk frameworks to support trading focus
Following the implementation in 2018 of a new risk framework for Dry Operator, the focus for 2019 has been to establish similar risk frameworks for the Group and the two other business units. The new group risk framework will be implemented during the first half of 2020. The new framework focuses on freight and asset price risks and includes a formalisation of the connection between risk capital and risk limits. Due to the dynamics of shipping markets, several risk measures are used, for example Value at Risk, stress tests and P&L flags (agreed thresholds for changes in expected earnings triggering a review of the current position).
In anticipation of increased oil price volatility related to the IMO 2020 regulation severely restricting the use of high-sulphur fuel types, a new bunker risk framework has been developed and implemented towards the end of the year. The new bunker risk management framework ensures more precise measuring, monitoring and hedging of NORDEN’s total bunker price risk.
The in-house developed risk system has been expanded to ensure significantly improved risk reporting with accurate overviews of positions, market values and relevant risk measures for both freight and bunkers on a daily basis.
Sanctions risk is an area of increasing importance. All of NORDEN’s commercial counterparts are screened daily on a number of potential risk factor issues, including sanctions lists, global law enforcement lists and vessel information.
To make sure that the Risk Management team is an integrated part of daily business, it is situated directly on the trading floor with the chartering teams, enabling the team to manage their mandate, challenge their positions, provide regular and ad hoc analysis and advise on risk optimisation and reduction.