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Disruptive Technologies in Commodity Trading and Risk Management

If, like us, you keep an eye on what is going on in the world of CTRM then you will have seen the constant reminders that technology is one of several drivers of change. Blockchain, AI & ML, Cloud and much more. In commodities, this seems to be a time of unprecedented change and technology is in part driving that change and facilitating it. Against that backdrop, we are looking at the role of technology in driving change in commodities and would appreciate your input into a small number of questions to help us understand where and how technology is being deployed. At the same time, we asked the CTRMCenter Thought Leaders for their opinions on what are the technologies driving change and why.

As you sift through their answers below, a couple of things stand out for us. Firstly, that the concept of ecosystems is mentioned in one way or another by almost all of these industry veterans and that automation and AI seem to be also widely mentioned. This certainly agrees with our own research and where we see things going. There is also discussion of digitalization and decentralization, but these trends are all related and the words somewhat interchangeable. What is apparent, is that technology is rapidly being deployed that will fundamentally change the way business is done within all aspects of commodities. We must also consider what the broader context of this may be? For example, in our recent white paper, we looked at the impact on training, skills development and the work force[1]. There will likely be many others.

Over the next quarter or so, ComTech will be looking deeply at how various technologies are being deployed in the commodity space. We are very keen to examine all current and possible use cases for these technologies. We are also, as we said above, looking for your own input via our survey. Please do help us and complete those questions.

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CTRM Thought Leader’s View on Disruptive Technologies in Commodity Trading and Risk Management.

In order to gain additional insights into this important topic, we asked the members of our CTRM Thought Leader Panel ( the following: – What do you believe is or will become the biggest technology disruptor of commodity markets or commodity business processes through the supply chain or in trading and risk management in the next 12-24 months and why do you think that?

Doug Gyani – We have, as a community within CTRM; been waiting for a disruptive technology to enter the space for some time now. Although we have seen new CTRM vendors successfully enter with “newer” technology platforms all of these remain within the current CTRM “box.” Existing vendors have also expanded their offering into the CM space with capabilities ranging from integrated accounting and general ledger functionality to chartering and supply chain oriented solutions. Although these extensions add a tremendous amount of breadth and depth to their respective solutions and their clients, no vendor has yet to reinvent the CTRM space with an embrace to disruptive or advanced technology and functionality that is integrated into their core solution.

Given the near term issues commodity organizations face with the increased pressure on the supply chain as we exit the pandemic, I believe we will see innovation and adoption of technology & extensions to address this space. More specifically, vendors will have to incorporate technologies such as block chain into their existing deal life cycle logic to be able to allow streamlined counterparty communications. The ability to manage the “Deal to Cash” model and add efficiency to this process in order to reduce time lags and remove the “paper” processes within the deal settlement processes should innovation. From the trade confirmation process through to trade finance and eventually invoice management; these steps and the exchange of information within them can be digitized and take advantage secure seamless communication and approvals. These technologies already exist of course but live in their own software silos. In some cases they are loosely integrated into the CTRM eco-system and in others they are stand-alone solutions. The ability to provide organic functionality from the CTRM / CM solution would allow for a far more comprehensive single point solution which would provide greater transparency into the trade lifecycle while allowing organizations to better protect their margins and reduce the deal to cash timeline.

The successful adoption of these types of solutions will depend not only on the vendors but also the users of the solutions globally, to ensure adoption is unilateral.

Jurgen Mayerhoffer – We are heading for a future where computational and robotic systems will radically augment our natural human capabilities. Artificial Intelligence will discover new ways of energy trading that humans alone would never be able to imagine. Energy traders will transform from executors to designers, teaching models on how to behave in a market to reach their target without violating restrictions and regulations. Models will learn autonomously from new market situations and adapt dynamically – without requiring programmatic source code that limits the solution space.

Processing the relevant data in real-time to make high-quality trading decisions will become a noticeable disruptor. It will allow us to offer flexibility to the market at large scale, manage renewable positions more efficiently and optimize portfolios in an unprecedented way. I firmly believe that data- and technology-driven companies will outperform incumbent players in profitability and efficiency, mainly achieved through high scalability enabled by automation and technology. There are numerous examples where the digital implementation of even the same business model has outperformed its ancestor – and AI will accelerate this process.

Jan van den Brom – For the mid-term of 12-24 months I believe that containerized microservices and edge computing is the major technology disruptor as it brings the availability, security, usability and integration experience to the next level. It will disrupt the CTRM market, but also any other technology bound to support commodity business.

Simon Wheeler – I think new offerings that create an “ecosystem” of applications around a core functionality will become the biggest disruptor of traditional CTRM systems. This needs to be supported by an elastic infrastructure hosted in cloud with solid API.

The number of requirements required for C/ETRM systems are constantly increasing. I don’t think any ETRM product will be able to meet all these requirements and trying to close the gaps with custom development is a never ending story. Having others be able to develop “apps” and connect to the ecosystem and having an API to allow import/export from any other system is the future.

Simon Piercy – We see decentralization of technology as a key theme over the coming years, delivered through several separate but related mechanisms. Decentralization is a progression of factors we have seen in recent years: the adoption of AI and algorithmic trading, blockchain and related technologies such as smart contracts; and a move from monolithic to ecosystem platforms. Decentralization becomes attractive to the commodity industry, primarily as a technology enabler, and in turn as a cost and risk reducer.

From a technology perspective, we see a greater push towards more open standards and interfaces (APIs), likely standardizing on REST APIs, with GraphQL waiting in the wings. As transactional volumes increase, the need to have low overhead, low latency APIs becomes paramount.

Vendors not already providing cloud-native solutions will need to get on board with distributed technologies such as containerization of deployed apps through technologies like Docker, built on orchestration platforms such as Kubernetes. Containerization allows for rapid “right-scaling” of resources to support peaks and troughs of data throughput and processing, rather than the very costly approach of provisioning the biggest servers available, all running 24/7.

Containerization also supports the microservices concept: small, lightweight, rapid, concise services providing a well-defined capability, built around reliability, low-latency and low-cost. A logical development from microservices is serverless: massively scalable and reliable components that are the ultimate in services computing efficiency.

Another decentralization push will be to promote more open-source use. Open-source hasn’t taken off within the commodities sector; vendors are maybe reluctant to commit effort to a riskier commercial model, and traders perhaps want to keep their models proprietary. There are, however, opportunities to build out standardized “plumbing” that could provide a bedrock on which components, containers, services and microservices combine to provide a “sum of parts” solution better, faster and cheaper than monolithic systems.

In conclusion, ecosystems of specialist vendors working together, using these newer decentralized models will offer faster, cheaper, more efficient and more connected technology solutions to the sector.

Richard Williamson – I double-checked the definition and the 3 biggest tech disruptors for the next 12-24 months are COVID, the current trade finance climate and one that’s been around for quite a while, standardization (lack of).

It will be more a case of cleaning house for most companies in the sector, replacing old systems plus spreadsheets for something more suited to the COVID-imposed working patterns and the stricter demands for transparency and controls from financial lenders. It’s always easy to talk about the next big thing but the focus is on the now, the adoption of existing modern technology to run your internal processes, tackle your operational risk, standardize things, give employees the right tools to work better together, provide comfort to your banks and insurance company.

If there is any spare capacity after this is in these 12-24 months, it would be really good if focus was directed at standardization of data, process, terminology etc. This would be the biggest tech disruptor for positive change for commodity supply chains. It’s the main factor that stands in the way of success for any of the potential industry disruptors, these supply chain hubs or trade finance network platform, anti-fraud collaborations, provenance, traceability, CARBON. All these hold huge potential in terms of value and risk management but without trade associations, institutions, task forces, members addressing the standardization issue, it will not happen, whatever timeline you put on it. And it’s not the kind of standardization that would require compromise in the art of the deal. Many lawyers and arbitrators would agree that standardization of contracts is a valuable risk management exercise and one that doesn’t or shouldn’t adversely affect or take away one’s competitive edge.

Then in 3-5 years, companies will be much better positioned to reap the benefits of collaborative advantage promised bythese new (blockchain or otherwise) industry platform solutions, incorporate AI and make better use of their data alongside “Big Data”and move on to the new opportunities to innovate and compete that these disruptors will facilitate.

Manav Garv – The pandemic revealed limited progress made by organizations in their digitalization efforts. The inability to address the breakdown in value chains while accommodating a remote workforce simultaneously, compelled organizations to re-prioritize their business goals. Dealing with the breadth and complexity of commodities and direct materials with legacy processes and technologies further compounded the challenge, making it more important than ever to shift to cloud driven solutions to quicken the pace of digital transformation efforts.

To that end, we believe there are four fundamental areas businesses must focus on to gain tangible value from their digital transformation moving forward –

Supporting new ways of working: According to a Gartner survey, two out of three employees report having to exert too much effort to use the technology provided by employers. An average employee spends more than five hours a week wrestling with tech issues. Gone are the days when an employee could walk to the IT department to troubleshoot. New ways of working are shaping up that call for significant focus on the need to enable self-service for workers to support remote ways of working at scale. It’s important to note that not everyone in the workforce come with the same level of technical proficiency. By providing detailed and comprehensive in-solution, self-help features based on best practices that users can access on their own, will enable broader adoption and reduce the need for manual support allowing users to accomplish tasks more independently.

Automation as the foundation for better visibility and faster decisions: With business continuity and growth at stake, enterprises operating in complex markets such as ours no longer have the luxury of spending days to understand their risk exposure. A survey of over 3000 C-Suite executives detailed that there will be a greater acceleration of automation efforts to ensure business continuity and resiliency. To focus on transformational efforts while improving speed and agility, automation needs to take center stage so that enterprises can free up their resources and concentrate on more strategic efforts.

Enabling and engaging network by digitizing critical processes across the organization: Upwards of 73 percent of organizations in a recent McKinsey survey encountered problems in their supplier base, and 75 percent faced problems with production and distribution due to Covid-19. These numbers jump to 91% and 100% respectively when you just focus on food and consumer goods industries. Participation across the ecosystem will be crucial in the next two years.

It isn’t about more digital technologies in the supply chain but the right kind that is developed for commodity and raw material intensive businesses. Companies, suppliers, and customers are only connected through data. These digital links do not extend across the entire supply chain back to the raw commodities where collaboration must happen. Perhaps the greatest lesson from COVID-19 is that companies need to be prepared to pivot quickly when unexpected market shocks occur. Embracing a digital supplier network provides that flexibility and most importantly transparency, that aren’t just benefits during pandemics and market shocks.

Agile platform built on a cloud platform: To deliver against the three previous initiatives, organizations need to ensure that their technology infrastructure is capable, resilient, and most importantly adaptable to enable long-term success.

Delivering the capabilities required by the supply chains of the future requires a more agile infrastructure—one that will accelerate digital transformation by extending existing services and providing the right foundation to quickly add new services as needs arise.

Most executives agree that agility will allow them to remain competitive in a post-pandemic world where customer needs are changing rapidly. Cloud-based solutions supporting open APIs for easier integration and delivered with regulation-driven enterprise security are enabling enterprises to shift resources from maintenance-heavy IT infrastructures while speeding digital transformation and driving business innovation.

Ultimately, it is primarily through cloud that organizations will be able to gain the agility to deliver remotely, globally, and in the continuous fashion that is shaping up to be the new normal.

Ganesh Natarajan – From my personal perspective, I would like to share the following viewpoints as disruptors

Commodity markets will be really looking at the value of digitization (Redesigning the whole process / value chain and replace with end-to-end digital solution (e.g Blockchain P2P model) versus digitalization (Taking existing processes and instruments and finding a digital/electronic alternative (eg e-Docs)

  1. Access to the Physical data
  2. Data analytics – AI, specialized hardware with deep learning Logos
  3. Investment in data infrastructure has to rise (digital cargoes and digital e-docs)
  4. Skill sets of commodities staff must have to evolve