CubeLogic Sees Credit and Risk Demand Growth
The Energy & Commodities credit software market is changing rapidly as issues like liquidity, fraud (and similar scandals), and stronger regulations with serious consequences, have emerged. A few years ago, ComTech viewed the credit risk market as lumpy at best with the biggest driver for interest in credit solutions being the occasional bankruptcy of counterparties. Now, the credit and risk management software market in general is much more sharply in focus. I talked recently with Karl Sees, head of product & market strategy for CubeLogic to find out what is really driving the credit software market today.
Commodities are inherently volatile and complex, and the sector has suffered from many serious issues over the years such as the collapse of Enron and the US merchant sector through to issues with inventory in LME warehouses or shipments of fake metals, for example. “It’s a difficult sector to operate in,” Karl said. It was issues like these that in the past drove often temporary interest in credit solutions yet, Karl notes that some companies with sophisticated approaches to the market always saw the importance of robust credit risk and more general risk management. “There were always companies in the sector that took pride in how they viewed risk and didn’t wait for regulations to force them into action,” he told me.
However, he sees several events and issues driving a change in the paradigm around credit risk management. “On the wholesale side, there has been the recognition that there has been a stepwise change in trade volumes and volatilities,” he said. In part, this has occurred as a result disruption caused by the Russia-Ukraine war forcing market participants to seek alternative gas supplies in the market from a significantly broader set of counterparties and with shorter-term trades. This means more counterparties and much more volume and churn, he told me. Furthermore, this has also led to increased nervousness around exposures meaning that parties seek out more collateral to help eliminate some of the risk. At the same time the operational aspects of credit risk have exploded with significant emphasis on counterparty onboarding, KYC processes and collateral needs, he notes. “Often, this is overwhelming those still utilizing manual processes and they have then sought to digitalize them.” Another area impacting the credit software market he says is the B2B area where commodities are sold to the end user. Here again, the issue becomes an inability to stay on top of manual processes and a requirement to digitalize them, he told me. All the market changes mean that “the credit markets are very different to what they were,” he said.
CubeLogic can help address the need to digitalize and automate processes via its API’s and ability to link into a variety of external systems – sources like external ratings agencies, for example. “We help customers orchestrate and automate all of those processes,” he said. “Using our rules engine, much can be automated. In some instances, up to 90% of trade requests can be approved automatically using the rules engine.” In the B2B and retail world where there may be tens of thousands of customers so automating and digitalizing the process helps deal with the sheer volume of requests. Karl says that CubeLogic’s ability to additionally bring both market and regulatory risk solutions to bear is also key to its success while pointing to the increased and steadier demand for credit solutions in the energy and commodities sector. “There are still a couple of very large deals each year,” he said. “But the credit software market is no longer lumpy with increased volumes of inquiries and sales, and a substantially larger number of smaller entities seeking credit solutions.”
In essence then, Karl points to increased market turbulence, more trade volume and activity and new regulations with teeth, creating far more complex processes and needs around credit for all entities involved in energy & commodities. This is driving a need to digitalize and automate to cope and avoid fines, penalties and issues, which in turn, is driving increased demand – not just for credit risk, but for risk solutions in general.
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