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Trends in Commodity Risk Management Technologies

Our new mini report on trends in risk management technologies has been released and can now be downloaded here. This research was kindly sponsored by Amphora, Commodities People and Nasdaq Risk Platform.

Commodity trading is fraught with various types of risk. In recent years, the number of types of risks that businesses that trade, procure, consume, or use commodities are exposed to have increased in both intensity and breadth. In the current environment of commodity shortages, geopolitical conflict, increasing environmental regulation and continuing covid impacts, risks of all types must now be constantly measured, valued, and ameliorated where possible. Where once price or market risk was the almost sole focus for commodity firms, a plethora of emerging risk now must also be front and center for these companies, including credit, regulatory, legal, political, operational, liquidity and multiple other forms of risk.

Examples of these increasing risks include both technology trends and global market developments:

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/ The increasing migration of software and/or services in the cloud has introduced and/or increased a whole series of other risks around IT, application, and infrastructure security. 

/ Fraudulent trading activities have also been in the news in recent months and years, requiring additional surveillance and new programmatic checks and balances throughout supply chains to help minimize such risks. 

/ Environmental, Social and Governance (ESG) has also emerged as an area that will impact risk management practices for years to come. 

/ And, perhaps most impactful in the near term, immediately after kicking off this project, Russia invaded Ukraine sending prices spiraling, increasing volatilities, and disrupting supply and demand patterns.

Though the Commodity Trading and Risk Management (CTRM) software used to track, value, and manage commodity transactions has continued to evolve, these solutions are often ill-equipped to address the plethora of risks that exist outside of a portfolio of commodity transactions, and even then, are often light on commodity-specific risk analytics or use overnight batch jobs to calculate positions.

Against this backdrop, ComTech had recently noted several technology trends that included:

/ The development of more advanced risk analytical solutions in various areas of risk management to supplement CTRM-type risk functionality, 

/ The development of broad cross-commodity risk platforms that allow further enterprise-level assessment of risks utilizing data from disparate systems across the company, 

/ Increased risk functionality and analytics added to CTRM and CM solutions, 

/ A move to real-time and event-driven calculation of risk metrics and away from overnight calculations of prior day.

Given the seemingly ever increasing litany of risks faced by market participants and apparent gap in technology solutions required to address those risks, ComTech has conducted a research effort to look specifically at current industry risk concerns and emerging practices in addition to reviewing the availability of commodity risk tools and solutions, with a generic view of different application classes. Additionally, an attempt was made to classify vendors and products in the market according to their relative risk capabilities and footprints at a directory-type level. This ‘directory’ can provide a tool for buyers and investors seeking to build short lists of solutions for consideration.