By Rana Basu, Trade Capture *
 
There are many opportunities to realise returns through improved risk management along the petroleum supply chain. Technology that is designed to provide previously untapped solutions for traders to profit in new ways is a sure bet for the success and future direction of energy trading and risk management (ETRM) development.

ETRM software that allows traders additional options to make profitable transactions along the supply chain is the new frontier. Trading organisations are no longer focused so intently on straight-through processing capabilities, which basically are standard in the ETRM software platforms deployed across most trade floors.

Increasingly, the trader is focused on having the right intelligence at the right time to allow for faster and more accurate decisions on fast-paced opportunities for transactions.
 
ETRM evolution

With the current capacities of today’s plug-in ETRM modules, software companies can maximise their product functionality through customisable solutions that provide decision support for traders.

ETRM solution providers must be knowledgeable about crude and refined products markets as well as the trading function to capture all the relevant data and present the impacts customised to the unique conditions of each market, and the liquid hydrocarbon market trades very differently than natural gas and power.

Data on the terms and conditions, the options around storage and transportation and the market information around vessel position and inventory stock levels – all help traders make more informed decisions as prices swing wildly.

Fundamental ETRM system requirements centered on ensuring daily position and P&L reporting and making the system serve as the source of record for audit purposes and process controls are taken as givens.

Having the flexibility to track positions from planning through execution of contracts, managing movements and inventory to liquidation, and accurately showing the delivery risk and the pricing exposure also are key ETRM ingredients. Providing transparency to the calculation of forward curves, transaction prices and thus the P&L on transactions allows for the tracking of market risk.
 
Real-time information

This is particularly true when hydrocarbon traders need extra vigilance and flexibility in adjusting to increasingly tight markets for raw materials and refined products. Technology must bridge the gap between the physical movement of oil and trading-floor methodologies.  Difficulties in trying to aggregate real time derivative instruments’ positions with delayed physical positions can make a day’s physical information incomplete at a company level.

Total flat price exposure, while more accurate at the desk level, is not always precise when rolled up to the company level due to delayed entry and manual processes.  This does not even take into account the double and triple entry sometimes needed to reconcile outside third party information with a company’s ETRM system. Traders need and demand shorter settlement cycles, with automated execution through to settlement.

The problem of real time data flow verses batch data flow (or worse, fax and TELEX) is real and introduces operational risk to the trading company, particularly when aggregating real time derivative instruments’ positions with delayed physical positions.
Efforts by organisations such as Leadership in Energy Automation Processing (LEAP) to bring together market participants and establish standards for the interchange of information are having great success at facilitating this. Such standards are also reducing the total cost of implementation of these efficiencies.

With LEAP getting consensus on standards of information flows between counterparties, there is already a key part of the market that has provided full electronic information exchange. The ICE, Nymex and many brokerage houses today already have established standards for providing the market platform and trade information to their customers for the most liquid instruments. Most of these data flows are already tested and secured, with significant automation that moves executed trades from the platforms to the ETRM system.
 
The “Effectiveness” utility

Many trading organisations now focus on the “effectiveness” utility of the ETRM system. The most common desire is to accurately attribute P&L changes to changes in curves and their impact on trade cost or trade value, as well as P&L changes due to delivered specifications, outturn losses, timing or other factors (changes in additional costs, changes due to new trades, changes in hedges or pricing events, and so on). All this allows companies to drill down and better understand where the money is being made or lost with traders kept informed with actionable intelligence as the ETRM information hub is updated by new data flows or events.

The current surge in commodities market price volatility and trading volume are tremendously challenging for trading companies. Getting the right data at the right time for faster and more accurate decision-making is crucial, and the ability to correctly allocate expanded trading volume quickly and precisely is imperative. As ETRM systems master these challenges, they bring traders as close as possible to the assets they trade.  The gains in efficiency that this allows have an immediate positive ROI and fully support an effective hydrocarbon trading strategy.
 
* Rana Basu is Vice President of Center of Enterprise (CoE)at TradeCapture, a global provider of innovative and cost- effective solutions designed and developed for companies in the field of commodity trading and transaction management. Since 1997, TradeCapture has been delivering its ETRM systems for multi-commodity markets throughout the world. TradeCapture is headquartered in Houston, and has sales, development and support centres around the world including Hyderabad, India, Rome, Italy and London, England.