As background, INSCX Exchange is an autonomous and independent closed-user, commercial delivery commodity exchange based in the U.K. It enables members to trade physical commodities via an electronic platform. Exchange members comprise producers, end-users and traders/distributors of the commodities listed for trade.

INSCX is strictly a physical delivery marketplace, so no futures are involved, other than the facilities to forward purchase and draw down, using a liquidity provision. Members instruct the exchange to make trades, acting on their own accounts with orders being received by a so-called specialist merchant and then broadcast anonymously on the live electronic platform.

The specialist is a wholly owned subsidiary of INSCX, effectively a neutral trade member of the exchange. Its only role is to facilitate trade as instructed between members and to act as a principal counterparty in an agreed trade on a best execution basis, as instructed.

The objective of INSCX is to provide a neutral, transparent and fair marketplace for all users of the exchange, with markets maintained during U.K. and North American business hours. INSCX aims to ensure price neutrality, trade integrity, regulatory compliance and best trade execution.

Another service offered by the exchange is access to capital liquidity. The exchange permits members this access to aid more flexible trading. The objective of the exchange is to enable members to sell on a cash vs. contract basis, buy on margin or deferred payment terms – avoiding the use of cumbersome banking instruments such as letters of credit – and trade on a spot, forward or fixed term sale or repurchase basis.

For example, when a trade is agreed, the exchange specialist acts as principal to pay the seller while accepting payment from the buyer in the form of a margin deposit or payment at the end of an agreed term. When the trade has been agreed and the specialist has paid for it, the buyer is made fully aware of the sellers identity and vice versa.

Buyers and sellers will have their own reasons for using the liquidity facility. One reason is to enable access to working capital and credit. Capital liquidity is made available to bridge the funding gap between purchase and delivery of a cargo or parcel of base oils. Typically, buyers use dated letters of credit to bridge this gap and to provide credit from the seller.

Through INSCX, the availability of a cash vs. contract settlement is designed to remove seller credit risk, maximize the seller’s use of working capital and offer the receiver or buyer more flexible payment terms in a more efficient manner than presently available through standard banking channels. The buyer, for example, does not have to issue a letter of credit.

In addition, members can use a facility to trade on margin, for example, posting 20 percent of the trade value with the exchange. Thereafter, the exchange pays the seller in full cash vs. contract.

Frequent traders may have an interest in margin trade. At the same time, producers can use the facility to better manage stock and inventory costs by agreeing to fixed price or term sale and repurchase style transactions, using the auspices of the exchange.

Buyers and sellers must be registered with the exchange and are assessed to obtain a liquidity value. This value is the time limit over which the exchange will extend credit to a member, and the corresponding limit of payment to the seller.

Basic details must be registered, ranging from the member companys full corporate identity, last available financials and a broad outline of typical trades the buyer or member wishes to transact. Once a company is registered and assigned a liquidity value, the procedure to instruct and confirm trades is fluid thereafter.

For example, approved buyers need not issue instruments such as letters of credit to make margin purchases. Instead, they can purchase on margin while buying from existing and exchange-approved sources. Buyers can also bid for best price execution anonymously while acting or operating as a cash vs. contract buyer without letters of credit. In some cases, they can even secure credit terms for periods longer than 90 days.

Sellers can use the exchange to sell on a cash vs. contract basis to either their approved customers or neutral bidders. Sellers can use the exchange to book and guarantee trades while offering cargoes for sale anonymously. They can sell to existing approved receivers or exchange-approved sources and receive payment against contract.

While using such a platform has many benefits, the status quo within base oil markets may make it difficult for buyers and sellers to change the way business is transacted. Only time will tell.