 CTRM Systems and Increasingly Uncertain Markets - By Patrick Reames CommodityAlerts 2/26/2010 Free For anyone involved in trading, whether its energy commodities or baseball cards, uncertainty has always been a component in the market and in the decision making process. Uncertainty is, in fact, the grease that keeps markets running. The lack of perfect knowledge keeps the buyers buying and the sellers selling, each believing that their crystal ball gives them insights, that when combined with the widely known "facts" of the market, provide an advantage over the others in that market. While uncertainty has always been a component of the markets, it's rarely been the dominate component. However in today's commodities marketplace, uncertainty has gone from being the marginal area where buying and selling decisions are ultimately made, to being, in many ways, the overwhelming market condition, particularly in the United States. CTRM systems certainly aren't a cure for all the uncertainty that exists in these markets; however, the latest systems do provide many tools that can help manage the risks and allow companies to better control a myriad of exposures. Traditional market or price risk management tools are becoming more sophisticated and provide the stochastic analytics that are necessary to manage forward price risk in markets that have been roiled in unprecedented volatility over the last five years. Many CTRM vendors now offer sophisticated credit risk management capabilities which can monitor both commercial counterparty exposures and external credit rating agencies, and provide alerts when predetermined risk thresholds are neared or breached. Operational risks, especially those related to managing the logistics of physical commodities, can be somewhat ameliorated with the use of the powerful scheduling tools now common to most of the leading CTRM systems. Increasing regulations and the requisite compliance (and exposures of non-compliance) are also being addressed in CTRM systems. Regulatory reporting and audit capabilities have become more common in the commercial CTRM systems, particularly post implementation of Sarbanes-Oxley regulations. Unfortunately, CTRM systems can't manage future regulatory risk very well. They can't read the minds of politicians and bureaucrats to discern fact from rhetoric, nor can they bring clarity to the turmoil that surrounds issues like cap and trade, EPA rule making, and CFTC intervention in markets (including potential intervention in the OTC markets). However, the best systems are architected to allow users to react to some degree to new or unexpected regulatory changes, with features such as flexible ad hoc reporting capabilities, highly configurable data structures and screens, and robust audit and data security capabilities. Some systems are now even providing sophisticated trading surveillance capabilities (such as that recently announced by SunGard Energy and Commodities) that help to ensure trading compliance with many of the regulations (and internal policies) that currently exist, or may arise in the future. Still, until "the powers that be" start to behave a bit more rationally and show some understanding of the negative influences that politics can have on what are supposed to be free and fair markets, traders and systems vendors can do little more than constantly monitor all available information sources in order to inform their next move. For traders, those decisions involve the size, shape, and location of commodity positions; and for vendors, the decision is where to allocate precious development dollars to not only service the needs of existing customers, but also provide the solutions needed by their prospective customers, those traders that operate in uncertain markets not only in the United States, but around the world. |
