A study of the benefits and features of:

 Commodity Trade and Risk Management systems

 Enterprise Resource Planning systems

Considering integration, reconciliation and “one size fits all” systems

Interfacing Aspect CTRM and ERP systems

Contents Executive Summary ...... 3 CTRM and ERP Integration ...... 4 ERP ...... 4 CTRM ...... 4 ERP and CTRM working together ...... 5 AspectCTRM and SAP Integration ...... 6 Data Integrity and Single Entry ...... 7 Data Migration Projects ...... 8 Conclusion ...... 9 About Aspect ...... 10 Appendix A ...... 10 AspectCTRM High Level Functionality ...... 10 Aspect Technology Features ...... 11

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Interfacing Aspect CTRM and ERP systems

Executive Summary AspectCTRM is a full front to back solution for commodities trading and risk management (see list of functions in Appendix A below). As a CTRM (Commodity Trade & Risk Management) software solution, it includes functionality for front office, middle office and back office as well as providing vital data for management reporting about P&L, cash flows, and GL postings.

AspectCTRM can be interfaced to an Enterprise Resource Planning (ERP) system such as SAP, Oracle, Baan etc. to allow users to run these systems in close harmony, and enjoy the advantages of best of breed functionality for CTRM and ERP solutions together. Many companies use the same ERP software as the General Ledger too, this paper is concerned only with Trade level integration, the interface to a General Ledger is provided by AspectCTRM Trade Accounting Interface.

The purpose of an ERP system is to manage the logistics of physical materials.

The purpose of a CTRM system is to manage the financial and risk elements of physical trading and any derivative / hedging trades.

Best practice dictates that a company engaged in commodities should utilise both ERP and CTRM, and to arrange that these systems work closely together to provide both best of breed solutions in their respective functionality and an overall holistic approach to running the commodity business.

CTRM and ERP systems typically hold different data, some of which is common to both functions. Clearly it is desirable that such data is entered only once and is then shared between CTRM and ERP. Conversely, there is data which is discrete to each system too, for example ERP is not concerned with price risk exposure; whereas CTRM is not concerned with what truck an item is travelling on.

This paper discusses ERP and CTRM integration in more detail, both in theory and in practice.

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Interfacing Aspect CTRM and ERP systems

CTRM and ERP Integration

ERP Most companies trading in physical metals markets require or already have a software solution to handle the logistics part of their business; this is the management of the flow of materials and services between a point of origin and the destination.

Logistics involves the integration of information including transportation, inventory, warehousing and material handling. Logistics is the management of the physical supply channel where value is added related to the time and location of materials. Logistics includes the ability to plan, and then execute efficiently to that plan.

Today the complexity of logistics can be modeled, analyzed, visualized and optimized by simulation software often using Enterprise Resource Planning (ERP) software such that available from companies like SAP, Baan, Oracle, IBM and others. ERP provides decision support functionality such as suggesting the optimum transportation method and route for particular destinations based on pre-agreed costs for that movement.

CTRM Traditionally companies using an ERP logistics solution could manage their business adequately, requiring only the addition of some general ledger functionality for accounting (often available in the same software package as the ERP logistics functionality).

However in today’s dynamic and volatile global markets, commodity trading companies can find themselves disadvantaged if they do not also have the ability to clearly visualise and plan the financial aspects of their trading business too. With high volatility in both commodity prices and foreign exchange and interest rates, it is all too easy to think that a trade is making a positive profit when in reality that profit may be eroded by movements in prices and rates and secondary costs.

This is where a Commodity Trade and Risk Management (CTRM) solution can add significant value: it provides the ability to plan ahead the financial aspects of a particular purchase or sale, including secondary costs (freight, duties, taxes etc) and any foreign exchange exposure, and monitor the value of the goods in transit or in warehouse by marking the price to market using standard market data price feeds.

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Interfacing Aspect CTRM and ERP systems

For an active trading company, it is vital to be able to see the entire portfolio of physical positions, as well as be able to drill down into any given one to investigate the details. Views should be available at trade, department and group level to give a holistic view of the business.

Seeing the physical positions then facilitates consideration of using hedging instruments to mitigate adverse exposure to price and/or FX movements. The CTRM system should offer the ability to report on where price risk still exists (for example even if material is delivered but price has not yet been agreed), so it requires multiple data points to distinguish between material logistics and ownership/ price risk.

Of course a CTRM system will also support outright positions to be taken in derivatives for speculative trading (for example on the LME).

ERP and CTRM working together So we can see that and ERP system and CTRM system are both vital parts of an effective and efficient commodity trading company. Each provides a different view of the business:

 ERP will tell you what you have, where it is, and when it will arrive at its destination, where it is stored and who it is sold to.  CTRM will tell you the current value of what you have bought, the cost of purchasing and moving it; the likely P&L of selling it on, and monitor and measure actual P&L both at an individual trade level, departmental and group level. It should provide real time analytics to consider alternative sources, routes and destinations/ customers to optimise profits as well as monitor the exposure which the company is taking in this trading business. It will operate in multi-currency and include foreign exchange costs and interest on cost of funding etc.

While in the ideal world it would seem attractive to seek a single software company who could provide all the above functionality in a single package, unfortunately this is not the case in practice.

Software companies typically start life in a particular area based on business expertise of that area. Over time it becomes apparent that the “real world” companies they are selling to require more functionality than their single product offers; this often prompts them to try and develop the application “sideways” to meet the additional demands; this approach inevitably takes them away from their core expertise. While such “added on” functionality may be adequate for some

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Interfacing Aspect CTRM and ERP systems companies who require only basic functions, any company aspiring to operate within best practices will need the best of breed tools available to facilitate that.

So today, with modern technology and years of hard won experience, the widely accepted solution to this conundrum is for the commodity trading company to identify best-of-breed software applications which offer good integration tools too.

AspectCTRM and SAP Integration AspectCTRM is a modern software application which was designed from the outset to be easy to integrate into an existing trading environment. There are very few “green field” sites where a client is starting from scratch. Thus AspectCTRM uses modern Web Services APIs (application programming interface) to allow data level integration with ERP systems, Exchange Trading systems, Order Management systems etc.

AspectCTRM can import and export data using a variety of data formats including XML (recommended format). This functionality allows data within the ERP system to be passed to the CTRM system where it is then enriched with additional data such as contractual information and can also be assigned any appropriate hedging instruments to mitigate price or FX risk.

The advanced analytics in AspectCTRM can then be used to analyse exposure and hedging, P&L (real time using latest mark to market data) and various MIS reports run off (again in real time) to give visibility at trade, department or group level from a wide variety of perspectives such as product, counterparty, country/location, and more.

Similarly, data within AspectCTRM can be exported to SAP to update the logistics data with latest pricing and valuations etc.

The image shown here is an extract from an XML message sent from AspectCTRM to SAP at a large global trading company. Sensitive trade data has been obscured.

This XML file was generated by AspectCTRM and was automatically sent to SAP NetWeaver. SAP accepted this file and sent back a confirmation in XML format to AspectCTRM.

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Interfacing Aspect CTRM and ERP systems

Fig.1: XML data transfer between SAP and AspectCTRM.

Data Integrity and Single Entry ERP and CTRM systems perform different but complimentary functions; thus they also have requirements for different data, although of course some of the data is common to both sets of functions. A classic requirement for any business is to avoid duplicate data entry which inevitably can lead to errors, while also ensuring that all required data is captured appropriately.

To illustrate this in physical commodity trading, as discussed above an ERP system is concerned with the logistics of material movements. Where material is located or how it is transported is the essence of obtaining added value from it. Thus there is a requirement to capture in detail a large amount of information pertaining to where a given piece of material is, or what is the cost and time of moving it to another location.

Conversely, a CTRM system is concerned with the financial and risk aspects of the material. How much did it cost to purchase, costs of storage, shipping, and its intrinsic value while it is held along with monitoring the exposure which the company then has to movements in its intrinsic price.

Thus both functions will have data entry screens which prompt for and capture all these essential data points. Note that systems which claim to offer both sets of functions often fail to capture the full rich detailed data required to professionally manage both aspects of the business. A company which aspires to best business practice should then analyse and create an infrastructure where all this rich data set is captured, but only once.

So for example, the primary trade data (quantity, initial price, counterparty etc) may be entered in either the ERP or CTRM system – which one is used is a business led decision based on the particulars of each trading company; either one may be used.

For additional peace of mind, it is possible to ensure data consistency by running reconciliations between such systems. This reconciliation exposes the data transferred between the different functions of ERP and CTRM. This is advantageous over data passed internally where it cannot be easily viewed and monitored.

Reconciliation monitors that:  Trade data is being correctly entered in both systems, and as such best practices and company policy is being adhered to  Both ERP and CTRM systems are functioning according to the business blueprint and are configured correctly for all instances of use (business may change over time, the holistic solution should continue to cope with such evolutions)  Both ERP and CTRM systems are functioning technically according to specification. The external reconciliation exposes the data flow for such monitoring.

There is a generic reconciliation module available in AspectCTRM that helps reconcile transactions with external sources. Data can be uploaded from various data sources ranging from MS Excel to ERP or GL systems such as SAP, Oracle, Baan etc. The AspectCTRM system automatically reconciles transactions from its own database with uploaded data. Any and all discrepancies are highlighted.

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Interfacing Aspect CTRM and ERP systems

There are a number of Use Cases of a reconciliation module. A typical example is reconciling paper (hedging) positions with broker statements. At the end of a trading day, brokers send their clients all trades done on that day (usually in spreadsheet format). This spreadsheet is (automatically) uploaded to AspectCTRM and reconciled against AspectCTRM transactions. Please see an example of such a reconciliation screen below.

Fig.2: AspectCTRM screenshot of Reconciliation functionality: example for broker statements

Data Migration Projects There are occasions when a particular piece of software can no longer provide the functionality which the business requires, or more likely the technology is simply obsolete. In these cases, a company may need to consider a project to migrate the data from the old system to another newer version offering latest technology or perhaps some significant business benefits.

Data migration projects can be undertaken with careful planning; they are typically lengthy and expensive, not least due to the following issues:

 Data compatibility – it is often the case that data in one system will need to be adjusted in some way in order that the proposed replacement system can handle it. This may be effected at best by running software scripts; however in some cases it may be necessary to manually adapt some (hopefully not all!) of the data.  Reconciliation – once the data has all be transformed, it must be uploaded into the new system, however for large databases where a system has been running for a few years, it is highly advised that some additional reconciliation is performed to ensure that all data has been moved, and that it is in the correct format, and in the correct location in the new system

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Interfacing Aspect CTRM and ERP systems

 Parallel Running – moving the data is only the start of this process. It is then necessary to run both systems in parallel for a period of time to ensure that the claimed functionality of the replacement system is adequate and can support the business needs. o During this parallel run period, it will be necessary to: . run duplicate data entry . Re-reconcile the data in both systems constantly

Clearly such projects not only require additional resource to implement, but also place additional pressure on the operating staff of the company for dual data entry.

Hopefully the migration project will succeed first time, although of course contingency plans should also be put in place as fall back, with the option to repeat the exercise having fixed whatever problem was encountered.

The financial cost of such a project should not be underestimated, both direct costs of new software and effort to install, configure and test the new software and migrate the data across, but also the secondary costs of impact on the business of parallel running, checking output of both systems, and staff training and acceptance testing the final project. Replacing an ERP system is more expensive than integrating a CTRM best of breed with an existing ERP best of breed system.

Conclusion Software companies typically have significant focus and expertise in particular areas. The “holy grail” of one piece of software which fulfils all business functions does not exist. The best one could find is an application which is very good in one area, and at best it is merely adequate in another area.

For this reason, numerous large software companies have devoted many millions of investment dollars in creating high performance integration software layers and protocols such as Microsoft Web Services and XML protocol.

Modern software applications should be designed from the start with the expectation that they will fit into an overall business and technology architecture to provide best of breed solutions which work in harmony together.

Aspect is proud to have built such software solutions and to have proven this in numerous projects across the globe with a world class client base. AspectCTRM is a fully functional solution for managing trades, positions and risk exposures for metals companies. It has a built in trade accounting interface of course, and modern sophisticated integration tools designed from the outset to provide a seamless business solution with ERP systems.

To discuss you particular requirements please contact Aspect.

END

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Interfacing Aspect CTRM and ERP systems

About Aspect Aspect was founded in 1999 to leverage unique industry knowledge, modern technology and years of experience. Building upon a flexible infrastructure and technology platform, with an innovative development methodology, Aspect’s development team has produced a range of Web-based applications, customization services and enterprise integration solutions. Aspect is now the leading global provider of Web-based commodity trading, risk management and data management applications. We offer the only integrated, all-in one platform delivering Software-as-a- Service (SaaS) applications in the Cloud. This enables rapid deployment, controlled costs and immediate ROI for all size companies, from small trading houses to global conglomerates. Aspect solutions are accessible via the same online password providing seamless, user-friendly collaboration for global teams. Aspect clients produce, refine, market, ship and trade globally and rely on our expertise in these key physical and financial markets: Oil, Metals, Steel, Coal, Marine Fuels, Biofuels, Freight, Natural Gas, Emissions and Agriculture/Softs.

Appendix A

AspectCTRM High Level Functionality  Trade capture – Primary trade data and all Secondary trade data (transport and shipping costs, taxes and duties, cost of funding, etc) for physical and financial (hedging) trades and contracts  Trades either entered manually or uploaded from electronic trading systems / Excel /SAP etc as required  Portfolio management / position keeping / Mark to Market  Exposure management and modelling  Hedging and decision support tools  Full multi-currency support, FX exposure management, reporting in any currency  Limits management (stop loss, concentration risks etc)  Business Escalation workflow (including interface to email systems etc)  Enterprise risk management – Value at Risk  P&L reporting - on demand in near real time  Documentation generation – confirmations and invoices  Reconciliation (e.g. invoices vs payments received, broker statements, trade level to ERP systems etc)  Documentation management – scanned external documents saved to the database and associated with particular trades or “strategies”  Cash flow and credit risk management  Tactical reporting – on demand in near real time  Management reporting MIS - on demand in near real time  Interface to ERP systems to manage physical logistics as a holistic business

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Interfacing Aspect CTRM and ERP systems

 Trading Sub-Ledger reporting and analysis  Interface to General Ledgers systems

Aspect Technology Features  Modern Java based system utilising Component Based architecture  Web Services based interfacing for easy integration with external systems  Entire application runs In-Memory for ultra-high performance and near real time reports etc  Available as Software-as-a-Service (SaaS) thus offering minimal implementation project times and cost and very high return on investment.

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