Trading & Risk Management Technology
The Gartner ETRM ‘Magic Quadrant’ for Energy Trading & Risk Management Platforms
being used still reliable?” Many quantitative statistical measures assume that certain factors are within certain bounds. If this is no longer the case then the risk measures being used now might be inappropriate. As historical trends break down, it can also be argued that risk measures relying on historical data and market behaviour are now also increasingly inappropriate. So now is the time for commodity firms to review risk measures and statistics and to move to models that rely more on stochastic variables. Now is also the time to conduct more rigorous stress testing of your portfolio and/or exposures. This requires more sophisticated and scalable technology [see page 37].
Controlling Risks The financial crisis has led to general scepticism
around risk controls within trading institutions, as well as the “expert” judgments of ratings agencies. This has led to:
• Increased direct stakeholder scrutiny of the company’s risk management practices.
• A greater chance of credit spread where risk management appears opaque.
• Growing demand for financial statements of risk that are coherent and robust – and far
greater expectations around adherence to transparency demands.
“Stakeholders continue to question senior
Over the past 12 months, a number of factors have continued to influence the ETRM platform market, not the least of which is the fallout from the financial crisis. Some of these factors include:
• More interest in simulation and scenario-based analytics. • Financial services companies taking more active physical positions. • Government subsidies/stimulus activity. • Greater integration of energy asset classes.
• The need for deeper, more responsive risk management capabilities and an holistic view of risk across the enterprise.
management, who in turn look to their risk managers to ascertain the strength of the firm’s risk management procedures. In this respect, transparency refers to the process itself, in terms of clear reporting lines, board and chief risk officer level accountability, and risk-based trading control measures. The more precise these are, the more stakeholders will see that the firm has a clear risk-oriented culture,” according to Marcus Cree, Director of Client Solutions at SunGard North America. When clarity around the statement of risk is determined, the firm can then publish riskiness and risk metrics as produced by its risk systems. Once the risk process is established, transparency is approached at the granular level, where clarity around data and methodology is exposed to the internal stakeholders. If data and methodologies are clearly presented, then the risk limits can be more easily situated and contextualised by
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This has led a number of energy market participants to take a more rigorous approach to market and credit risk management. As part of this revised approach to risk management, there has been a greater interest in simulation-based and scenario-based analytics. ETRM platforms have played, and continue to play, a key part in these simulations and scenarios – directly as part of the application, or indirectly as a data source.
Source: Gartner, March 2010
the internal stakeholders. Risk calculation is imperative. Calculation requires a
risk framework that can be optimised yet flexible enough to accommodate newer and more efficient calculation methodologies at any time, according to Cree. Risk calculation must include efficiencies in:
• Data storage that enables historic data to be easily accessed and interrogated.
• The calibration of data into risk factors that can be used to price instruments and drive sophisticated, stochastic
distribution algorithms for simulation-based risk measures, worldPower 2010
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