The CTRM Blog

These days, risk management is high on most trading firms’ agendas. That is risk management in both the broadest and narrowest sense. Increased oversight, regulation and both the rapid evolution and increasing speed of markets is driving this need. In a climate of price volatility, volumetric uncertainty, innovation in deal structures, changing regulations and globalization, effective risk management and the ability to respond to valuation challenges and portfolio optimization opportunities are pre-requisites to profitability for organizations that deal in commodities.

Risk Management Problems

Prior to the collapse of the Merchant energy segment, the North American Trading and Risk Management tradeshow was a vibrant and well attended event but in recent years many of the big tradeshows in that industry space have died off or died out altogether. But not here in Europe! E-World Energy and Water held every year in Essen, Germany has over 500 exhibitors ranging across the industry from large energy companies such as RWE, Vattenfall, CEZ, and the like to small software vendors and data providers. The coverage of the show is both trading & risk management and inside the Utility so covers smart metering, smart grid, CIS and more. Furthermore, the event was absolutely packed.

COP15 (the United Nations climate talks) in Copenhagen came to a close on December 18 after a tumultuous two weeks in which emotions and expectations rose and fell on a daily basis. In the end, COP15 produced a relatively weak political agreement that committed to keep global warming at 2°C or less and promised $30 billion in funding to battle climate change by 2012. It also created a framework for international transparency on climate actions for both developed and developing nations. The deal allows each country to attach their national actions and mechanisms for combating climate change and to then provide information on those actions. The accord is not legally binding.

Greenhouse gas emissions have been receiving a lot of attention recently. Last week, President Barack Obama traveled to the Climate Change Conference in Copenhagen and pledged a 17 percent reduction in U.S. greenhouse gas emissions by 2020. Meanwhile, other initiatives have taken place both within the US and in other regions of the world. At this time, despite continued uncertainties, we may well stand on the precipice of an era in which carbon becomes a globally traded commodity and in which companies, particularly energy companies, are forced to monitor, track, report and reduce their GHG and other emissions.

As many of the world’s leaders arrive in Copenhagen to try to seal a climate deal, the signals emerging regarding progress from COP15 are mixed. Yesterday, the negotiating process was subject to an “unexpected stop,” according to Yvo de Boer, the United Nation’s top climate official and it has indeed been a week of stops and starts as even on Monday, informal talks between the COP15 presidency and developing countries ended a daylong boycott of negotiations, which was apparently caused by controversy over the Kyoto Protocol. There has also been much public talk by those involved of “posturing” and “placing blame on others.” On the other hand, the Danish hosts are said to be preparing a new compromise draft and many of the countries involved have already brought forward substantive voluntary commitments to the table including, for example, Japan’s offer of a total of 15 billion U.S. dollars for climate aid for developing countries through 2012.