CommodityPoint & Seminel’s Risk Management Study
This study was designed to examine Risk Management in the Energy and Commodities Market in order to produce:
• A review of the current state of risk analytics used in the market;
• An assessment of the systems deployed there;
• The key risk management requirements of companies trading in the market;
• An assessment of where risk management is headed in commodity and energy trading and its impact on the systems.
CommodityPoint and Seminel utilized a combination of a web-based questionnaire and phone and/or in-person interviews with industry participants to determine their views along with secondary research and interviews. The survey, which was conducted between July and October 2009, had 47 valid responses.
The respondents to this study came from a diverse background across the commodities space with a general bias towards physical energy players such as utilities, generators and refiners and while just under half of the respondents were based in North America, there was good geographic diversity with strong European participation.
In terms of software, while the majority of respondents use commercially developed and supported packages, there are still a large number (around 45%) of companies using internally developed or spreadsheet-based solutions, either exclusively or partially (in combination with commercial software packages), to manage their trading. Of the responding companies with at least one commercial package installed, the majority have deployed between two and three separate systems and a small minority three or more separate systems. No single package dominates the market with SunGard, Triple Point, Allegro and OpenLink Financial mentioned as the most popular, being used across a broad range of commodities, while other solutions, such as, SolArc and Amphora are utilised for specific commodities. North America was the most mature marketplace with the largest proportion of package installations. Thus, relative to the Financial Markets, risk systems in Energy Markets are generally immature, with the risk concepts and tools to support the physical nature of the market still evolving.
With respect to current system capabilities, while basic VaR and Credit Exposure functionality are relatively well-supported, the survey respondents indicated a need for improved support in the following areas:
1. Improved support for risks associated with physical assets including generation, capacity, storage, transportation and volumetric exposures
2. Credit Risk, in particular Counterparty VaR, Credit VaR & Concentration Risk
3. Integrated Risk, including Market & Credit as well as Enterprise-wide Holistic Risk reporting, incorporating Market, Credit and Operational risk
4. Assessing the impact of ‘tail’ events, including Stress Testing, Extreme Value approach and What-If testing
5. Risk Adjusted Performance Measures (such as RAROC)
6. Risk Metrics ‘on demand’ (versus end-of-day)
7. Back Testing.
These areas of functionality will need to be addressed by the vendors in their systems going forward, and are in fact being addressed by some of the vendors in the latest releases of their products. However, systems cannot provide reliable risk information in isolation and, as many of the respondents and interviewees indicated that high quality input data and processes – as well as use of commonsense – are absolute requirements for a robust and credible risk capability.
The full report is available here
