Facing the future with a consolidated view of liquidity risk

Commodity price spikes have placed liquidity risk management front and centre in the minds of energy companies and commodity trading houses. How can trading and risk management systems provide cover from such events?

The volatility seen across the commodities complex over the past year has boosted demand from market participants for a clear and accurate view of energy and commodity trading activities. Trading systems that can identify exposures and model different scenarios can help firms prepare for future market unrest by anticipating the changing liquidity risk picture.

For organisations that trade in the increasingly volatile energy and commodities markets, it is becoming more important to gain a clear, accurate and timely picture of overall exposure – not just today, but further out along the forward curve. As such, commodity and energy trading and risk management systems (CTRMs/ETRMs) need to be able to provide a holistic view of a company’s liquidity position, but should also be able to simulate changes to cash flow balances in both the short and long term.

With such capabilities, energy and commodity trading companies will be able to anticipate and withstand extreme market movements now, and in the future. So how can energy and commodity companies ensure CTRM/ETRM systems are up to the challenges of today’s tumultuous markets?

Gauging the impact of commodity market volatility

In volatile markets, organisations must be able to assess the impact of significant market event. The need to ensure cash covers trading exposures that are out of the money is vital, particularly when extreme market movements can send margin calls into billions of dollars. From a treasury and credit risk perspective, however, forecasting margin requirements has become even more challenging in the current market environment. The ability to run sensitivity analysis on prices and exposures, as well as to examine the impact of credit rating downgrades and additional margin requirements, can provide much-needed visibility.

As trading teams attempt to grasp the liquidity impact of doing business, conducting pre-deal checking is key. Using both deterministic and stochastic simulations can also provide an in-depth understanding of the impact of the kinds of major business and market changes seen in the market in recent months.

When managing power price volatility, for example, deterministic simulations will help to determine how an increase in power trading activity could affect a business. Or they could highlight potential changes to liquidity risk exposures for those trying to source commodities like grain from new suppliers as a result of Russia’s war on Ukraine. Stochastic simulations can analyse historical correlations and volatilities between various asset classes to simulate worst-case scenarios – another extremely useful tool as energy and commodity traders attempt to navigate current market conditions.

Back office teams can also benefit from a more holistic approach to liquidity risk management. To monitor cash movements and deliver near or real-time cash forecasts, they need to incorporate the implications of external events such as sanctions or exchange rate fluctuations into their calculations. Ensuring bank lines remain open and cash is available for future projects is a key concern for these teams, but these are challenging tasks to complete in a volatile environment.

Building a holistic solution for liquidity risk management

These challenges can be addressed by building trading systems that provide a holistic view of exposures, consolidating all trades – over-the-counter (OTC) and cleared – in one system. This enables organisations to monitor, analyse and report on changes. Similarly, energy and commodity firms need to be able to view exposures across all trading platforms when trading different markets such as oil, gas and metals, as well as in different regions and therefore currencies.

As a result, feeding real-time, quality data into a trading system from a range of sources is invaluable to risk management, particularly in difficult trading environments. Doing this manually often involves consolidating information from numerous spreadsheets, however – a time-consuming and often error-prone process.

Trading systems therefore require secure and reliable interfaces with numerous data sources to calculate initial and variation margin demands, as well as collateral requirements for OTC trading and settlement data. By providing the ability to analyse liquidity quickly and provide effective and intuitive visualisations of the results, an organisation’s C/ETRM can support enterprise-wide awareness of exposures, enhancing decision-making.

Creating a consolidated picture of an organisation’s exposures will help to develop a long-term, transparent approach to managing liquidity risk. In addition to satisfying internal audit requirements, being able to quickly share accurate information and analysis across the business will boost internal communication and cooperation between credit, trading and treasury teams.

The need for a credit and liquidity risk focused system to bring this all together

Having a solution that complements your CTRM and ETRM systems to bring all of this information together for a consolidated view of exposure will help commodity market participants to not only withstand but better anticipate and plan for extreme market movements in the future. With continued volatility expected for energy and commodities markets, organisations need to be able to manage risk effectively right now, while also preparing for future storms.

Let Brady help you do this with CRisk, the cloud-built credit and liquidity risk management platform designed for energy and commodities trading.


Written by

Ian Tobin
Business Lead – Risk


About Brady Technologies   

Brady Technologies is a leading provider of energy and commodities trading, risk, and logistics management software that empowers global market participants to trade confidently, profitably and sustainably today and in the future. Its customers include renowned multinationals, where Brady software sits at the core of their mission-critical global trading operations. Brady’s portfolio of applications covers the entire trading operation from capture of financial and physical trades, through risk management, handling of physical operations, back-office treasury and settlement, for power, oil, gas, coal, LNG, FX, emissions, refined and unrefined metals, and agricultural products.  

Facing the future with a consolidated view of liquidity risk