Risk as a Service – The Next Thing in Affordable Corporate Risk Management?

WHITE PAPER

RISK AS A SERVICE THE NEXT THING IN AFFORDABLE CORPORATE RISK MANAGEMENT?

Risk as a Service – The Next Thing in affordable Corporate Risk Management?

A ComTechAdvisory Whitepaper

INTRODUCTION In the past, the use of ‘sophisticated’ risk tools and metrics was considered the bailiwick of the very largest entities that could afford to develop and run with such an approach. Often they saw advanced risk analytics as offering them a strategic and/or competitive advantage in the market. Others in the commodities space simply could not afford to perform sophisticated risk analytics and anyway, they often didn’t have the skills onboard to perform, or even understand, them appropriately. Some firms resorted to using more simplistic reporting of positions, or other metrics, to monitor ‘risk’ and/or used somewhat simplistic limits for various forms of market and/or credit risk. Often, the calculation of exposures, or at-risk capital, value or earnings, or PFE, took a great deal of time to compute and if something went wrong, like a missing price for example, the calculation might simply crash before completion. This meant that often, risk exposures were only accurate well after the fact and were never available to inform the business when needed.

With the speed of change in our industry; the renewed

both expensive and difficult to find. For example, if a

and deeper scrutiny, regulation and geopolitical

company choses to measure earnings at risk (EaR)

environment, the need to perform faster, more rigorous

on a constant portfolio of trades, contracts and assets,

risk has broadened and now all entities in commodities

how can changes in EaR be explained in a meaningful

need to demonstrate proper risk management. However,

way allowing the business to use the tools effectively?

setting up a deep risk management infrastructure of

This is a complex calculation and drilling into and

the necessary systems, processes and skills can be

understanding all of the different components of risk

very expensive and add an additional cost burden to

takes both significant expertise and the right tools.

eat away at those reduced trading margins. While this may look like short-term thinking versus the impact

Historically, the emphasis has been on market, price and

of a cataclysmic market or counterparty event, it is

credit risk, often using simple reports as outlined below.

certainly an operational and budgeting issue that has to

However, unexpected geopolitical or other events are

be addressed and it often slows the progress of moving

now occurring more frequently and often with dramatic

towards a more risk management-focused corporate

effect. Use of portfolio stress testing and simulations are

environment.

one way to try to plan for these events. More rigorous credit risk is also needed to help identify and limit

Even when the tools and methodologies are in place,

exposure to weaker counterparties and partners. Trying

it requires the skills, knowledge and expertise to

to find ways to identify and mitigate other forms of risk

understand what they mean, and this too can be

from operational risks to legal risks is also now a focus.

Risk as a Service - The Next Thing in affordable Corporate Risk Management?

A ComTechAdvisory Whitepaper

RISK SOFTWARE SOLUTIONS IN ENERGY AND COMMODITIES For any risk professionals in energy and commodities, most E/CTRM solutions do not really offer sufficient risk capabilities. In many E/CTRM solutions, risk management functions are limited to basic ‘risk’ reports like position and PnL, basic credit and position limits, and perhaps some fairly simplistic valuation tools that probably have limited applicability to physical instruments or assets. Often, what risk tools are provided need overnight batch jobs to run to completion to produce the reports, and any form of omission (prices, for example) can result in the job not completing at all. This can mean that up to date position and PnL reports are unavailable at critical moments in the trading day.

To get around the risk management weakness inherent in most E/CTRM software solutions, many firms have hired experienced risk management staff who have built up an array of internally developed risk tools, or they have procured specialist risk analytic or credit risk solutions from the limited number of small consultancycome-vendors that offer specialized risk software in the space. These then have to be integrated with the E/CTRM(s) being used by the firm adding cost and complexity.

ComTech estimates that around half of the market for advanced risk analytics is served by in house solutions

of one form or another. It is an area lacking a dominant supplier or indeed solution, and this adds to the ongoing expense of risk management. Furthermore, there is a need for quantitative professional risk staff who are also in demand and can therefore be expensive, ensuring that providing solid risk management can be a pricey proposition. On the credit side, there are a very small number of comprehensive commodity-focused credit solutions on the market and some of these are now aging being 15-years or more, old. Essentially, the E/ CTRM is often insufficient as a risk tool and it needs to be supplemented with a true advanced risk analytics/ credit solution.

Š Commodity Technology Advisory LLC, 2020, All Rights Reserved.

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Risk as a Service - The Next Thing in affordable Corporate Risk Management?

A ComTechAdvisory Whitepaper

FROM SPECIALIZED RISK MANAGEMENT SOFTWARE TO RISK AS A SERVICE In the broader market for software, skills and processes, the software as a service model has begun to catch on as it provides a business a way to gain all three but on the basis of a service level agreement and for a periodic fee as opposed to an upfront sunk cost and ongoing operational expenses. With the advent of the cloud, the ability to offer cost effective software as a service has become a reality. Indeed, in the energy side of commodities, it is now quite common to outsource certain areas of the business, like scheduling and dispatch to outside vendors who provide the service under an SLA. In other industries, the model has already gained a wide degree of acceptance and the trend looks set to continue. So why not risk as a service?

Risk as a Service makes sense as an option for commodity firms because of three key reasons, 1. Risk sophistication is no longer just for the larger, more sophisticated players but, as pointed out above, a necessity for all operating in these risky markets with increasing regulatory and stakeholder oversight, 2. Reducing costs and optimizing business processes is a major objective of almost all firms who increasingly look to digitalization, cloud and outsourcing as means to reduce costs and to increase agility and effectiveness, 3. The service model has become much more broadly accepted as a reliable and cost-effective model across all businesses. A variety of deployment

modes and service level agreements can range from classical on premises installation via cloud and managed service with individual arrangements.

Larger commodity firms with multiple E/CTRMs deployed for different commodities or geographies, face an even greater issue in terms of being able to see risk exposures at the enterprise level. Indeed, the problem is even larger for entities that trade multiple asset classes including commodities such as FX and debt, for example. For many commodity firms, but particularly larger firms with more complex operations, risk software that is capable of quickly aggregating positions and providing KPI’s on a timely basis is extremely important.

Š Commodity Technology Advisory LLC, 2020, All Rights Reserved.

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Risk as a Service - The Next Thing in affordable Corporate Risk Management?

A ComTechAdvisory Whitepaper

MANAGED SERVICES FOR CORPORATE RISK A key aspect of risk as a service is the managed services provision that is more than simple hosting and requires a provider with an infrastructure and experience in providing such managed services. Proven managed services vendors provide for the management of everything from the data center to the business process providing clients with benefits such as a lower and more predictable total cost of ownership, the ability to focus on the core business and increased agility, for example.

A proven and trusted provider of managed services already has the infrastructure, security, internal processes and service level agreements in place in a tried and tested format and already provides such services at high levels of trust and security. It will also have the skills in house not just to manage IT services

like back-up and recovery or testing services but to provide specific application and functional expertise as well. To properly provide managed services requires either a large vendor who has developed the infrastructure and services already or a partnership by the vendor with a provider of managed services.

FIS’ CORPORATE RISK CAPABILITY One vendor that has extensive experience providing managed services into the banking and other sectors, including commodities, is FIS. It is able to provide all aspects of a managed service at multiple levels according to service level agreements with a guarantee of financial sector security levels.

It also has commodities sector and other asset class expertise and a high-end risk application in the form of Adaptiv. This allows FIS to leverage its managed services experience to save costs for clients while delivering complex risk calculations via a service-based architecture (Figure 1).

FIS provides cloud-based solutions on public and so-

called hybrid cloud, where FIS sets it own monitoring and security tools on the top of public cloud. These tools allow more efficient and automated monitoring of all the processes and provide top security level to protect from cyber-attacks.

Adaptiv supports physical energy deals, energy options, transportation contracts, forward curves and complex price formulae out of the box as well as a host of valuation methods. Where the client uses complex deal valuation approaches for things like gas storage,

Š Commodity Technology Advisory LLC, 2020, All Rights Reserved.

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Risk as a Service - The Next Thing in affordable Corporate Risk Management?

swing deals and/or virtual power plants, Adaptiv offers the ability to pull in in-house model results, have the user decompose the complex deals into simpler structures, or through the use’ deals which represent the deals as a set of sensitivities. Each approach has its pros and cons and it is totally up to the customer which way to go. However, the customer can benefit by serving multiple locations and E/CTRMs with one robust and scalable risk engine for all deal types, high-

A ComTechAdvisory Whitepaper

performance and scalability.

Adaptive also has in depth credit risk functionality and credit analytics meaning that it can be the single engine for market/price and credit risk while also offering valuation, simulation and stress testing capabilities in a single, centralized enterprise-wide service or application.

RISK AS A SERVICE Risk as a Service is more standardized industry offering and could indeed be the ideal solution for a large number of companies. By delivering it both as an individual cloud installation with managed services or as a standardized Risk as a Service, FIS helps reduce infrastructure and IT costs while providing a high-end solution. The FIS Risk as a Service approach

includes data management, cleansing and QA. It also provides exception management, quantitative analysis support for issues like result validation, drill-down and investigation, as well as model calibration. In terms of the range of risk functions that it can cover what if analysis, risk attribution, risk analytics VaR, PFE, exposures, Greeks, Sensitivities etc.) and risk monitoring.

Figure 1 Risk as a Service

Š Commodity Technology Advisory LLC, 2020, All Rights Reserved.

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Risk as a Service - The Next Thing in affordable Corporate Risk Management?

A ComTechAdvisory Whitepaper

SUMMARY As the need to perform various forms of risk analytics increases, many energy and commodity firms are assessing their needs and finding that an E/CTRM often does not provide the level of support or sophistication needed. Those who have multiple E/CTRM solutions and/or deal with other asset classes as well as commodities, also need to be able to aggregate risk at the enterprise level. However, adding the risk software, skills and processes necessary to do this can be very expensive both in terms of an up-front investment and in terms of ongoing costs. Furthermore, there just aren’t that many providers of risk or credit analytics in the energy and commodity space and most of these are small, niche consultancy-type firms so many firms simply rely on in house developed solutions.

At a time when most commodity-related firms are trying to reduce costs and increase efficiencies, having to invest in expensive staff and homegrown or niche solutions, doesn’t help. However, the emergence of managed services and software as a service has created another way to reduce total cost of ownership and increase agility in areas of the business like, for example, scheduling and logistics. Risk as a Service then is an area where forms can ensure the application of more sophisticated risk analytics to their portfolio while keeping costs under control. FIS’ Risk as a service is an example of this trend where a major financial services focused company with a proven managed services capability into an industry with a need for a high-level of security, has come to market with a high-end advanced risk analytics software solution – Adaptiv – delivered as a service.

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ABOUT FIS About FIS Solutions for Energy and Commodities FIS’ energy and commodities solutions help energy companies, corporate hedgers, hedge funds and financial services firms to compete efficiently in global energy and commodities markets by streamlining and integrating the trading, risk management and operations of physical commodities and their associated financial instruments. Through real-time data, connectivity, and analysis, FIS’ energy and commodities solutions help customers achieve transparency and regulatory compliance, address endto-end transaction and operational lifecycles, and meet time to market needs with flexible deployment options.

For more information, visit www.fisglobal.com or email us at getinfo@fisglobal.com

About FIS FIS is a global leader in financial services technology, with a focus on retail and institutional banking, payments, asset and wealth management, risk and compliance, consulting and outsourcing solutions.

Through the depth and breadth of our solutions portfolio, global capabilities and domain expertise, FIS serves more than 20,000 clients in over 130 countries. Headquartered in Jacksonville, Fla., FIS employs approximately 53,000 people worldwide and holds leadership positions in payment processing, financial software and banking solutions. Providing software, services and outsourcing of the technology that empowers the financial world, FIS is a Fortune 500 company and is a member of Standard & Poor’s 500® Index.

For more information about FIS, visit www.fisglobal.com

ABOUT Commodity Technology Advisory LLC Commodity Technology Advisory is the leading analyst organization covering the ETRM and CTRM markets. We provide the invaluable insights into the issues and trends affecting the users and providers of the technologies that are crucial for success in the constantly evolving global commodities markets.

Patrick Reames and Gary Vasey head our team, whose combined 60-plus years in the energy and commodities markets, provides depth of understanding of the market and its issues that is unmatched and unrivaled by any analyst group.

For more information, please visit:

www.comtechadvisory.com ComTech Advisory also hosts the CTRMCenter, your online portal with news and views about commodity markets and technology as well as a comprehensive online directory of software and services providers.

Please visit the CTRMCenter at:

www.ctrmcenter.com

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