Gary Vasey, Managing Partner of ComTech Advisory interviews Brady’s Risk Practice Lead, Ellen Stars.
ComTech Advisory: How does the market for credit solutions look at the moment?
Ellen Stars: Having a credit solution in place allows for cohesion and collaboration internally to enable greater financial return. We’ve seen that credit exposure has increased a lot due to volatility and companies have higher exposure to banks in trading OTC, LCs and obligations. So, the question becomes how they handle this exposure better. They need a solution to help them to estimate, analyse and forecast their credit risk more accurately.
ComTech Advisory: And given the obvious drivers around liquidity, banking, and inflationary pressures, what is it that companies look for functionally at the moment?
Ellen Stars: Credit is a changing landscape; for the most part the mechanics are the same, but companies need a lot more liquidity, and credit is becoming more decisive in financing than ever before. We have seen an increase in credit insurance products for MTM, however, not everybody has a full understanding of how these work. For example, the company needs to take the 1st loss, this can be expensive and also it’s not easy to trigger the insurance payoff, so there’s a realisation that using a portfolio of hedges and having tools to manage the cost of credit are better options. Companies clearly need the ability to manage more hedging, as well as manage, anticipate and optimise liquidity.
ComTech Advisory: What trends are you seeing in the industry around credit risk – i.e. Trends that accentuate the risks and drive firms to procure software?
Ellen Stars: With increased credit exposure and volatility, companies are looking at various ways to manage and mitigate the risk. There is more focus on selective processes to identify the main counterparties to deal with and the pockets of stability say within certain groups (whether it’s by rating, by sector etc), so that they can lift the limits higher with certain portfolio groups and individual counterparties. Companies are looking to assess how they can charge for the liquidity and how much it costs the group to raise the debt. Therefore, measures such as CVaR, CVA, and how to process things like PDs and default rates are being analysed more. They are looking for new indicators and trying to determine stress tests.
ComTech Advisory: How is Brady’s software solution in the credit area differentiated?
Ellen Stars: At Brady we are continually evolving our solution for credit risk management and liquidity forecasting. This year we have a new release with enhanced margining and liquidity management functionality. The liquidity module enables our customers to calculate current and forecasted cashflow positions for initial and variation margin per commodity, per counterparty and portfolio across different market venues. It also calculates liquidity stress testing (price stresses, expected business growth) and provides the ability to analyse and understand the short term and longer-term liquidity risk.
ComTech Advisory: Do you think the current interest in credit is sustainable?
Ellen Stars: Volatility is here to stay; the market dynamics have changed in the move away from reliance on Russian gas. There is a higher demand globally for LNG, this creates competition and volatility. The price of energy depends on a range of different supply and demand conditions, including geopolitical situation, environment protection costs, network costs, severe weather conditions etc. Companies continually need to measure and monitor credit risk to effectively steer activities throughout their key business processes whether it’s business as usual, new business planning, entering new markets, the introduction of new products or counterparties, to ensure that their risks systems are fit for purpose to support their business.
ComTech Advisory: Why do firms need a credit solution over say, a CTRM with some credit functionality?
Ellen Stars: Many companies have attempted to manage their risk infrastructure in a fragmented way, either by building tactical inhouse solutions or investing in simple point solutions. As markets have evolved, some are now realising that these systems are expensive to maintain and lack the flexibility to keep pace with changing market conditions. The credit risk exposure in a derivative transaction is very significant; a counterparty can default prior to the maturity of the contract and the expected loss from such an outcome must be monitored. It is important to capture netting agreements, and collateral agreements to accurately quantify and price counterparty risk exposure. Hence, to mitigate risk, enhance transparency and increase capital efficiency companies need a more dynamic and scalable system that can provide a single view of credit risk across their entire portfolio.
About Ellen Stars, Practice Lead, Risk, Brady Technologies
Ellen Stars is the Risk Practice Lead at Brady Technologies. Based in London, Ellen manages the professional services team implementing Brady’s energy credit risk software solutions across Europe & North America. Previously, Ellen has held Director of Consulting roles at several international software companies, providing front to back office trading and enterprise risk management solutions to both energy and capital markets sectors. Ellen has been a member of GARP and PRIMIA since their inception in the early 2000s. She has also led the Financial Engineering and Research Team at Finastra on projects relating to contagion in credit risk portfolios. Ellen holds a BSc Computer Science in Software Engineering from the University of Westminster.