Enterprises, by definition, take risks. Fortunately, risk can be managed well. The art is to identify and mitigate them. Sounds simple, and according to risk-experts, it is. Many people mix up problems and risks. To be clear, a risk is never a problem. A risk is something that can happen but hasn’t happened yet. And if it does happen, it is a problem and no longer a risk. Moreover, as long it is a risk, you can manage this. Therefore too, it is not a problem. Provided of course you are properly equipped to do so. Here is where an integrated Energy Trading and Risk Management (ETRM) comes in: Can you afford to let a risk become a problem?
The uncertain effects of risks can be both positive and negative. Traditional risk management is based on negative uncertain effects. However, you can also take a mirror image of this view and consider the opportunities that may present itself. Uncertainties can work against you, but they can also help you. When taking this view, the subject of risk management become more appealing. Most enterprises know that risk management is important but may pay lip service to implementing the tools to properly manage it. After all, as with so many things, when giving something attention it gets better.
Enterprises can do a lot themselves to minimize risk. When something does happen it often is a result of an accumulation of things that go wrong. When you keep most of those under control, the chance for an incident reduces.
For the start-up and small enterprise trading firm, a spreadsheet offers a quick and cost-effective route to rudimentary deal capture and position management functionality, typically limited to handful of users only. Similarly, for the legacy-system-user, a spreadsheet offered a way to create workarounds, albeit isolated and disconnected, for functionality that cannot be supported by the legacy system, take too long to build or is too costly. There is no question about the value and power the spreadsheet software holds, and the part it plays in our professional lives. But used in an isolated and disconnected way is no longer sustainable or responsible when considering the lack of controls, risk exposure, and compliance reporting requirements.
At the same time, there is recognition that in a world of fast-moving markets, affected by multiple information sources, and subject to regulatory reporting, spreadsheet-based systems lack the controls, increase risk, and can’t deliver management the information for proper decision-making. A trade capture system may help a lot, but it is only the ability of an integrated ETRM system that can provide the required single overview to keep taps on Market risk, Credit risk, and Operational risk.
Market Risk results from changes in market parameters which affects all open positions, driven by market prices, volatilities, foreign exchange rates, spreads, interest rates etc. A modern, "live" ETRM system can capture and configure your risk policy, and subsequently report critical impacts to the position in near-real time, for immediate action, while notifying decisionmakers when volumetric, value-at-risk and other limits are reached.
Credit Risk is the risk the company is willing to take regarding over-the-counter transactions. It stems from counterparties not able or not willing to pay. Drivers include credit worthiness of the counterparty, the mark-to-market of the deal, and contractual terms like payment conditions, netting clauses, and more. An integrated ETRM system allows to capture credit scores, define credit limits per counterparty, manage collaterals, and monitor credit exposure. Crucially, the ETRM system allows for seamless integration with the accounting system to receive payment information that update credit limits.
Lacking that single view is part of the Operational Risk. This risk results from financial damage due to inadequate processes, systems, human activities, as well as external events like natural disasters. A highly configurable ETRM helps to navigate the changes a business will go through and to capture customer-specific business processes, while implementing the necessary controls.
Hitachi Energy's TRMTracker supports the entire trading cycle from trade capture and contract management, to portfolio management, risk controls, collateral and credit management, and regulatory compliance reporting. It is designed for both large and small enterprises, supporting multi-commodities, and available as integrated or specialized best-of-breed solution that integrate with and augment existing systems.
With various deployment options available today - from traditional on-premise to Software-as-a-Service - , as well as a choice of implementation approaches - from vendor-implemented to self-serve -, an integrated ETRM solution is now within reach for any type of enterprise, thereby mitigating that a risk becomes a problem.
Learn more about energy trading and risk management (ETRM) from Hitachi Energy.