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Daily risk management

The Risk Department ensures that all risks are systematically identified, quantified, monitored, mitigated and managed on a daily basis. Risks are isolated and off-laid to the financial community allowing the retention of risk only where the Group has a competitive advantage. The retained risk is managed within strictly monitored limits at all levels of the Group.

A team of experienced professionals monitors and manages our various retained risks:

Market risk

Market risk refers to the losses that the Group would incur due to changes in the market value of the commodities to which Louis Dreyfus Company (LDC) is exposed. Categories of market risk include exposures to price, foreign exchange rates, volatility, time, geography, quality and inter- and intra-commodity spreads.

We have significant experience and expertise managing relative value in the commodity space. To reduce price risk, we use a range of instruments including exchange-traded futures and options contracts.

Market risk is quantified, reported and managed within specific limits, on a daily basis.  
This is managed using notably a 1-day 95% confidence interval Monte-Carlo VaR (Value at Risk) measure together with forward-looking stress analyses. Systems are back tested for empirical validation.

Credit and country risk

Credit risk refers to the loss that the Group would incur in the event of counterparties failing to perform their contractual obligations. Cross-border transactions are exposed to country risk associated with a country’s overall political, economic, financial, regulatory and commercial situation.

Retaining those risks is not a profit driver for the Group. Where possible, credit risk is systematically mitigated and passed on to third parties.

While it is not the policy of LDC to extend financing to counterparties except in particular and specific circumstances, we may seek to obtain trade financing for our counterparties by putting in place trade structures where both the funding and the risks are deferred to financial institutions on a non-recourse basis for LDC. The Group uses a broad range of financial instruments from either banks (letters of credit, standby letters of credit, bank guarantees, forfaiting, without recourse discounting of drafts) or from the insurance markets (policies from private insurers or export credit agencies) to mitigate this exposure.

Residual risk is quantified and managed within limits set for each counterparty, profit center, commodity line and at Group level.

Commercial Disputes are handled by this team.

Physical risk

It is LDC's policy to cover its major insurable risks. Principal areas where the use of insurance is a tool used to follow and mitigate risks include General and Specific Liability, Property, Marine & Cargo, Travel and Vehicles.

Liquidity and funding risk

Liquidity and funding risk is the risk of failing to meet access to liquidity, managing working capital or margin posting requirements.

The Group ensures that sufficient headroom is preserved at all levels (corporate, regional and platform) through a system that forces platforms to maintain a liquidity reserve within their working capital usage allocation to meet exceptional market conditions.

Line availability is controlled both locally and centrally and residual funding capacity is monitored against cash flow forecasts. In case of potential stressed situations, businesses are required to reduce line usage.

Margin call risk is managed daily using various VaR and Stress calculations that allow the Group to anticipate potential price related cash out and inflows.

Operational risk

Operational risk relates to the risk of direct loss or reputational damage arising from shortcomings or failures in internal processes, fraud, or system breakdowns.

LDC manages operational risk by mobilizing significant efforts and resources to improve and consolidate control standards and day-to-day monitoring (including internal control procedures, segregation of duties, review of new flows prior to trade and trade to cash formalized procedures).

Environmental, social and reputational risk

This is the risk of direct or indirect loss due to the actual or perceived impact of our activities.

Environment LDC is committed to environmental responsibility and at a minimum complies pro-actively with relevant legal and regulatory requirements.

Social Impact LDC promotes the economic development and improvement of the quality of life of the communities where we operate and supports actions to this effect.

Reputation LDC is a "responsible citizen" in all the markets and activities in which the Group participates, and strives to retain and improve that status through all corporate actions.

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