AHCX has adopted spot market suitable risk processes in order to ensure that its objectives and those of stakeholders are met, and that the Exchange and its participants are protected. Risk management systems are designed to ensure effective and efficient delivery of service in the Exchange’s operations of: Trade and Investment, Collateral Management, Clearing and Settlement, Finance, Marketing, Research and Development, Administration, and Membership recruitment.
AHCX acknowledges that in pursuing its business objectives, risk cannot always be avoided, hence the identification and categorisation of risks into those that should be accepted and those that should be mitigated to acceptable levels through robust controls. The strength of controls is determined by the likelihood and impact ratings of individual risks. Risk reporting to Management is done on a monthly basis, with annual review of the risk management framework.
In broad terms, some of the identified risks include:
- Quality Related Risks
AHCX has to ensure that it receives commodity within the set standard grades as set out in the contract specifications, which has not been tampered with by depositors in any way in order to attain such grades or volume, and it is the duty of the Exchange to maintain the grades as such at delivery albeit handling and storage. AHCX employs the services of an independent, professional and reputable certifier.
- Warehousing Risks
AHCX has systems and controls in place to ensure transparency of warehouse processes and operations, professionalism and integrity of warehouse staff and outsourced services, maintenance of commodity quality and timely delivery. One of the controls in place to manage risks under this class is regular warehouse surveillance.
- Trading Related Risks
AHCX trading system is equipped with various controls and validations intended to limit the extent of user rights under various circumstances, for example members trading beyond their limit or beyond the available Warehouse Receipt balance. Physical checks are also done prior to uploading of data into the electronic system. The Exchange operates flexible daily price filters in order to protect buyers and sellers from market price volatility and sudden price movements. AHCX aims to operate fair and transparent commodity trading and provide sufficient protection to its members because these are essential for a quality market, and a prerequisite for price discovery, as such AHCX performs trade surveillance.
- Settlement Risks
AHCX provides guarantee of delivery of commodity to the buyer as per contract specification and payment to the seller, therefore measures are in place to ensure that commodity is deposited at its warehouse and is kept intact, and that funds are collected from prospective buyers prior to trade to ensure liquidity and limit losses to AHCX. AHCX is central to a transaction between a buyer and a seller and one of its key roles is to limit default risk and settlement risk of parties by taking away the interface between the two. This gives AHCX advantage over the informal market.
- Non-Compliance Risks
AHCX regulates its own operations in the absence of legal framework in Malawi to govern the operations of commodity exchanges; however efforts have been made to come up with such a law. AHCX therefore has in issue a set of rules known as ”Rules of AHCX” which govern its operations, but further to this, all participants and AHCX itself are required to comply with other government laws, regulations and policies that are relevant to the business activities of AHCX. AHCX has a Legal Services Department and a Compliance Department, which are responsible for formulating the rules and enforcing compliance, respectively.
- Reputation Risk
AHCX believes in running its operations in a fair and transparent manner in order to ensure maximisation of value to all stakeholders and to uphold its image. One way of doing this is through AHCX Management Information Systems, located both centrally and remotely, and through the media. Most of the identified risks have the consequence of damaging the reputation and image of AHCX. Hence, the proper identification and management of risks is of paramount importance in managing reputation.