Holistic Risk Management
and capture requirements often requiring multiple solutions
•
Inability to extract meaningful information with which to
– one for each market. effectively manage the business.
In the end, the trading organisation finds itself with an
intractable integration issue which effectively eliminates its ability The Current State of Risk
to support straight through processing and thus essentially The current state of commodity markets and trading is now
limits the implementation of adequate controls, workflow and placing additional demands on traders in the area of market
audit trails. In the end, its own systems, while perhaps providing risk. The risk analytics utilised by the industry and many of the
a good deal of functionality and support for end users in vendors in the space are simply, in our view, no longer viable
different areas of the business, fail to offer the enterprise tools under current market conditions. Many rely on historical
adequate operational risk protection and can even become an price data to ‘predict’ the future and many make basic
additional risk factor in and of itself. Even supposedly large- assumptions about volatility and other parameters which have
scale and sophisticated trading firms often have a patchwork simply broken down over the last two to three years.
quilt of systems from various sources supplemented by CommodityPoint’s recent study
*
provides the data to suggest
spreadsheets and manual process and interfaces. that this is a major issue in tackling holistic risk management.
Credit and counterparty management is now a key
... the current state of risk management ...
requirement of commodity traders, but most TRM solutions
offer only a thin veneer of coverage in these areas. The same is
in many cases, it is inadequate & may in
true for the functionality to support hedge accounting and
fact contribute additional risk other onerous regulatory requirements. Traders now need to
understand the impact of a prospective trade on available
A significant part of the issue is the technical complexity credit just as much as they need to understand their price
involved in delivering proper integration and workflow. exposure; credit is becoming more and more integrated into the
Despite the use of wide communication frameworks that offer front office. On one hand, this means more software solutions
the technical opportunity for integration, the far bigger issue is deployed and a larger integration issue as discussed above and
in mapping all of the various data sources in a coherent and on the other, it places more strain on vendors to come up with
intelligent manner. This is simply an enormous task of more rigorous analytics and reporting.
significant complexity that requires intimate knowledge of the CommodityPoint’s assessment of the current state of risk
technical aspects of all the systems and software components management in the energy commodities industry is that in
utilised across the organisation, as well an understanding of many cases, it is inadequate and may in fact contribute
the business processes. It also can require some pretty hefty additional risk into the business for the following reasons:
computing power.
•
Poor levels of integration.
In fact, CommodityPoint’s recent study
*
underlines these
•
Widespread use of inappropriate risk analytics (or in some
issues in some of its other findings. Amongst the critical cases no analytics at all).
business issues outlined by its respondents are issues such as
•
Credit and regulatory risk is barely covered by TRM
inability to retrieve data from systems, data management, and most vendors, forcing users to procure or build yet more niche
tellingly, lack of integration. Our view is that in today’s business software products adding to the integration problem.
and trading environment, the software supporting trading and
risk management is simply being stressed to the point that In a nutshell, the systems and environments deployed to
these historical and well known weaknesses are becoming support trading and risk management are often themselves a
increasingly obvious and problematic. With market volatility significant risk.
•
as it is, counterparty credit a serious problem, reduced market
liquidity and price behaviour breaking with the past, trading Dr. Gary Vasey is an energy industry expert and currently
companies simply have to address this issue – and quickly. manages UtiliPoint’s European practice from their office in
From CommodityPoint’s perspective, lack of integration the Czech Republic. CommodityPoint is a division of
amongst the applications used to support trading and risk UtiliPoint International, Inc.
management activities is both a risk to the business and a key
* Changes in Commodity Markets – Impacts on Traders and
aspect of holistic risk management for the following reasons:
Software, CommodityPoint Report, 2009.
•
Inability to implement work flow and controls.
http://utilipoint.com/reports/Whitepapers.asp
•
Risk of data entry errors.
•
www.commodity-point.com
Risk of systematic abuse.
worldPower 2009 71
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