Hi TSW, I hope you are fine. Does Platts monitor the credit counterparty risk of a physical trader ? Please help me to understand the role of Platts MOC in oil letter of credit.
-Manager Commodity Trade Finance, Bank
PLATTS is like “an umpire of the commodity markets”, their specialty is assessing prices, not positions.
They do price assessments only, and haven’t such credit counterparty risk assessments of the physical traders.
A priori, PLATTS is not in market commentary and doesn’t want to do anything that could influence prices.
The agency monitoring the creditworthiness is Standard and Poor’s Ratings Services, not PLATTS, despite both are a division of McGraw-Hill.
S&P is the agency specialized in credit rating which has the ability to comment the situation of a trader (should the trader is covered).
When the trader has not credit rating, someone has to build internal credit scores and use Equifax, Transunion.
The next part pertains to the role of Platts MOC in oil letter of credit:
There is indeed a role they play.
The Platts MOC process (Market on Close) will accept oil bids and offers during the eWindow from the trader if it’s backed by L/Cs from a bank.
A commodity trader no longer enjoying open credit terms with other traders, shut down in the OTC swaps markets and dealing with covered credit issues will raise obvious questions about their ability to perform in the physical market.
In theory this entity can still post its Eurobob, Hssr or Naphtha bids/offers in the Platts MOC reporting system without trouble.
For Platts, a bankrupted trader can stay solvent, as long as they can prove that they can open the L/C.
However, Platts doesn’t require seeing a copy of the L\C, only a communication (letter, email or phone call) from the bank officer stating that there is a standby L/C backing them, or proving that they have the support and can open a first class L/C up-front.
For this reason, the activity of the trader in the Platts eWindows is absolutely not an indication of its credit counterparty risk.
If I may allude to OW Supply & Trading.
-They were a participant in the Platts eWindows in the weeks and days prior the bankruptcy in 14’.
-The L/Cs were in place and the cargoes were delivered but subsequent to the collapse, the cargo sellers never got paid.
-A commodity trader doesn’t produce anything but contracts.
-The chain of contracts at OW had to be divided into assets or liabilities between the multiple suppliers, cargo and shipping interests.
Finding what’s in the egg can be a grueling exercise.
Only the lawyers will assuredly get paid.
Be particularly leery of the unusual bids from a such entity removing liquidity.
This certainly has implications outside of the eWindows and afterward.
The author has many years of experiences in Commodities Transactions, Financial & Risk Analysis bringing together the know-how of the Dry/Wet Cargoes Transportation and the Commodity Trade Administration.
He consults full-time with hedge, traffic and logistics desks in commodity trading and end-user firms.
Contact Simon Jacques 1 226 348 5610
Commodity Merchant Trading Shipping Advisory Services