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The Importance of Price Curve Management In A More Regulated Commodity Trading Environment

A ComTechAdvisory Whitepaper

WHAT IS REQUIRED?
In many companies, much of the basic work around price curves is performed in spreadsheets. Many E/CTRM
solutions actually lack basic curve functionality and pre-suppose that price data, including curves, will be
brought in and stored for later use. They lack any ability to derive curves, track changes, monitor reasons for
changes and audit such changes. As a result of increased regulatory oversight, commodity-trading firms now
need a significantly more robust and auditable solution for forward curve management. This solution should
provide:

1/ T
 he ability to define an automated methodology to


7/ S
 torage

recording of all calculations used
within the process of curve creation with a complete audit trail.

for all curves able to be manipulated and
the results of those manipulations. The manipulations might be used for stress testing or another
reason, but it is important to have a complete audit
trail of prices, price curves and reasons for changes.


3/ T
 he long term storage of all source data along with


8/ F
 lexibility. It should be relatively easy to set up de-

create forward curves from specified source data,
using a simple or complex formulation.

2/ T
 he automated

rived curves that are formula-based with a good
deal of flexibility. These may be used for pricing or
as valuation tools and each needs to be subject to
all the rigors outlined above.

the resulting curves, including versioning of those
curves, with the ability to easily access that data on
demand.

4/ T
 esting of curve methodology. Prior to promoting a

curve methodology definition to production status,
the ability to thoroughly test all the scenarios that
a rule-based framework requires to operate effectively. This would provide the confidence required
for downstream system capture, data integrity and
documented proof to any internal or external oversight.

5/ A
 rules-based

approach which would allow adjustments for units of measurement and currency conversions along with other manipulations.


6/ A
 rules-based

approach which would also provide
fallback scenarios in cases where a price is missing or unavailable for a period of time. Should the
previous price be used or should some other temporary derived price fixing mechanism be used.
Again, as more reliable prices came in, the old
price curve would be maintained.


9/ S
 ecurity of access. The auditor will want assuranc-

es that access to curves for editing is limited to
those responsible.
10/ T
 he ability to visualize the curve and manipulate
it within the context of a visualization tool is also a
nice to have feature.

With an increased demand from inside and outside auditors,
regulators and stakeholders for this kind of rigor around
prices and forward curves, the time has definitely arrived for
comprehensive, robust and flexible solution that meets all of
the above criteria. The risk to the business of not being able
to demonstrate this level of completeness around prices and
forward curves are simply now too great and could threaten
lines of credit, equity value and stakeholder sentiment, the
profitability of the business and more importantly, its reputation and brand.

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