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More on Risk

In a recent blog post titled Risk Management Software Should be Booming, I made the case for the emergence of two software classes in commodities – Commodities Advanced Risk Analytics and the Commodities Risk Platform. I also suggested that the overall status of the RM part of the CTRM software category was getting more focus and that risk aspects of CTRM were being bolstered in response to a series of inter-related trends that are driving risk management to the forefront in commodities.

ComTech may soon be floating a research idea around this general topic and in thinking about that, several other aspects of risk management came to mind. One of those is the need to get closer to real-time with risk calculations of all types. In most legacy CTRM solutions, large complex calculations are ran as ‘batch’ jobs over night to provide a retrospective look at measures like PnL, MtM, VaR and so on at the end of the previous day. This is then the starting point for the next 24-hours of activity resulting in a new set of calculations performed overnight to start the next day. These days however, particularly in very active markets and in markets that are not daily but more granular, the need for up to date risk numbers has resulted in on the fly calculations to approximate in day changes through the day. However, as pace, speed and volumes of data pick up more or less exponentially, even this is not enough. What is needed is an accurate view of risk at multiple levels that is up to the minute with an ability to do what if scenarios on top. This move to near real-time risk is happening now and is in part helping to drive the platform concept. This trend will continue as vendors and users seek to find ways to have up to the minute risk numbers available.

I also see risk becoming a much broader animal. Though the focus is often on price or market risk, we live in an increasingly political world in which political decisions may up end current practices in a relatively short time frame. Climate and sustainability provide two examples where policy has a huge impact on operations and risks very rapidly. These policies impact all aspects of the operation throughout the supply chain and the nature of operations and business practices worldwide and are increasingly driving operational risk, legal risk, geographic risk as well as price and credit. Furthermore, in an increasingly digital and high-speed world, fraud is increasingly an additional risk to which firms are exposed whether that be in fraudulent trading or in the replacement of valuable goods with painted concrete and everything in between. So here, we see the potential for risk management to become a much broader focus with the need for tools like GPS tracking devices, tamper warning devices, satellite and other imagery, trade surveillance and much more. From a software perspective this would include comprehensive workflow and approvals, audit trailing and so on. And, since data is now such a huge (and increasing) component of the commodity trading world, risk management at its broadest scope includes security of access – to buildings and facilities, applications, databases and more. This also places more emphasis on data accuracy and reliability meaning a greater focus on data management and validation.

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Of course, whether all of these activities lie under one position – the risk management executive – is an organisational decision yet they all play a part in determining what tomorrow’s risk systems will look like. Vendors like CubeLogic have already seen this trend it seems and provide market, credit and regulatory risk solutions along with trade surveillance. Others are more focused on operational risk management within supply chains. But as managing risks becomes deeper and broader, we do expect to see other solution classes emerge in addition to the platform and advanced analytics. Some of these will undoubtedly involve AI, and exception management – a trend that we already observe.

All in all, risk is the name of the game and managing those risks will increasingly be the focus of those involved. Risk management solutions and providers should benefit.