Energy trading risk management (ETRM) software is a powerful enterprise software solution that enables companies to manage the whole energy trading lifecycle all the way from front, middle and back offices processes. What are some of the typical features and benefits of an ETRM system? Let’s find out!
What is a ETRM and what does it do?
To get started, let’s talk about what an ETRM is and why you would need one in the first place. ETRM stands for Energy Trading Risk Management, ETRM is also used interchangeably with CTRM which stands for Commodity Risk Management. Both names are used to describe software solutions that are designed to provide support to various trading functions that are required at front, back and middle office levels. When referring to trading businesses the front office is typically where the trading of financial and/or physical contracts happens, middle office is the risk management function of the business and back office is where the trade settlement function sits.
What are the main features of ETRM or CTRMs
The main elements of any good ETRM typically include:
A trade or deal capture system – this is where all of your trades are entered and tracked. Ideally all physical and financial trades should be captured in the deal capture element of an ETRM, but in some cases sophisticated trades could be kept ‘off-system’ (typically in Excel workbooks) as the trades cannot be entered in the ETRM or they have to be simplified in order to be captured. This is not ideal from a process and audit perspective and also from a risk management perspective since trades that aren’t entered may not be included in risk metrics for the company.
A risk management system – this allows traders to monitor their exposures for different time periods such as the current day, week or month and set up positions before they even happen. A good risk management module of an ETRM can calculate multiple risk management metrics such as the current valuation of the entire portfolio (also called Mark to Market), a position report, Value at Risk (VaR), Earnings at Risk (EaR) and Potential Future Exposure (PFE).
VaR is a key metric of many trading businesses, as it forecasts the risk and related potential loss for a given time period. VaR is typically expressed in percentages of annualized profit or loss at an assumed confidence level (e.g., 95%). It’s also good to know that VaRs are based on probability distributions with different volatilities so they may not be accurate under all circumstances – this is why you would need a software package that can then run different VaR methodologies as well as scenarios and stress tests on a company’s portfolio.
Trade settlement and back office tools – trade settlement and back office tools are essential for any trading company. What these types of tools do is they will streamline the trade settlement process, enhance transparency in financial transactions (as well as provide support to address operational threats), control access to systems, manage reconciliations between multiple platforms and help with cash flow forecasting when a large number of trades need to be processed on a daily basis
Reporting dashboards and analysis tools – these allow traders to see their overall exposures in customised reports either in the ETRM, Excel or in a browser. They can also make projections about what could happen if certain events occur such as: What happens if rates increase by 100%? How much do we stand to lose from market volatility? What will our profits look like in 2020 assuming no significant changes. An analysis module offers a variety of reports that allow you to track performance metrics such as market volatility, portfolio value, VaR limits over time, profit margins and more.
Can ETRM or CTRMs really offer all that functionality in one product?
This really depends on the requirements of the client specifically around sophistication of trading, commodities traded and the size of the business. Market players are adopting an migration strategy from the hunt for a monolithic ‘all in one’ solution to a ‘best of breed’ approach to software purchases. ComTech advisory commented on this trend in a recent blog noting “a move back to best of breed via ecosystems of applications that offered discrete, but deep vertical functionality or broad horizontal functionality knitted together via open APIs”.
How can Lacima support your search for a ETRM/CTRM?
For the most competitive market edge, achieve consistency between the Front and Middle office by using the same pricing and numerical engine to trade and manage risk.
Trading Analytics – The Lacima Trader suite of products for Front Office are built specifically for energy and commodity markets and designed to work as stand-alone trading, structuring and valuation tools capable of transparent drill down to detailed outputs and value drivers. Find out more.
Risk Analytics – Lacima Analytics is the only commercially available single application for valuation, optimisation and risk management for multi- commodity, multi-geography and/or multi-asset portfolios. across a whole portfolio of physical assets & complex financial contracts. Power, gas, LNG, crude & refined products, ags, metals – we cover it all. Lacima Analytics can sit alongside any number of trade capture systems (E/CRTMs) and provide best-of-breed risk measurement. Find out more.
Collaborative Solutions – Embed Lacima’s analytic engines into your in-house or third party solutions to leverage award winning capabilities. Find out more.