This case study explores the successful implementation of a bespoke Energy Trading Risk Management (ETRM) system designed to enhance a company’s trading capabilities and risk management practices.
Building a Comprehensive ETRM System
The project aimed to build a robust ETRM system with the following key functionalities:
- Market Data Services:
- Real-time, End-of-Day (EOD), and on-demand data connectivity for ICE, Calypso, and Caprice market data sources.
- Market data dependencies based on user-defined valuation sets (EOD LDN, Japan, Live)
- Independent trader functionality for defining new market data curves and spark spreads.
- Integration capabilities for valuation curve snapshots.
- Valuation & Trade Services:
- Commodity Support: Power, Gas, LNG, Ethanol.
- Product Onboarding: Exchange Traded Futures, Options & Swaps, Physical Fixed & Floating Price, Swap Fixed-Float & Float-Float, OTC Options, Fees.
- Trade Life Cycle Management: Design and implementation of trade change events.
- Trade Model Schema: Designed for valuation purposes.
- Gas Storage Schema: Designed for valuation purposes.
- Integration of OPICS – IR Futures & Swaps and FX exposure.
- Scheduling, Shaping & Calculation:
- Scheduling services for optimized trade execution.
- Shaping services for managing energy demand fluctuations.
- Calculation and Orchestration: Replicating existing risk system’s calculation and orchestration steps for trade valuation.
- Regression Testing:
- Verification of the new system’s accuracy by comparing its valuation results with the previous system.
- Valuation Library:
- Construction of a comprehensive library for pricing Exchange Traded and Physical trades.
- Regression testing against the previous pricing library to ensure accuracy.
- Aggregation & Presentation:
- Market data view for comprehensive market analysis.
- Portfolio selection view for efficient portfolio management.
- Results valuation for clear visualization of trade valuations.
Onboarding and Risk Management
The project also encompassed onboarding various products and functionalities to enhance middle office and risk management capabilities:
- Book Onboarding: Efficient onboarding of Exchange Traded and Physical products onto the new ETRM system.
- Middle Office & Risk Management:
- MTM Valuation P&L: Real-time Mark-to-Market (MTM) valuation and profit or loss (P&L) calculation.
- P&L Attribution: Detailed analysis of P&L contributors.
- VaR Stress Testing: Comprehensive stress testing scenarios to assess potential portfolio risks.
- Pricing Models: Development of robust pricing models for physical assets and gas storage.
- Accounting & Back Office:
- Settlements Preparation: Streamlined preparation of settlements for efficient trade completion.
- Counterparty Settlement Confirmations: Automated generation and management of counterparty settlement confirmations.
- SWIFT Message Reconciliation: Automated reconciliation of SWIFT messages for enhanced data accuracy.
- Hedge Accounting & Invoicing: Streamlined hedge accounting processes and invoicing.
Regulatory Compliance & Governance
The new ETRM system ensures adherence to relevant regulatory requirements:
- MIFID Regulatory Management: Compliance with the Markets in Financial Instruments Directive (MiFID).
- CFTC Position Limits Repository: Reporting to the Commodity Futures Trading Commission (CFTC) position limits repository.
- EMIR Position Reporting: Compliance with European Market Infrastructure Regulation (EMIR) position reporting requirements.
- REMIT Compliance Reporting: Adherence to Regulation on Energy Market Transparency (REMIT) compliance reporting.
- Dodd-Frank Regulatory Reporting: Compliance with Dodd-Frank Wall Street Reform and Consumer Protection Act regulatory reporting requirements.
This successful ETRM system implementation significantly enhances the company’s trading capabilities, risk management practices, and regulatory compliance, positioning them for continued success in the dynamic energy trading market.
