Breaking Down the Barriers
to Holistic Risk Management
By Gary M. Vasey
T
he last few years have brought many significant available TRM software to replace the error-prone spreadsheets
changes to commodity markets and trading. As more and home-grown solutions to cut down or eliminate data entry
and more money has flowed into commodities from an errors and provide some form of audit trail. Our research has
increasingly wider range of traders and investors, historical shown that despite selecting and implementing TRM solutions,
pricing relationships and trends have broken down, volatilities a number of problems and issues still often remain:
have increased, and price movements sometimes become 1. The TRM solution, while potentially offering an integrated
disconnected from the underlying fundamentals. suite of solutions in of itself, is almost never a perfect fit to
The banking crisis has seen commodity price formation requirements meaning that off-system spreadsheets
switching rapidly from being focused on supply to demand as continue to be utilised for some aspect of the business.
slowing global economic growth has reduced the need for raw 2. The TRM solution is strong in some areas and weak to even
materials. Prices have fallen rapidly, as has market liquidity, non-existent in others, requiring it to be supplemented with
and counterparty and credit issues have taken centre stage other commercially available solutions for specific areas of
with volatilities remaining high. functionality.
Perhaps it isn’t surprising then, against this background, 3. Business requirements change rapidly and the vendor is
that a recent study by CommodityPoint
*
conclusively showed often unable to provide the necessary enhancements
that risk management was the key critical business issue for quickly enough, or the users are unable to upgrade their
2009 and beyond for commodity trading firms. Indeed, during software for whatever reason to take timely advantage of
thefirsthalfof2009manycommoditytradingfirmshavebeen the vendor’s updates, resulting in other off-system
focused on examining their risk management processes, workarounds being developed and deployed.
controls and systems as evidenced by the strength of demand 4. The vendor of the software is acquired or has gone out of
for risk management software and consulting. In 2009, the business and no longer offers adequate support for the
focus is necessarily on holistic risk management and not just software, requiring the users and the IT department to make
market or price risk. ‘tweaks’ and additions internally.
Holistic risk management in this context is used to describe
all areas of risk associated with commodity trading. As if this was not enough to deal with, the users also have
Commodity holistic risk management can be broken down in additional systems such as electronic trading exchanges, credit
to several areas: Market, Operational, Counterparty/Credit and counterparty risk management, regulatory risk
and Regulatory Risk. management, price feeds, market price forecasting tools and
In today’s commodities trading environment, all four aspects many other applications that are required to be integrated or
of risk need to be addressed. Indeed, areas such as credit and interfaced to the TRM solution. CommodityPoint research
counterparty management – and regulatory risk in particular – shows that many trading firms have in excess of eight different
are usually served by specific applications outside of the main software solutions supporting their trading and risk
TRM software solution. But in attempting to tackle the concept management operations – and an integration nightmare as a
of holistic risk management, one faces result. Indeed, most trading organisations
several seemingly intractable issues.
In 2009, the focus is
are still, boldly stated, in a mess from a
Risk & Integration
necessarily on holistic
systems point of view as CommodityPoint
research has consistently demonstrated
Unfortunately, many trading firms have
risk management
that the vast majority of them rely on
not made the investment in software and manual interfaces between the solutions
systems required to support their operations from an holistic risk deployed in their trading and risk management area and most
management perspective. CommodityPoint has consistently have failed to eliminate some level of reliance on spreadsheets.
observed that most trading organisations initially rely on Unfortunately, this situation is also exacerbated by two other
spreadsheets and internally developed software to support their important factors:
tradingandriskmanagementactivities.Itisatruismthattraders 1. Most trading organisations trade more than one commodity
adore their spreadsheets and are often reluctant to abandon requiring additional solutions specifically for each
them.Astradingvolumesgrow,mistakesstarttobemadeandat commodity for at least scheduling and settlement.
some point the risk department, auditors, or senior management 2. Most trading organisations trade several markets or
require the selection and implementation of commercially geographies and each may have its own set of data transfer
70 worldPower 2009
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