Handling Pricing Complexity is a Key to Gen10’s Multi-Commodity Positioning
Over the last couple of decades of development of ETRM, CTRM and CM software solutions, many have aspired to provide support for multiple commodities. As ComTech has explained many times in the past, having a solution that is truly multi-commodity is a complex task and it is very difficult to develop and maintain such a solution. As newer technologies have emerged, some vendors have adopted different architectures that have allowed progress to be made in developing and maintaining multi-commodity solutions. These days, ecosystems of applications, modules or components are preferred over monolithic client/server applications and that certainly helps in solving some of the complexities. What are the complexities? Well, each physical commodity has a different supply chain, different physical properties, different processes and more so that a solution developed for one commodity may be lacking substantial functionalities to support another.
One key area though that absolutely needs to be addressed as a first step in a multi-commodity TRM or CM solution is pricing. It needs a robust pricing engine that is configurable and usable across all commodities and beyond. This isn’t used just for the pricing of a deal or a contract, but for calculating Mark to Market, P&L as well as price fixation, and more through both time and the supply chain. So, when Richard Williamson, CEO of Gen10 told me recently that it had rebuilt its entire pricing engine, my ears pricked up. “Originally as an Ags solution, we had fixed price and other agricultural commodity pricing models catered for, but what stopped us getting into LME and Oil opportunities, for example, was that we needed much more pricing context and capability. So we took a step back and redid it. We built a new formula engine so that users are not restricted by the pricing models in the system and could instead, write their own pricing formulas,” he told me.
Gen10 now boasts the functionality to support metals and concentrates/ores, and beyond. This requires a pretty configurable and robust pricing engine and I was shown an impromptu demonstration of many different pricing approaches from simple fixed price, unpriced with differentials off a future, to much more exotic pricings complete with premiums, penalties, average price fixed on an exchange, component pricings, formulas, and so on. The formula engine also allows pricing to handle different units of measure conversion, wet/dry weight conversion, charges and costs like treatment charges, interest charges and so on, FX differences, price tiering, quality attributes, and pricing changes due to new tests, analyses, and assays, combinations of indices, and so on. Quite a good deal of flexibility and configurability has been built into the engine, but then, if it needs to handle concentrates pricing, then it simply has to be that way.
As Richard explained, “Materials can be weighed 4 or 5 times during transportation and each time a different result is obtained. The price may be based on one of those weights taken at a fixed point in the journey. It can become extremely complex,” he said. “By linking the contract/formula/pricing functionality and events along the supply chain to the physical lots being shipped, we can calculate much more accurate pricing for MtM and PnL as well as the invoices. The formula engine actually gets used multiple times across the supply chain for a shipment.”
This is exactly the type of pricing approach that is needed to handle multiple physical commodities. Any CTRM that purports to be multi-commodity needs to be able to handle similar levels of pricing complexity and some do, albeit with different designs of course. Such a pricing engine allows Gen10 a seat at a much broader but more exclusive commodities table than it used to have, and it ticks several functionality boxes that buyers will be looking for. Vendors that cannot provide such flexibility and coverage will essentially not be able to compete outside of their own commodity niche or as a true multi-commodity solution.
What Gen10 has done well in its formula engine, in my opinion, is in the way they have broken down the premium into its components, giving the trader more freedom to price his risk more precisely and reflective of the different costs associated to each option as well as provide flexibility to his customer. “The formula engine we created doesn’t just address pricing but inventory analysis and hedging. You can go as far as to have formulas that are based on or factors of a combination of other formulas and so on. And taking all of this out of the code and into the front-end helps everyone involved,” Richard told me. “It’s a tall order to get your different books marked to market instantly and reliably and invoices automated using the correct, well, everything, but that is what we’ve done.”
