Trading & Risk Management Technology
such as value at risk (VaR) or potential future exposure (PFE).
• The calculation framework for pricing instruments across thousands of simulations in a timely manner.
• Infrastructural design to facilitate transparency. Timely calculation of results is the product of both sound
system design and an efficient calculation methodology. Today’s risk systems must therefore be scalable for tomorrow’s potential volumes and complexity, by employing a component-based approach in which differing scaling issues can be managed in a component specific manner. As Cree explains, “These components include a flexible, extendable database for trade and data storage, where new data types can be easily added as required; and grid-based calculation engines optimised for grid technology, which allows increasing volumes of calculations while maintaining speed with additional hardware.”
Which Technologies? Architectural business requirements should drive an
institution’s risk management infrastructure. And a modern infrastructure should establish and maintain an efficient and consistent risk culture throughout the institution. But organisations facing risk management infrastructure
challenges need not despair. These requirements, driven as they are by the financial crisis, are now in harmony with the technology available in the industry. In fact, many of these systems were designed to meet the risk management challenges of today rather than yesterday. Systems that enable institutions to select and to use capabilities designed to solve specific issues necessitates a component based approach to data storage, calculations, and distribution of results. “Traditionally, most have focused more on the financial
trading side providing STP for paper trades while offering some degree of functionality for the physical trading but perhaps lacking operations and logistical management for physical trading,” according to Patrick Reames, Managing Director of Utilipoint, The Americas. However, “rarely have the products from these large vendors been deployed in isolation. Indeed, in almost all cases, customers who have bought these systems have also licensed additional third-party components to address specific functional gaps that are not addressed in the larger T&RM systems. Many of these gaps are associated with logistical complexities of specific commodities or region/ country-specific market requirements,” Reames explains. The large vendors have obviously recognised those functional gaps (and the revenues lost to smaller vendors) and have, at times, attempted to close them through internal
worldPower 2010
development, generally in cooperation with a client or group of clients who could supply commercial support and business expertise to the development process. However, within the last couple of years, many of the bigger T&RM firms have sought to build-out their product capabilities via the acquisition of smaller companies whose products provide specific functional capabilities, or coverage of additional commodities. These acquisitions have brought functional products, established
... the market, and trading, are premised upon physical realities ... prerequisite to covering all aspects of physical and financial trading and risk management
clients, and the business and technical expertise that was not readily available in-house and have allowed the vendors to quickly expand their market coverage, increase their revenues, and gain some competitive advantage against the competition. A good example of this is OpenLink’s acquisition of dbc SMARTsoftware, Inc., a global provider of software solutions for the agricultural, biofuel and soft commodity industries. SMARTsoft is a ‘value chain’ management software suite for producers, processors, manufacturers and traders who buy, sell, hedge, warehouse, merchandise, export, and transform commodities into value-added products and by- products for distribution. A critical and often underestimated key to delivering solutions covering the whole commodity trading value chain – from highly complex physical gas and power trading and logistics to more standardised financial trading functionality – is understanding that the market, and trading, are premised upon physical realities. Companies like Navita are founded on this understanding, which they believe is prerequisite to covering all aspects of physical and financial trading and risk management in one system portfolio – being a primary point of differentiation and a driver of value for the company. CommodityPoint has observed the changes taking place
in commodity markets; trading a more diverse portfolio of commodities, new and changing relationships amongst commodities and the growing desire to assess the profitability and risks of a trade through its entire value chain including such things as cost of storage, transport, credit exposure and so on. As Reames explains: “These trends in the industry have been incorporated into the buying criteria of those seeking ETRM/CTRM software and the vendors have needed to, and will continue to respond.” ■
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