Contigo's Jon Yeomans
This year is critical for power and gas trading companies: it is the year when it becomes an absolute requirement for them to have in place robust data capture and trade reporting systems, to ensure compliance with upcoming EU-wide remit and emir regulations. This article looks at the challenges organisations will face when evaluating their readiness for the regulatory changes, and highlights key questions to address when deciding the best route forward.
Whether you currently use a spreadsheet-based trading model, an in-house developed trading application, or a legacy energy trading and risk management (ETRM) platform, the regulatory onslaught will affect you – and non-compliance with the new regulations is not an option as falling foul of them can lead to prosecution and heavy financial penalties.
Who’s most at risk?
Commodities now has published many detailed analyses of the impact of the remit and emir regulations to trading organisations. One such feature appears elsewhere in this issue. Those with the most work to do, and with the biggest risk potential, are market participants who predominantly use:
• Spreadsheets to capture, store, and settle trades;
• In-house developed trading and settlement systems; or
• A vendor-supplied ETRM legacy system with little room for flexibility, data enrichment, customisation or extension.
If this is you, it is imperative to investigate moving to a more inherently centralised system containing a single version of the ‘data truth’ – sometimes called the “golden source” – to ensure that you are correctly capturing and reporting everything that is required. But you also need a system that will not impede your team’s ability to focus on the job in hand – i.e. effective trading.
‘Why can I not just use spreadsheets?’
Traders obviously love the flexibility that spreadsheets offer, but in the new regulatory framework, spreadsheets will not provide the high quality and low risk reporting required. So you will need to convince your front and middle office teams that change is not only essential but will also be beneficial. Here are some questions to challenge their thinking:
• Can you keep track of all changes made to the spreadsheets or even be sure that the data is accurate (i.e. Who made the changes and which need to be re-reported)?
• Can you ensure that all relevant data from the necessary spreadsheets is in the required format for reporting?
• Can you ensure that all spreadsheets use the same approach and terminology for simplified data reporting?
• What is the time lag between spreadsheet creation, aggregation, mark-to-market, and report submission? Is this too long to allow for real-time or daily reporting?
• Can you demonstrate that you have the capability to look for suspicious trading patterns with data scattered across multiple spreadsheets?
At Contigo, we believe that spreadsheets are simply no longer ‘fit for purpose’ given the regulatory challenges. Migrating to a modern, centralised ETRM system – such as Contigo’s enTrader product suite – can offer much better support and bring the following benefits:
• Automatic validation and reporting of data across all areas of trading and markets;
• Clear visibility of any missing compliance-required information;
• A rock-solid audit trail of trades and supporting documentation;
• Real-time updates to positions for mark-to-market valuation.
‘Why can’t I use my in-house developed or existing legacy ETRM system?’
Your existing ETRM platform is highly unlikely to guarantee remit and emir compliance because its trade data capture, reporting and auditing capabilities will not have been designed with the regulatory reporting framework in mind. This leaves you with several options:
• You accept the cost, time and risk of making your own system compliant;
• If you have a legacy ETRM platform, you trust your current vendor to understand the regulatory requirements and implement a timely and suitable solution;
• Go to market and source a purpose-built, next-generation ETRM platform that resolves your regulatory compliance risk and delivers a competitive edge.
‘What does the ideal ‘remit & emir ready’ ETRM solution look like?’
At first this appears a tough question to answer because the regulatory changes are still not fully defined. Many questions remain, such as;
• In the world of energy trading, how do you define a derivative trade that needs reporting under emir rather than remit?
• What trade repositories are available to report to and how will the reporting process work?
• How can I position my organisation to have the best chance of remaining compliant in both the short and long term as the legislative process is still evolving?
Critical questions to put to your compliance team or to any external ETRM vendor:
• Will it create unnecessary work for traders or unwanted delays in the trading process?
• Will it provide high-quality, real-time centralised trade and position data?
• Will it support formula-based pricing to help us migrate away from spreadsheets?
• Does it retain a 100% complete audit history as insurance against regulatory inspection?
• How will it capture all significant communications required for remit compliance?
• Does it allow us to attach evidence (such as documents, press releases and news articles) to the trades to demonstrate that they were based on information public at the time of the activity?
• Can it meet the need to report on the creation, updating or deletion of trade data within one working day of the change being made, including the mark-to-market reporting?
• Can I implement customisation and bespoke business processes in the ETRM, or must I wait for the vendor’s release cycle to deliver this change?
• Does it provide automated reporting and compliance deviation reports? Will it prevent duplicate reporting as required by emir?
• Does it support configurable trade life cycle workflows to manage the reporting activities?
• Does it provide a demonstrable level of security and data segregation between different teams?
• Can you demonstrate how I could customise your solution in-house to adapt quickly and cost-effectively to future regulatory changes?
• Will it provide high-quality, real-time centralised trade and position data, i.e. ‘the golden source’?
• Is your solution remit and emir compliant and can you provide a “SaaS cloud hosted” remit and emir ready ETRM demo which my in-house teams can evaluate right now?
Simply tinkering with existing systems will not deliver positive answers to the large majority of these vital questions in the way that a next generation ETRM platform would. Ideally, that platform should come from a vendor – like Contigo – with a strong European focus and detailed understanding of the impact of the regulatory changes.
Contigo believe that trading organisations need to implement an ETRM platform with as many configurability, flexibility, scalability and customisation options built into the product’s core framework as possible. This mitigates the risk that uncertainty brings.
Also, there are key product capabilities that will be required – like credit risk management and trade repository notification – so you need a vendor that has an integrated story on these capabilities or a track record of partnering with others to deliver the solution you need. Unfortunately, most ETRM vendors offer frankenstein-esque legacy products that are the result of a disparate range of products, assembled through acquisition with no coherent architectural vision. The following capabilities need to be built into an ETRM system’s very fabric, not bolted on as an after-thought or as a knee-jerk reaction to change:
Notification framework – when the trade repository reporting requirement is finally defined, you need to be confident your platform can easily accommodate this. Products like Contigo’s envoy offer flexible workflows and built in acknowledgements and alerts when things go wrong.
Capital management – a potential outcome from the remit and emir regulatory change is that trading companies will need to be far more focused on evaluating and collateralising their credit risk exposures. Choosing an ETRM platform that provides these capabilities will future proof the investment.
Custom fields – the ability for the end-user to define new data fields (via the user interface) to be captured against any entity (counterparty, trade, etc). As regulations evolve, new information will need to be managed, captured and reported on.
Custom processes & validation – the ability to add new coded capabilities into the core product with zero downtime. For example, calculating a custom mark-to-model valuation on trade save for specific derivative types.
Custom scheduled events – the ability to dynamically add new coded events to be run at scheduled intervals, such as the daily extract of trade mark-to-market valuations for reporting.
Custom user interfaces – the ability to modify and extend the ETRM user interface to add customised pages. For example, adding new compliance KPI dashboards.
Custom aliases – different regulators (i.e. ESMA and ACER) may require unique registration codes, identifier codes etc. For similar (or identical) ETRM entities (e.g., products, counterparties). An ETRM platform should support multiple aliases for all entities as a general capability.
Auditability – the ETRM platform should provide a 100% audit history of every field added, changed and deleted and by whom, clearly highlighting what needs to be re-reported.
Document management – the ETRM should allow the capture and reporting of all kinds of evidence (such as documents, press releases) directly to the relevant trades and contracts.
Regular mark-to-market – emir requires reporting on the mark-to-market position of appropriate trades and positions where there are indicative prices. A good ETRM platform should do this automatically utilising forward curves. Trades without indicative prices will need a risk model to value them – which should automatically feed data into a model and update the required emir mark-to-market information prior to reporting.
Custom reporting – the ability for end users to create new reports with appropriate data segregation and embed them in the ETRM platform with full user access control.
Custom workflows – the ETRM platform should fit around your business, not the other way around. The ability to define entity-specific custom workflows for trades, counterparties and agreements etc. is essential.
Completeness – the ETRM platform should help you demonstrate that you have reported everything that falls within the scope of remit or emir, in a timely manner without the need for significant resources.
Contigo’s enTrader product suite delivers all of the technical capabilities to facilitate remit and emir compliance. enTrader also offers the ultimate in ETRM product flexibility through:
• Rich, price-formula support that will ease you away from relying on spreadsheets;
• Data warehouse capability that provides drill-through analysis on ‘big data’;
• Integration with envoy - our flexible notification product for trade repository reporting;
• Mark-to-market of positions – including half-hourly products.
Don’t tinker with systems that are no longer fit for purpose. Seize the opportunity to find a new vendor. You need a partner like Contigo who are ‘simply different’ and can provide an ETRM platform that is ready to meet the remit and emir challenge, and who also has the industry knowledge and the technical skill to become your collaborative partner through the process of change. Not all vendors are the same. Beware of those that continue to push inflexible ETRM platforms that have no place in the new regulatory landscape or who see this purely as a revenue generating opportunity.
2013 heralds a new regulatory landscape that will change the way organisations involved in trading commodity products, especially derivatives, will have to operate. Companies must review their systems and practices. But instead of seeing this as burden, organisations should embrace this new regulatory environment as an opportunity to transform their energy trading and portfolio risk management practices, making them not only compliant but also more efficient and effective.