Eliminating Spreadsheet Risk:
Kill or Cure Rather than demonising spreadsheets, businesses need to be clear on when it’s right – and when it’s wrong – to use them.
By Stuart Cook I
n the face of increasing automation in the energy trading world, spreadsheets have been singled out by some as old-fashioned and outdated. While a growing number of
energy traders are moving on to more sophisticated trading systems, this overly simplistic analysis ignores some of the notable benefits of spreadsheets. But rather than demonising spreadsheets, businesses need to be clear on when it’s right – and when it’s wrong – to use them. Anyone who works with spreadsheets knows that it’s all too
easy for errors to creep in. Most are due to negligence, but some are due to fraud. In 2002, rogue trader John Rusnak’s fraudulent manipulation of spreadsheets lost his employer, Allfirst Bank, US$691 million. Through his unauthorised currency trading, Rusnak adjusted the inputs into the calculation of value-at-risk. Instead of manually checking the figures, Rusnak’s colleague trusted a spreadsheet that drew data from Rusnak’s personal computer. That data was based on figures relating to fictional transactions, enabling Rusnak’s fraud to go undetected for some time. Spreadsheet disasters are not restricted
However, spreadsheets continue to form a necessary and
useful part of the energy trading landscape, and there are many perfectly legitimate reasons behind energy traders’ traditional enthusiasm for relying on spreadsheet technology to manage their trading and risk activities. Traders have built up trust in their own calculations and models, and are therefore reluctant to move to unfamiliar software which they often perceive as complex, inflexible and non-intuitive. They can also act as a convenient first port of call for new projects at their inception. There’s no doubt that spreadsheets can provide a flexible
to banks. In 2003, Canadian power company TransAlta Corp suffered a US$24 m hit to its earnings after a bidding error meant it accidentally paid over the odds for more US power transmission hedging contracts than it needed. The company’s spreadsheet contained mismatched bids for the contracts. TransAlta’s chief executive blamed the debacle on “a cut-and-paste error that we didn’t detect when we did our final sorting and ranking of bids prior to submission”. So how much has changed? Even six years on, a 2009 CommodityPoint survey, sponsored by software vendor Triple Point Technology, of energy and commodity executives discovered that 70% of companies are using spreadsheets or internally assembled systems to manage counterparty credit risk. At the same time, 60% of the companies surveyed felt the need to upgrade their credit risk systems to manage counterparty risk effectively in the current business environment.
Spreadsheets: Not the Only Answer In recent years, the energy trading industry has been
characterised by the emergence of new markets, higher trading volumes and more stringent risk and regulatory reporting requirements, especially in the wake of recent events in financial markets. As the industry has matured, it has become clear that spreadsheets alone are neither scalable nor robust enough to cope with ever-increasing trading volume and middle and back-office requirements.
worldPower 2010
... spreadsheets can provide a flexible short-term or ad hoc solution for a business
short-term or ad hoc solution for a business, giving traders the ability to capture trades, analyse positions and generate risk reports rapidly. Minor commodities, such as carbon, are often not included in core trading systems because they have an annual process rather than specific delivery periods like power and gas. Spreadsheets can be an ideal solution for this type of situation, providing a quick and efficient method of trade capture and analysis. However, critical spreadsheets need to be swiftly followed up by a lightweight auditable solution, where analysis indicates a business case for doing so.
With Budget Constraints – A Low-Cost Option?
With IT budgets being squeezed at many firms since the
downturn, the low costs involved in using spreadsheets can also be a decisive factor. As most traders already have spreadsheet packages on their PCs, using these sidesteps the bigger up-front IT costs associated with the purchase, build and implementation of more scalable tools. One of many scenarios in which spreadsheets can provide
a very safe and reliable medium is performing ‘what-if’ analysis on a trade, particularly in cases where some degree of flexibility is required. For example, if a trader is dealing with an uncertain or rapidly changing situation, a spreadsheet could well be less constrained by inflexibility and slower time to market relative to a system. When it comes to prototyping new pricing models and
algorithms which may later be incorporated into other systems, spreadsheets can also create an ideal environment. They are highly customisable and have the ability to link to algorithms and incorporate add-in functions such as option valuation models and other analytics tools. Traders also see spreadsheets as being easy to maintain – which is generally true – so long as multiple users are not accessing and working on the same set of data. But just as there are situations where spreadsheets, if properly
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