Contents - AL-Tax

154 11 Global Trading of Commoditiesmarket, which has been in steep backwardation for an extended period of time).Instead, they have focussed to a much greater extent than previously on short-termtrading.11.1.6 Division of Labor and Risks Among Group MembersThe firm that is the subject of this case study engages in a wide range of customerbasedand proprietary trading activities. It is contending with all of the challengesposed by hedge fund participation, China’s marked decline as an importer andexporter of key metals, dwindling pre-payment opportunities and ongoing consolidationin the aluminum markets. Each Group member that concludes trades hascredit lines on which it can individually draw, and the group as a whole has a numberof swing lines as well. Similarly, each entity that concludes trades has the requisitelogistical and administrative support staff to verify contract terms with counterparties,review all contracts to ensure their enforceability, provide lending institutionswith the necessary documentation, etc. FP performs risk management activities ona group-wide basis, evaluates customers’ creditworthiness, and has developed andmaintains the group’s IT infrastructure. Firm-wide credit and position limits areestablished by a committee composed of representatives from all trading entities.Natural gas, alumina and aluminum are traded by multiple group members,although the degree of interaction among traders in different offices varies considerablyby commodity. UKS trades natural gas in the United Kingdom and on theContinent. USS and CAS trade natural gas in North America. Because of the lackof physical infrastructure (i.e., pipelines) spanning the Atlantic, and the fact that,to date, cross-Atlantic trades in LNG are the exception rather than the rule, naturalgas traders in the United Kingdom have virtually no interaction with their oppositenumbers in the United States and Canada.USS and CAS engage in some, albeit a very limited volume of, intercompanytransactions in natural gas. These transactions take place at index prices. USS’ naturalgas traders deal primarily with customers based in the United States and WesternCanada, while CAS deals primarily with Eastern Canadian customers. However,originators and schedulers employed by CAS assist USS in developing and maintainingrelationships with certain Western Canadian counterparties, and in nominatingpipelines. (When a trader intends to move gas via pipeline, he or she notifies ascheduler on staff, who contacts the scheduling personnel employed by the pipelineoperator, “nominates” (or designates) a particular pipeline, and makes the necessarycontractual arrangements.)FP, USS and UKS all employ alumina and aluminum traders; CHS employs marketerswho act on behalf of these traders. As with natural gas, there are comparativelyfew intercompany transactions in alumina and aluminum. However, tradersbased in Switzerland, the United States and the United Kingdom routinely sharemarket intelligence, jointly formulate trading strategies, identify sources of supplyand outlets in their respective markets, and maintain a single book of business.