Risk Management is an important component of Western Bulk's DNA. Much more than a set of models, reports and administrative procedures, it is a way of thinking that permeates the organization from top to bottom and across departments and offices.
For us, risk management is not seen as something we 'should' have; rather, it is a real value driver for the organisation - a 'must' have. In Western Bulk, every decision is considered on a risk-adjusted basis.
To get to this point, we have invested significant resources in building a state-of-the art risk management infrastructure, and we continue to invest resources in maintaining and developing this competence. The risk management team currently consists of six people working to ensure that we maintain a thorough understanding of how we are exposed to market, counterpart and operational risks, and advising on how to manage or mitigate those risks. We seek to identify all major risks facing the Company, and to measure, control and manage these risks in a systematic way. In particular, we strive to understand the tail risks - the unexpected scenarios that could have the potential to significantly impact our business.
Our risk appetite is low to moderate. Defined by the Board of Directors, it puts an absolute limit on the amount of risk we can take in the market, with the aim to ensure relatively stable earnings throughout the cycle. The limit is allocated down the different business units in a way that rewards performance while ensuring a good level of diversification. Every commercial person in Western Bulk knows that there is a limit to how much risk his department can take, where that limit is, and how close or far away from that limit they are:
- Commercial departments are continuously held accountable for all exposures in their books, and for the changes to the market value of their contract portfolio. Market values and risk measures are published daily on our intranet.
- Top management maintains constant attention to risk management issues. A weekly risk meeting between risk management and senior management is used to monitor and discuss relevant risk issues.
- We strive to be responsive and regularly develop new risk measures and reports to focus on the risk factors we believe are particularly relevant in the prevailing market environment.
- Risk management is a fully integrated part of the commercial decision making process - ensuring risk awareness at all decision points.
The Risk Management department is set up to ensure that all activities and exposures stay within the risk boundaries set by the Board of Directors and corporate management.
Based in Singapore, the core risk team produces daily VaR numbers, and provides M2M valuations of all physical and derivative positions in the business units’ forward books. These are complemented by stress tests, Cash Flow at Risk analyses and other measures. Together they provide a comprehensive base of information to complement and assist commercial and managerial decision making.
All new counterparts for the group are vetted by the risk team, and current exposures to existing counterparts are monitored and re-evaluated continuously. Working closely with the commercial and legal/claims departments, the counterpart approval process aims to take all available information into account when assessing potential new accounts.
Execution of Freight and Bunker Derivatives transactions are centralized functions within the group, and an integrated part of the Risk Management department. The Risk department executes derivatives transactions on behalf of the business units. Centralizing these functions enables execution of larger volumes and more efficient prices in the market, in addition to reducing transaction costs for the different business units.