For generations, many businesses have measured organizational success based on a narrow set of financial performance measures, such as operating and net profit, return on investment, and earnings per share of stock. Financial performance measures are valuable in that they capture the economic consequences of business decisions; however, they tend to be "lagging" indicators of performance that report the financial effects of operational business decisions weeks or months after the decisions have been implemented.
Organizational managers and employees typically manage their work in terms of physical flows and other nonfinancial resources. For example, sales managers focus on market size, sales volume, share of wallet, customer satisfaction, and similar measures. Production managers concentrate on production capacity, throughput time, quality, and productivity metrics. Human resource managers are responsible for hiring appropriately skilled personnel, maintaining a safe and legal workplace, and organizational development outcomes. Managers and employees throughout the organization make decisions and use resources that eventually impact the financial outcomes of the firm; to do so effectively, they need performance feedback that links the outcomes of their decisions to the strategic and financial goals of the firm. This feedback is most useful when it is a "leading" performance indicator, or one that is closely related to the work being performed. The Balanced Scorecard (BSC) was developed as a management tool to help managers better understand and link customer, operational, and organizational decisions to financial outcomes, and to the strategy of the organizati
BSC Basics
While General Electric has been credited with developing one of the first balanced scorecard performance models,1 the BSC concept was first described by Dr Robert Kaplan and David Norton in a series of Harvard Business Review articles in the early 1990s, and was subsequently expanded upon in books and articles by these and other professionals. The BSC as a management tool has gained widespread acceptance in the corporate world. In a survey of more than 700 companies operating in five continents, Bain and Company reported that 62% of the respondents used the BSC.2
BSC perspectives typically include financial, customer, operational (internal business processes), and organizational (learning and growth) aspects. By identifying key performance measures within each of these perspectives, top management signals strategic objectives and organizational goals to managers and employees. By receiving feedback on achieved outcomes for each of these measures, management is able to evaluate how closely performance is meeting strategic objectives.
As shown in Figure 1, the four traditional BSC perspectives are interlinked, and are linked to the overall vision and strategy of the organization. Each perspective reflects a focus area for the implementation of strategy and, therefore, for performance measurement:3
Figure 1. Linking of BSC perspectives
Financial perspective-focuses on financial aspects of performance, and links strategic objectives with financial impacts. Balance sheet, income statement, and cash flow performance measures are often included in this dimension. Some firms include alternative measures of financial performance, such as economic value added, recycling income, and sales growth by channel.
Customer perspective-contains measures that reflect how the firm is creating customer value. Customer satisfaction measures are typical, but leading firms will include measures such as share of mind and share of wallet, consumption per capita, customer retention, and product accessibility measures.
Internal business processes perspective-focuses on how a company is performing through an operational lens. Internal business processes encompasses many facets of operations, including engineering design, purchasing, manufacturing, distribution, and environmental and social performance. In a customer service organization, measures might include response time, process quality, employee productivity, and bridge to sales ratios.
Learning and growth perspective-assesses how well the organization is preparing itself and its employees for the future. This perspective often includes measures of organizational practices, employee development and satisfaction, and systems development and deployment. Aspects commonly measured in this perspective include employee turnover, diversity, promotions from within, training hours or expense by employee, innovation measures, and surveys of corporate climate.
Conclusion
The BSC is a powerful concept that enables organizational change. The BSC is not just a performance measurement tool, but a multidimensional system that requires management to define strategy in operational terms, and to understand and communicate the cause and effect relationships between the work performed at all levels of the organization and the high-level strategic goals. An effective BSC communicates strategy throughout the organization, thereby signaling to the employees what achievements are needed to implement strategy. A BSC also serves to communicate results back to management, using measures that link into specific strategic objectives. By having such a detailed map of strategic intent and accomplishments, both managers and employees can become more effective in their work.
Case Study
Mobil Corporation
In the early 1990s, Mobil Corporation's North America Marketing and Refining group (Mobil) implemented a strategy that resulted in an increased return on capital from 6% to 16%, and an improved operating cash flow of over $1 billion per year.4 This dramatic improvement in financial results was achieved in just three years, and was aided by a BSC implementation to help focus and align the organization.
In 1994, Mobil began a BSC project as a means to help communicate and implement a strategic organizational change. Mobil's new strategy was twofold:
increase volume and revenues of premium products; and
reduce costs and improve value chain productivity.
Mobil began by defining its high-level financial objectives-return on capital employed and net margin-and then disaggregated these objectives into specific objectives related to its revenue growth and productivity strategies. An example of Mobil's objectives in relation to its revenue growth strategy is shown in Figure 2.
After developing the financial perspective of the BSC, Mobil's managers developed the customer, internal, and learning and growth perspectives. The customer perspective focused on customer satisfaction and dealer relationships, using specific performance measures to capture achievement on each objective. The largest set of measures were the internal business processes measures, which included new product volume and profitability, dealer quality, refinery performance, inventory management, order quality, and safety measures. In the learning and growth perspective, the firm focused on measures such as an employee climate survey, core competency achievements, and the availability of strategic information.
Each perspective contained a small set of focused and interlinked measures that were keys to achieving corporate strategy. The development of the BSC was accompanied by a realignment of organizational structures, the use and communication of the new measurement system, and linking compensation with meeting the explicit goals and objectives. The outcomes for Mobil were dramatic-surveys showed that employee awareness of strategy increased from 20% to 80%, safety and environmental statistics improved, lost yield was reduced by 70%, new products were being introduced, volume growth exceeded the industry averages by over 2% annually, cash expenses were reduced, and Mobil's relative profitability within the North American oil industry improved from last to first in class. Each of these improvements had an impact on increasing Mobil's operating cash flows and return on capital employed. The BSC helped management to communicate corporate strategy through a set of strategic objectives and specific goals, essentially aligning the organization toward a common set of objectives.
Enhance Competitive Performance via Critical Key Performance Indicators (KPIs)
Introduction
Measuring performance is a fundamental part of every organization, whether it is run by a private sector or a government sector. A performance measurement system (PMS) highlights whether the organization is on track to achieve its desired goals. Performance measures are primarily used to evaluate organizational, as well as employee performance. A PMS develops key performance indicators (KPIs), or metrics, depending on the nature and activities of the organization. KPIs can serve as the cornerstone of an organization's employee incentive schemes. KPIs are used as guidelines and incentives to facilitate the coordination of managers and business unit goals, with those of the overall corporation goals, that is, they encourage goal congruency. Through these metrics, the organization communicates how it wishes the employees to behave, and how this behavior will be judged and evaluated. Effective organizational managers rely on KPIs to set direction, make strategic decisions, and achieved desired goals.1
It has been suggested that, in today's competitive and global financial crisis environments, organizations need to be masters at anticipating customers' needs, devising radical new product and service offerings, and rapidly deploying new production technologies into operating and service delivery processes.2 For several decades, performance measurement has been used as an internal informational tool to evaluate business units' operations, and make program and budgetary decisions.
nancial and financial KPIs. According to Omega's senior management, one of the advantages of adopting a multidimensional PMS is that it gives a better indication to employees of the long-term organizational priorities. It also helps to communicate any crisis to all of Omega's divisions, which was important to ensure that any impact is minimized. Each KPI is tailored, not to a division but to one of the five major activities of Omega, consistent with its attempts to become more outcome-focused. For instance, the percentage of lost working days or absentees is aimed at measuring Omega's ability to be a chosen employer. Similarly, the return on net operating assets is a new KPI, which is used to measure the commercial sustainability of Omega. In setting the KPIs, Omega employees suggested that it was common when the information was available to benchmark against other water entities, to ensure that the divisions are providing a service at a similar standard as their private and public counterparts, so that they are not seen to be performing poorly when the contractual period ends. Some of Omega's subdivisions also suggested that this had put the division under pressure to improve its performance.
Table 2. KPIs of Omega
Major strategic focus
KPIs
Customer focus
% Customer satisfaction % Compliance with verbal service-request response times Number of water supply interruptions per 1,000 properties Number of planned water supply interruptions per 1,000 properties Number of unplanned water supply interruptions per 1,000 properties % of water and wastewater service interruptions within 5 hours Number of customer complaints per 1,000 properties Number of water quality complaints per 1,000 properties Number of odor complaints per 1,000 properties % of meters installed within 14 days from date of payment
Chosen employer
% lost working days Training expenditure versus total operating expenditure (%)
Environmental sustainability
% tests meeting WWTP EPA license criteria Quantity of treated water supplied per property, not seasonally adjusted Number of uncontained wastewater spills % of wastewater spilt per wastewater treated % effluent reused
Commercial sustainability
Combined operating costs per property % expended of revenue-funded capital expenditure Water and wastewater renewals expenditure as a percentage of current replacement cost of system assets % unaccounted water Operating profit Return on turnover (net profit after tax/sales) Return on net operating assets (EBIT/total net assets) Debt-equity ratio (total interest-bearing debt/total equity) Total financial distribution to council (as a % of post-tax profits)
Quality water service provision
% tests meeting NHMRC (1996) bacteria criteria % tests meeting NHMRC (1996) chemical criteria Water main breaks per 100km of water main Sewer chokes per 100km of wastewater main Wastewater main (gravity and pressure) breaks per 100km of main
Accountability
% Compliance with wastewater spillage procedure (ensures spillages are properly reported and remedied) Maintenance of ISO 9000 and 14000 third-party certification
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Conclusion
An English-born American communications executive, who was president and CEO of ITT, suggests that, "the best way to inspire people to superior performance is to convince them by everything you do and by your everyday attitude that you are wholeheartedly supporting them."7 This short article suggests that measuring performance is important for all businesses. However, it is much more difficult to develop KPIs for each area of performance within the organization which can be measured effectively. Effective KPIs are those that enhance business performance in all areas of businesses-financial and non-financial. Harold Green remarks: "Performance stands out like a ton of diamonds. Non-performance can always be explained away." KPIs need to be developed to fit to the business process flow, and focus attention on the critical success factors of the business.
Everything You Need to Know About Benchmarking
Introduction
Organizations are constantly looking for new ways and methodologies to improve their performance and gain a competitive advantage. As they seek improvements to their own business processes, many organizations recognize the importance of learning from best practices that have been achieved by other organizations. By removing the need to reinvent the wheel and providing the potential to adopt proven practices, benchmarking has become an important methodology for providing a fast track to achieving organizational excellence.
Case Study
Benchmarking Leads to Cost Reduction of the Finance Function
An Australian company conducted a global benchmarking exercise on its finance function and found that it had an outdated infrastructure that cost more than 4% of company revenues to run, that staff spent more than half of their time collecting data, and that the information did not meet its global business information needs. A reengineering team redesigned the company's business processes and proposed that the company create a shared services centre (SSC) to process common transactions, drive down costs, and improve the quality of the service delivery. The company achieved the following:
Selected a location for the SSC based on the quality/skill/cost/flexibility of the workforce, taxation, communications costs and infrastructure, real estate cost, travel accessibility, political stability, language suitability, and company infrastructure;
Established three teams in the SSC: a supplier process team, a customer process team, and a general accounting team;
Teams were trained and a new mind-set was developed to service the business units;
A service level agreement was introduced and customer satisfaction surveys, employee satisfaction surveys, the balanced scorecard, and Six Sigma were used to measure performance;
Salary reviews and promotion were aligned with performance.
Within two years, the SSC began to provide high value-added services to the business units, including financial reporting and analysis, treasury management, tax and legal consulting, and credit and collection management. The cost of running the SSC was less than 1% of sales revenue and achieved world-class standards. The SSC reduced the cost of the finance function globally by more than 50%.
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Conclusion
Benchmarking is a proven, powerful tool that can facilitate improvements to efficiency by organizations, increase value added, and enable them to gain a competitive edge. The rationale underpinning benchmarking is sound, and the benchmarking concept of learning from others should be embedded throughout all improvement-focused organizations. Benchmarking projects should be linked to key organizational objectives, and support from senior management needs to be both strong and visible.
There is little doubt about the potential and versatility of benchmarking as a tool. It has been successfully applied by organizations of different sizes and in different industry sectors and has become one of the most popular management tools. However, it is thought that most organizations use performance benchmarking (comparing performance) rather than the more powerful but resource-intensive approach of best practice benchmarking (comparing and learning from others and implementing best practices). Using best practice benchmarking methodologies, such as TRADE, and website resources, such as the BPIR website, will help more organizations to reap the benefits of benchmarking.
Risk management
Quantifying Corporate Financial Risk
Case Study
An ethanol-producing company may be reluctant to issue more debt because of the high volatility of its cash flows and the increased risk of being put into bankruptcy.
A bank has proposed a transaction where the company would reduce its risk by selling its ethanol to customers at a price agreed today-i.e., entering forward contracts. If it did so, the bank would lend additional funds at the same rate. The company is reluctant to accept the bank's proposal because the sales price falls below the level at which the company thinks it can sell ethanol, costing the company $2 million per year. How can the company compare the benefit of higher debt with the cost of selling at a distressed price? And how can the company and the bank determine an appropriate level of additional debt?
A stochastic pro forma analysis could be done for the company before and after the proposed transaction. Before the transaction, the average earnings before interest and tax (EBIT) is estimated at $100 million with a standard deviation of $50 million. Shown in Figure 3 are five outcomes simulated over an eight-year period. The current annual debt service is $49 million.
By selling its ethanol forward, the company expects to lose $2 million per year, but reduce the standard deviation to $25 million. The resulting stochastics demonstrate that the company can now prudently afford to make higher interest payments without having much risk of failure to pay (Figure 4).
The company can afford to pay $65 million in interest safely, after hedging its results.Should the company accept the hedging program? The answer depends on taxes. If the ethanol company is not in a tax-paying situation, it has lost an expected $2 million per year in value, so it should not hedge unless there are other reasons to do so. A taxpaying firm in the 40% bracket, however, will be able to deduct the interest expense from taxable income, saving $6.4 million per year (40% of 65 minus 49). The taxpaying firm should hedge, barring other considerations that might cause the firm not to want to hedge.
A Total Balance Sheet Approach to Financial Risk
Introduction
We are living in some of the most volatile times in the history of the global financial markets. One of the reasons is exactly because they have become truly global. As banks seek to restore profitability, they may increase their offering of "treasury products" to customers. This article argues that these should be considered only in the context of a total balance sheet approach rather than transaction by transaction.
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Managing Increased Financial Risk
We have seen a period in which the oil price rose to $147 a barrel and then fell back dramatically. The wider commodities market followed suit. Inflation rose to its highest level for many years before easing back. Property prices have been savaged, following a protracted boom. Only interest rates have remained relatively benign compared to the extremes of the past.
Volatility has been traded as a market index for many years, but in 2008 alone it hit several spikes. It has become a fact of life. Markets are now driven mainly by fear-fear of being caught out when prices fall or fear of not being in the market as prices rise. Add to that the power of short sellers and you have a scary scenario for borrowers and investors, whether individuals or corporate.
Protecting or insulating yourself or your company against financial risks is known as "hedging." The principle of hedging is easily understood-it's like an insurance premium. In practice, the instruments generally used are known as "derivatives." These are poorly understood and, given the recent financial mess, probably viewed with fear or trepidation.
This article attempts two things: first, to put forward a more objective approach for companies wishing to improve their financial efficiency at a managed level of risk; and second, to demystify financial risk, making it a more approachable topic for the average manager or director.
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What Is a Derivative?
A derivative is a financial instrument whose value changes in relation to an underlying variable, for example: interest rates, the rate of inflation, commodity prices, share or bond prices, house prices, etc. Its most general use is for the purpose of "hedging" a given risk, i.e. neutralizing or taking the opposite position to a given risk, such as commodity prices, exchange or interest rates.
The problem with derivatives is that although they were created for the primary purpose of insuring against financial risks, the proportion of derivatives trading done for speculative purposes now dramatically outweighs that for ordinary trade purposes.
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Most Hedging Is Transaction-Based
In this article we shall be proposing a "full balance sheet approach" to the management of financial risk. Most businesses currently use a transaction-driven approach. This could result in overall risk being increased rather than decreased.
By a transaction-driven approach, we mean that each transaction or set of similar transactions is individually hedged. This is the most common situation, whether the use of derivatives is recommended by a bank or requested by the customer. The generic title often used by bankers for these hedging instruments is "treasury products."
Trading and managing the use of derivatives is a highly skilled and often complex process. They are usually created and dealt with by the treasury or special products division of a bank. In the United Kingdom, these "rocket scientists," as they are sometimes known, are usually based in the City of London, embedded within the financial markets.
If you wish to hedge a risk, your bank will usually put you in touch with such a treasury specialist. Alternatively, the bank may make the first move. Not surprisingly, banks have increasingly been offering these products in the climate of increasing volatility for all the commodities and financial facilities that companies use.
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A Transaction-Based Approach Can Actually Increase Overall Risk
There is an important difference between the profit and loss account approach and the balance sheet approach to improving financial efficiency. Any accountant or banker worth their salt can look at the profit and loss account and come up with suggestions on how to improve profitability or reduce risk. If you fear interest rate, inflation, or commodity price risks, your banker can provide you with a derivative-based hedge to reduce or neutralize that risk. Accountants like certainty, so that they can sleep easy at night.
The danger of this approach is that it can actually increase the risk of loss for the company. Take a simple example:
Suppose you have a commercial property-the business premises for example-that you own and plan to keep for the long term. It is by nature, therefore, a fixed asset. It has a fixed notional return, i.e. its long-term value to the business. You wouldn't think of financing it out of short-term overdraft. You want a long-term debt, ideally, to finance it. This may well be at an interest rate linked to bank base rate.
Your bank draws your attention to the possibility that interest rates may increase. Wouldn't you like to hedge that risk? Their treasury products division can sell you an interest rate hedge that swaps the variable-rate risk into a fixed-rate risk, thereby insulating you against the cost of rising interest rates.
Now consider two worrying circumstances. The first is that interest rates actually fall. In those circumstances you have not only lost the value of the "premium" you paid, i.e. the cost of the derivative contract, but you've also lost the opportunity to gain from the interest rate falls, because you're now effectively stuck with a stream of fixed-rate payments.
So the first and most important consideration is not to use hedging on a transaction by transaction basis, because you may actually be increasing the overall risk profile of the company.
Take another example: sterling is falling against the dollar and, because commodities are usually priced in dollars, the effective cost you are paying for your raw materials is increasing. So you decide to hedge against the risk of a rising dollar. But suppose you also sell much of your finished product overseas. Whether or not you are invoicing in dollars-but especially if you are-the currency you receive will be exchanging into more and more pounds. This could be counterbalancing your raw material price increases.
Of course, you could decide to hedge the raw material currency risk alone and profit from the widening margins in sterling. But again, if the currency rates swing round the other way, your sales income in sterling will be falling and you won't benefit from the fact that raw material prices are also falling. This again illustrates the importance of looking at both sides of the trading account or balance sheet.
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A Holistic or Full Balance Sheet Approach
So, the first point we are making is that when you are looking at your trading, before entering into a hedge on one side of the transaction, i.e. the buying or selling side, you should also consider what is happening on the other side. You can hedge price increases and currency fluctuations, as well as interest rate movements.
There is also a range of products that can make the holistic hedging approach even more effective. As well as swapping variable interest rate payments for fixed, you can also buy what is called a "cap" or a "collar." A cap protects you from interest rate increases above a certain level but enables you still to benefit if rates fall; and a collar gives you protection from interest rate fluctuations both up and down, outside of a given band of rates, and may be cheaper.
Having considered trading transactions on both sides of the equation (such as the inflation of selling prices matching out the inflation of raw material costs), the most significant and generally underexploited area is the balance sheet.
Many of you will have come across fixed-rate mortgages for home purchase. Although 25-year fixed-rate mortgages have been available in recent years, few have been taken out to date. Normally fixes are for up to five years. The problem is that, on a 25-year mortgage term, after five years you are exposed to the risk of rising rates again. In other words, you don't have a perfect hedge.
And so with balance sheets. It would seem to be folly to fund long-term fixed assets from overdrafts, but that is exactly what some businesses effectively do. By taking the whole balance sheet perspective, you can not only ensure that you reduce overall financial risk, but you can also increase profitability without increasing risk.
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Effecting the Full Balance Sheet Approach
You may still wish to seek the help of a treasury specialist, but here you want them to look at the whole balance sheet.
To take the earlier example: you may have funded the purchase of a commercial property that you intend to use and keep indefinitely, by borrowing on a five-year term at a margin over bank base rate. There is certainly logic in swapping this into a fixed rate if you think interest rates may rise, but this can also be a gamble because if they fall, you are not gaining the benefit.
Furthermore, the most common source of long-term capital, fixed by nature, is retained profits. So, suppose that your retained profits are at least as great in value as the cost of the property. Given that both are retained for the long term, they could be said to match each other. This leaves the cash that you have borrowed on a variable rate free to fluctuate. If you also generate spare cash on the other side of the balance sheet, then, in order not to increase the overall financial risk in the balance sheet, either this should be invested at a variable rate, or, if it is at a fixed rate, then the cost of the debt should be swapped to variable.
When you put all those assets and liabilities together in the balance sheet, you have not only reduced the financial risk in the balance sheet, but you have also significantly improved the certainty of the net cost or profit arising from those matched transactions.
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The Concept of Duration Risk
The final piece of the jigsaw is known as "duration." In simple terms, duration is the length of the life of the particular asset or liability. The importance of this is as follows.
Most people understand the likely folly of borrowing short to lend long. You wouldn't borrow money for six months to buy your house. You might borrow money for 25 years with a fixed rate for the first five to give you relative certainty, but because of the constant risk of rising interest costs it is no surprise when people are looking to refix the rate for another two, three, or five years-for example, when the first fixed rate runs out. It may cost more, but that is the price of certainty.
So, the final piece is duration, and we bring this together with the whole balance sheet approach. First, you analyze your whole balance sheet by looking at each of the assets and determining which liabilities are funding which assets. If you have a mismatch between, say, fixed-rate assets and variable-rate liabilities, you may want to hedge or renegotiate more fixed-rate liabilities to produce a better match and more overall certainty, with, by definition, lower overall risk.
The next stage is to look at the average duration (or maturity/life) of the assets and the same for the liabilities. If there is a mismatch, either you will have greater overall certainty and lower risk because the average duration of the liabilities is longer than that of the assets, or you may have greater overall risk and less certainty if the balance is the other way. In the latter case, you may wish to increase the average duration of the liabilities, perhaps by refinancing.
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Conclusion
We have introduced some complex concepts here, but this is for at least two important reasons: first, if you have, or know of, a risk that you face and choose to do nothing about it, that decision alone increases the risk to the corporation. Hedging through the use of the increasingly sophisticated range of derivative-based products can both reduce risk and increase either or both the overall return and the certainty of costs or return.
This can only be guaranteed if you use the full balance sheet approach or look at both sides of the transaction. If you allow yourself to be persuaded to hedge individual transactions, you may by definition actually be speculating and, worse still, increasing the overall risk profile of the business.
Any worthwhile treasury products specialist at your bank should understand all the principles and concepts introduced in this article and would find it hard to disagree with the overall premise. Business finance should be about improving returns and the certainty of returns and reducing or neutralizing risk. Never has this been truer than in these increasingly volatile times.
Integrated Corporate Financial Risk Policy
measures of risk that are consistent with corporate objectives, consistent policies for treasury and insurance risk, best practices in procurement and marketing risk, corporate hedging policy to hedge integrated risk (not in each silo), and risk-based performance measurement to reward those who manage risk
Conclusion
Risk management policy is more than a risk control policy. It sets out defined threats to corporate objectives, measures threats relative to the financial indicators that define success, and ensures consistent interpretation and pricing of risk throughout the company. A widely used measure at financial institutions is RAROC or something similar. A corporation's choice of risk measure and cost will depend on its own particular circumstances.
Case Study
A large multinational corporation operates a distribution facility in Puerto Rico. The facility maintains automobiles and light trucks, requiring the use of significant amounts of diesel over the year. The price of diesel is determined by a local index that fluctuates roughly along the lines of US gas prices. The company's procurement officer has a budget to meet for the year, and will not meet his target if diesel prices increase over the year. He has two alternatives: to try to fix a price with a small distributor, or to try to hedge the price using market derivatives. What should he do?
Answer: First, since this is a large corporation, it is likely that it does not need to manage this risk. In other words, the costs of managing risk are probably greater than the benefits. The only driver for hedging is the policy that affects the procurement officer's compensation. Therefore, the procurement officer should seek a solution whereby his budget is adjusted in line with the changes in diesel prices; if diesel prices go up $0.50, his budget should go up as well. His budget should drop if diesel prices fall, so he is not rewarded for a windfall outside his control.
Regarding the hedging methods, both are problematic. By fixing the price with a small distributor, he may be using his market clout to put the distributor in jeopardy, since the distributor may have to take the deal and will not be able to hedge. Since there are not many diesel distributors in Puerto Rico, this may not be wise, since the distributor could go bankrupt. By hedging the price with derivatives, the procurement officer will see increased trading costs, including risk of rogue trading (see the Ford debacle on platinum), margining, and counterparty credit risk
