Real-Time Physical Risk Exposure: Do E/CTRMs Pass the Muster?
Physical Risk Blog

We have been reading a litany of white papers and blogs about volatilities in the commodities market and how it impacts the financial and credit risks. And if E/CTRMs are ready for the traders, risk managers and management need to be up-to-date on their physical risk exposures. 

 

In all this, we barely talk about the physical aspect of commodity trading and the delivery risk. Do E/CTRMs really have a good understanding of the delivery and ability to provide ‘up-to-date’ – or as everyone says, ‘real-time’ – view into their true exposures?  

 

If the answer is a big NO (which it is!), one must ask “why not?”  

 

Let us peel the layers on this onion. Most logistics/scheduling functionality captures the ability to show delivery/movements in/out of storage or pipeline or ship/railcar/truck. However, the one big dimension that is missing is time. Most, if not all, such movements are instantaneous in the system. That means, it shows that the delivery or movement or processing was instantaneous. 

 

Take the example of LNG (Liquified Natural Gas) terminals where gas is liquified. In most systems, if the user processes gas as an input and LNG as an output from the terminal, the process mimicked in the system shows that the LNG is immediately available, whereas in real life, it takes days to go through the process. Another example is the loading of ships, which typically takes days. But systems instantly show commodity onboard as long and short exposure on the input side.  

 

This time lapse in actual processing, loading or other activities is what differentiates an up-to-date physical exposure from a perceived one. Consequently, it is not able to provide schedulers, traders, and others with a concurring view into their physical exposures. And as we know, things could go wrong in real-life during processing at a terminal or loading at a port, for example. 

 

So legacy E/CTRMs – take note of these shortcomings. And when designing the latest ‘best in breed’ scheduling/logistics product, new entrants should keep this in consideration. Only then can E/CTRMs or logistics systems claim a candid, real-time commodity risk system and pass the muster. 

 

Let us know what you think. And if we can help manage your risk.  

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