This is the second in our series of seven questions every emissions trading desk should be asking about their ETRM.
There are two distinct dimensions to profit and loss in emissions trading, and most systems only show you one of them properly.
Trading P&L covers your active futures and physical positions the daily mark-to-market based on settlement prices, the realised gains when you close a position, and the unrealised exposure on everything still open. This is what traders look at throughout the day and what risk managers review at close of business.
Inventory P&L is different. Once certificates have been delivered and sit in your registry account, they are no longer part of an active trade — but they still have a market value that moves every day. If you hold 50,000 EUAs in inventory and the market drops two euros, you’ve just lost a hundred thousand euros in unrealised value. That needs to be visible, reported, and attributed to the right book.
The problem arises when these two views live in separate places or worse, when inventory P&L isn’t calculated at all and someone is estimating it in a spreadsheet. The risk office needs to see total exposure: trading positions plus inventory holdings. Without that, the P&L they report to management is incomplete.
What good looks like: a single P&L overview screen where the user can toggle between trading P&L only, inventory P&L only, or a combined view – and where that toggle works at every level of aggregation. Book level. Strategy level. Counterparty level. The numbers should be consistent, auditable, and drillable down to the individual trades or inventory movements that make them up.
There’s a related nuance here that is worth understanding. Cash flow and P&L are not the same thing for physically settled instruments. Cash flow reflects the money that has actually changed hands what you paid to your counterparty when the physical was delivered. P&L reflects the market value of what you hold relative to what you paid. At any given point in time, these numbers will differ. Over the complete lifecycle of a position, they reconcile. But on any single day, your cash flow report and your P&L report will show different figures, and both are correct they’re just answering different questions. Cash flow answers “how much money has moved?” P&L answers “how much money have we made or lost?”
A system that conflates the two, or that only reports one, leaves either the trading desk or the finance team flying partially blind.
Next week: is your futures-to-physical rollover automated, or is someone re-keying trades?
