As I noted in my presentation at the event, their solution is very timely in that the rapid evolution of the energy markets, combined with the emerging Dodd Frank regulations, are driving a number of medium and large scale energy companies to undertake “rationalization” programs – that is trying to improve cross asset/cross portfolio information exchange and aggregation, while simultaneously reducing the complexity of the technical architectures within their trading organizations.  The ability to do that is dependent upon being able to deploy a solution that can, in real-time, link multiple CTRM/ETRM systems, operational systems, asset management systems, and market information; and provide the sophisticated analytics on an intraday basis that are required in order to optimize positions and assets; all the while meeting the emerging reporting regulations that will come with DF.  The ECRAA approach seems to fit that bill pretty well.

At CommodityPoint, we have often asked when the market would take a significant leap forward in the way organizations measure and control risk. Commodity players that have participated in our research around the topic of risk management have expressed dissatisfaction with the modeling assumptions contained in their “off the shelf” financial models. In fact, many have decided to build home grown modeling solutions.

When I asked Dr. Boesch what his objective was, he responded, “Our vision has 3 key objectives that will create an advantage specifically for our RightAngle customers over their peers: 1) a top tier risk dedicated system that unifies physical and financial risk management, 2) Wall-street-caliber financial modeling of commodities and derivatives, and 3) well separated and efficient components that allow real-time or “tic by tic” reporting of Greeks, P&L and P&L attribution.”

I pressed SolArc on their strategy in terms of what is the difference between what they provide now versus their upcoming releases. Mr. Gunn told us that, “ SolArc Right Angle provides all the key risk reports now whether they need mark to market, Greeks, trade P&L, basis reporting, P&L attribution or Var. Our goal is to create an instant answer to those questions. Running these reports in batch mode that takes 10 to 15 minutes is not enough. Customers need that information instantly and they need it with a “sharper pencil” than they have now with an off the shelf financial model.”

CommodityPoint also sees this as an issue – one which we have coined the “risk issue”. In a recent CommodityAlert, I said;

But the “risk problem” is more acute for commodity traders who deal in physical commodities. Commonly available risk analytics were often developed for markets other than commodities or commodity derivatives; they lack the specificity to deal with complex aspects of physical commodity trading and trade valuation. But there are a set of problems that make the “risk issue” one which is difficult to solve. Those problems often include the following issues (and this list is far from being complete):
• The need to access accurate and timely data from a number of different systems, including Commodity Trading & Risk Management (CTRM) solutions, price feeds, internal systems and spreadsheets, online trading systems, and more;
• The use of multiple CTRM solutions for different commodities which store and process data differently and are often not well integrated;
• The inability of some CTRM solutions to keep pace with developments in energy and commodity risk metrics. CTRM vendors have a broad range of functionality to focus on and requirements to meet, and sometimes are unable to deliver everything for a particular release. This is often a problem for more sophisticated trading operations, and it can force them to go off system for risk solutions;
• Inability of some CTRM solutions to run stochastic risk metrics in a timely fashion;
• Data quality issues which can result in costly errors, or omissions which invalidate batch runs of risk metrics;
• Inability to perform certain specific risk metric calculations, or perform stress tests.

Hyper Rig believes that its risk aggregation and data management products are ideally suited to solve these problems by providing the integration and extracting the required data (in near real-time as ‘events’ occur) into an environment in which it can be quickly analyzed and reported. As my CommodityAlert noted, data management solutions targeting risk management may well prove to be the solution to these problems.

Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in Detroit.

By providing her customers’ freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi’s gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.
Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.

Now, do you understand?

Today I was updated by Mr. Bhatt on the company’s progress to date. The company is 5 strong and is in the process of adding a 6th person with a target of doubling its staffing by the end of 2011. It has four clients; 1 in the Netherlands and three in Germany and is hoping to add two more over the summer in the UK and Italy. It is focused on the trading side of energy in areas such as forward curves, pricing and risk tools for complex energy portfolios as well as developing bespoke solutions for customers.

Its software products are marketed under the brand name PriceHub which includes;

– e·Pool Market Price Data Management
– e·Curve The Energy Forward Curve
– e·Price Energy Contract Pricing
– e·VaR Innovative approach to Risk Management and Control
– e·Stress
and e·IVaR.

eOpts view of the market is similar to our own. We too observe niche areas of functionality where CTRM software does not and cannot always offer the necessary depth and focus that users require and we observe many smaller companies such as eOpt offering expertise in those areas. In particular, CommodityPoint research around risk management software at the end of 2009 (available for free download here clearly demonstrated that the industry lacks real tools to perform coherent risk assessment on portfolios that include physical energy assets and other complex energy instruments. eOpt are helping to address this weakness in the market and we expect to see them grow rapidly as a result.

More information on eOpt can be found at its new website.

In an ideal world, running stochastic risk metrics such as full blown Monte Carlo Value at Risk (VaR), Earnings at Risk (EaR), portfolio stress tests or, other simulations, would be performed both on demand and in real time for complex commodity portfolios. Unfortunately however, this vision has proven to be elusive with most firms resorting to the use of overnight ‘batch’ jobs lasting hours to provide an accurate assessment of the day’s starting position and then utilizing parametric risk metrics during the trading day to approximate changes in position.

In part, the problem facing commodity trading firms is one of multiple different systems utilized to capture trades and track positions but it is also, in part, due to an inability of almost all commercially available Commodity Trading and Risk Management solutions to actually perform stochastic risk calculations on even relatively small commodity portfolios in a reasonable time frame. While many CTRM vendors claim such capabilities the truth is that many users have discovered that such claims cannot be met in practice.

In an era of a sharply renewed emphasis on risk management, faster market speed and increased volumes of data, a new approach to providing real-time stochastic risk assessments for commodity portfolios is required and Hyper Rig has devised a solution. The Hyper Rig’s suite of products, including its Risk Optimizer, are designed, using innovative methods, to both extract, in real-time, the data required to perform risk optimization from a plethora of different systems and databases and, to allow users to conduct stochastic risk metrics and analysis on that data on demand in just seconds or minutes and certainly not hours.

The Hyper Rig product suite doesn’t require users to engage in expensive and risky CTRM system replacements as it simply overlays and enhances the systems already utilized in house thus extending their usefulness and decreasing their cost of ownership while providing the tools that traders and risk managers require to make better and more timely trading decisions.

To read the rest of this TBN – Please download it.

For me the speakers dinner was the most rewarding as I had a very illuminating conversation with David Kucera, CEO of the Prague Power Exchange about their progress in establishing an exchange in the Czech Republic and the impact of local politics on the initiative. Additionally, I discussed a variety of industry issues with the CRO and Head of Trading of CEZ, the Czech Utility and Trader, as well as with Vincent Kaminski – ex- head of trading at Enron and now a University Professor.

For me personally it was a very rewarding experience and one presentation that interested me a lot was by Elliott Piggott of TrayPort who discussed essentially how the single integrated Trayport platform had and continues to contribute to the development of the industry in Europe.