Why Purchase a CTRM?
For any company that trades commodities, viewing both physical and price exposures is essential, particularly when amplified by the high volatilities in the market currently. There are various ways to achieve this and this article briefly exploring these options to help you determine whether a Commodity Trading Risk Management, CTRM, platform might be suitable for your organisation.
What is CTRM software?
Amphora, recently sponsored a new book called, CTRM Software, An Analyst View of a Dynamic Software Market, which defines CTRM as…
CTRM has a trade-centric design with a focus on capturing and tracking both physical and financial trades, with configurable book and reporting structures, position calculation and valuation, PnL, and various aspects of risk.
A CTRM platform will be used in nearly every department of a company that buys and/or sells commodities through traders, operators, middle office, IT, finance, to senior management. From trade capture through to taking deliveries and managing payments, a CTRM covers all aspects of the trade life cycle and more.
Benefits of a CTRM?
An integrated CTRM system offers real-time insight into positions for hedging, operations, credit, treasury, and finance departments. As soon as a transaction, or modification to a transaction, occurs in one module, it immediately becomes visible to all other modules, meaning that all relevant users in all departments can see the addition or change.
A CTRM brings the contracts, logistics agreements, prices, specifications, costs, payments, and all other important variables together, and using graphical Business Intelligence, BI, reports and dashboards, aids decision making. A CTRM allows for rapid data entry and allows users to extract this data relatively easily.
Most CTRMs are generic, providing support for multiple commodities and allowing them to all be entered in one place, with support teams always available to assist. This allows for a scalable solution, with no additional fees if new commodities/geographies/trade types are traded under different business entities. A CTRM vendor will also tailor its offering accordingly, so the client is not paying for modules that they do not require, resulting in a low cost and more rapid implementation.
How can my department benefit from CTRM software?
- View overall exposure across multiple trade types, including FX, price, P/L and physical
- Value and view VaR on portfolios/strategies containing multiple trades/costs to assess hedging strategies
- Enter trade pricings and secondary costs with the flexibility to easily set up complex formulas that capture all optionality with no need for assumptions or approximations
- Capture trades quickly and automatically, without error, using defaults, tailored reference data and a trade formula library
- Create trade recaps
- Streamline logistics with management of transport, storage and load/discharge quantities with a full visibility and history of relevant timings and specifications
- Manage inventory with Weighted Average Cost Of Goods, WACOG, or First In First Out, FIFO, calculations
- Manage additional costs associated with the transportation, e.g. demurrage
- Minimise operational risk with user tailored workspaces
- Improve efficiency with no need to manually update spreadsheets
- Attach documents to the shipment so all information is stored in one place
- Full visibility with snapshots of company exposures and P&L through different parameters, e.g. strategy, trader, desk, commodity, shipment
- Straight-Through-Processing, STP, allows management of all areas from trade capture to settlement without repeated entry of the same data
- Set VaR limits to portfolios/traders
- Enhanced cyber security
- 3rd party integrations to minimise manual input/errors
- Manage compliance requirements without the need of spreadsheets
- Approve trades before scheduling
- Monitor trades during life cycle
- Audit trails
- Automate processes
- Create workflows
- Create reports for stakeholders with personalised dashboards
- Integrate with price vendors to automate price loading and end-of-day processes
- MTM open positions with internal or published price curves, e.g. Platts/ICE
- Breakdown P&L attribution
- View trade price calculation
- Create trade confirmations
- View credit exposures
- Manage Accounts Payable and Receivable with links into accounting software for automatic updates
- Create invoices/confirmations
- Create rules to automate VAT costs (select if to contribute to P&L)
- Cash forecasting with comprehensive overviews
- Manage costs from the moment trade created
- Create reference data, for more info click here
- Create roles/permissions
- Create new commodities/markets
- Create additional fields in user interface for trade capture, shipments, invoices, portfolios
- Automate processes, e.g. end-of-day
Can we use Spreadsheets instead of CTRM Software?
Spreadsheets can be used to manage commodity trading positions, including hedging, with cost, flexibility, and user friendliness as their advantages. Advanced spreadsheets can include macros and lookup tables to achieve this. Often when a company’s trading activity is relatively small, excel can indeed be a solution.
However, as the company grows, and trade count and complexity increases, the disadvantages are…
- No audit history
- No live views of key information
- Lack of business control and integrated security e.g. permissions/approvals
- Often multiple spreadsheets, owned by different individuals- adjustments need to be updated in each one and changes communicated between different teams
- Chance of errors such as double entry, spreadsheets not in sync, and cannot confirm accuracy
- Lack of standardisation of business processes that can be delayed if the “owner” of a spreadsheet is not available
- Cells containing formulas can be overwritten with fixed values with no warnings/permissions, or user can incorrectly paste value rather than formula
- Lack of version control
- User can sort/filter/hide data without notifying other users, resulting in incorrect overall positions displayed in final calculation
- Difficult to create reports
- Time consuming, that only increases with use
Indeed, spreadsheets have a long history of creating issues in commodity trading as a result of the above factors.
Can we use an ERP instead of CTRM Software?
An Enterprise Resource Planning, ERP, solution, e.g. SAP/Microsoft Dynamics, is designed to cater for all industries, such as retail and manufacturing. Most offer additional modules to assist with specific functional needs. However, an ERP cannot properly cover all the specialist and complex functionality required to support the whole trade life cycle in commodity trading. ERP’s are integrated with accounting processes but often, the complex nature of commodity trading is not captured. This simplified approach can enable cost management, but with limited flexibility; the more complex trade pricings cannot be achieved with optionality not recorded, often these are entered as a fixed price trade which are then continually manually updated. This forces the user to make assumptions and approximations outside of the system, often with the aid of multiple spreadsheets. It is often difficult to manage overall exposure with an ERP, for example a physical price exposure hedged with a swap. This impacts the ability to use an ERP to manage risk and indeed, effectively and optimally manage the trading business.
Can we use Inhouse Build a Solution?
Companies have developed the necessary CTRM functionality themselves with their custom-made solutions integrated with an existing ERP solution. The clear advantage is that the solution is tailored specifically to their requirements so from day one it can appear to fit perfectly with no need to pay for licensing from a CTRM vendor. This may appeal to a large company with a significant IT department, who has a unique approach that they feel cannot be catered for with a commercially available CTRM solution.
Common issues with this approach have been...
- Time to build a solution is measured in years. It often takes much longer than anticipated and is sometimes superseded by business changes, meaning that the solution is never actually complete
- The costs of building, maintaining and supporting the system are under estimated
- During the build, it is often discovered that the business if more complex than first thought and this can include, for example, the commodity hedging module and other modules
- Under estimation the internal resources required to define, build, maintain and test the software specifically including the time required for key users on the project
- Custom-made modifications to commodity trading contracts make it difficult to upgrade
- New technology, regulatory requirements, and ever changing economic/trade opportunities will require continual enhancements to remain current; as a result, after several years, an outdated system can occur, or the skills needed to continue with the system are no longer available in the IT job market
On-Premise or Cloud CTRM?
Once the need for a commercial CTRM is confirmed by an organisation and a vendor is chosen, the final decision is how to install the software.
On-premises or cloud-hosted options are available which both come with different pros/cons that the client needs to consider before choosing their path.
On-premise or Cloud hosted
- Client has complete control
- No internet connection required for daily operation of the application
- No regular payments for hosting
- Suits preference of upfront Capital Expenditure, CAPEX over Operational Expenditure, OPEX
- Larger upfront cost plus asset depreciation cost over lifecycle
- Longer implementation time
- Additional hardware purchase cost
- Application maintenance (upgrade, and configuration control) required in house
- Infrastructure maintenance (licensing, patching, securing, scaling, backup/restore) required
- Data may not be always available if outage occurs as disaster recovery maintained on premise
- Third party solution connectivity (Exchange, ERP) must be governed
- Delayed access to application hotfixes and feature releases
- Shared security responsibility (customer on infra, vendor on app)
- Enhanced cyber security (Microsoft claims 4B USD PA)
- Aligns to corporate cloud transformation (If applicable)
- Improved performance
- Single point of contact (application and infrastructure)
- Allows increased focus on core business capability
- Scalable - add additional infrastructure as required
- No upfront hardware investment
- Rapid implementation
- Maintained by vendor
- Features and hotfixes automatically deployed once as soon as available
- Integrate with other cloud technologies
- Suits preference of expenditure of OPEX over CAPEX
- Depending on the on-premise Total Cost Ownership, TCO, cloud hosting may offer a higher operating cost over time, (5 years+)
- Strong internet connection needs to be maintained by client
Larger companies, (1000+ staff), with an already dedicated, confident, internal IT department with the necessary resources to cope with upgrades and all the necessary hardware requirements already in place may opt for an on-premise solution that could, long term, prove to be the cheaper option.
Most smaller companies, however, tend to opt for a cloud-based CTRM with the benefits of reduced initial cost, regular free optional upgrades, with minimal input required from the client and a faster time to deploy.
CTRM Client Requirements for Implementation, Training and Support
Once a CTRM is chosen and the implementation begins there will be a pull-on client’s staff time. Certain staff, for instance the super user, will need to dedicate time most days during the first month of the implementation, when the scope and requirements phase begins.
For more information on rapid CTRM implementations click here.
During the final stages of the implementation, training sessions will occur that are relevant to the department. The solution should be easy for the user to adopt and should therefore not require much time to learn- between 2 and 10 hours is standard. Most vendors will also offer ad hoc training sessions for future client employees.
For more information on efficient CTRM training click here.
Once live the client’s “Super-User” will have regular calls with the vendor’s support team who provide updates on current issues, enhancements and upgrades.
For more information on the importance of strong CTRM support click here.
Commodity trading companies at start-up will often initially use spreadsheets to manage their risk, finance, and logistical activities. After the company grows to a certain level and wants to go to the next stage, there is often a steer towards using an ERP and purchasing additional modules to enable any added functionality that is required. After several months, it becomes clear that not all trade/logistical activities can be captured, forcing the user to make assumptions and approximations with the use of multiple spreadsheets. At this stage a decision must be made to either invest in a CTRM or to continually use the sub-optimum ERP/spreadsheet approach and manage its risks to the business.
Once a CTRM is implemented, spreadsheets can still be used with extracts available to the user, from all modules, to enable further analysis. Users will always lean towards a spreadsheet as it requires no training, (as everyone knows their way around a spreadsheet) and they can be designed quickly by themselves at no cost. However, the CTRM should be the one-source-of-truth for business-critical activities, such as trade capture, logistics, reporting and risk management purposes. For go-live, a spreadsheet extract from the CTRM can often be used as a work-around for missing functionality that will be addressed in the client’s next upgrade, several months after go-live.
A CTRM, compared to other possible solutions, offers improved efficiency with all trading activities taking place in one platform specially designed for commodity trading and results in rapid deal entry and capture of all logistical activities with reduced chance for errors due to the use of automated processes. The scalability and adaptability of a CTRM ensures that as the client’s business grows the CTRM will evolve with no additional costs to the client.