What is CDOTE?
CDOTE is short for Commodity Derivative Order and Trade Execution and denotes a new solution of SAP which is part of its Commodity Risk Management offering. It first became available with SAP S/4HANA 1809 on-Premise. By the time this article was written FPS02 of SAP S/4HANA 1809 on-Premise is released.
Based on that release I would like to introduce this new solution to you.
The main benefit CDOTE offers is integration between the different Commodity Management components. Meaningit allows you to integrate your Agricultural Contract Management to Commodity Risk Management and / or your Commodity Management Procurement and Sales to Commodity Risk Management.
But how is this done and on what level? Let me give you an example.
Imagine you do have a Purchase Contract with a Futures price component that is not yet fixed. When it comes to establishing the price for that component on the request of your counterparty, without CDOTE you would have to do the following:
- Contact your Broker and place an order for a sale of an according future position at the exchange
- Wait until the Broker gets back to you, providing the executed transaction and the price details
- Maintain the price for the future price component manually in the purchase contract
- Create the financial Future sale transaction manually
As you can see, lots of manual processing is involved and Commodity Management Procurement and Sales and Commodity Risk Management is not really integrated with each other for this process.
In addition, doing these changes manually may result in wrongly captured data, causing follow-on issues, including incorrect risk positions. And it takes quite some time to capture the data and transactions. Because of the time this takes your position might be incorrect for a certain period and staff is bound to doing manual data entry. Both can be costly.
That kind of process can be automated, and position updates can be synchronized with CDOTE. Let’s see how the same use-case is executed using CDOTE:
- On the purchase contract pricing screen trigger a Future order to fix the price via CDOTE
- Wait until the broker provides back the executed future transaction
Now, with the help of CDOTE all the previously necessary manual steps are reduced to just one. Behind the scenes CDOTE creates an Order Request from your Contract and transmits it to the broker. When the brokers responds with a Fill, CDOTE creates a Future Financial Transaction, updates the Contract and makes sure both show up in a position at the same point in time.
While this is on a very high level what CDOTE can do, it also supports associated cases as well.
- You can create Hedge Orders, which are sent to the Broker and end up creating Financial Transactions only (having not necessarily a connection to a physical contract)
- You can also manage the pricing through Exchange for Physicals (EFP) or against Actual (AA) pricing mechanics using so called “Exchange Orders” that transfer the future positions at an agreed price to your purchase contract’s counterparty
- You can do Rolls using Spread Orders
The Broker integration is making use of FIX messages. CDOTE provides out of the box message parsing into the FIX format. As well as handling of messages in that format. Within an implementation project this can be leveraged to connect to a concrete FIX Engine or other system, capable of handling FIX messages. An important point here is that CDOTE is not a FIX Engine. But it provides capabilities for parsing the messages to the format and provides capabilities so that it can be called to get messages into the system.
In conclusion: with CDOTE you get a platform that can connect your Commodity Management solution for handling Logistics processes with your Commodity Risk Management solution. Additionally, CDOTE provides capabilities to connect to a Broker system. Giving you an end to end integrated solution.
As CDOTE is quite new I will try to explain it in more detail in later blog posts. There I will try to cover topics like:
- Highlighting some of the low-level features
- Try to explain how to setup certain areas of CDOTE
- Highlight extensibility points of CDOTE
- Explain how CDOTE is also able to act as incoming only interface if ordering is performed by phone or directly in the broker system