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Risk as a Service – The Next Thing in affordable Corporate Risk Management?
A ComTechAdvisory Whitepaper
INTRODUCTION
In the past, the use of ‘sophisticated’ risk tools and metrics was considered the bailiwick of
the very largest entities that could afford to develop and run with such an approach. Often they
saw advanced risk analytics as offering them a strategic and/or competitive advantage in the
market. Others in the commodities space simply could not afford to perform sophisticated risk
analytics and anyway, they often didn’t have the skills onboard to perform, or even understand,
them appropriately. Some firms resorted to using more simplistic reporting of positions, or other
metrics, to monitor ‘risk’ and/or used somewhat simplistic limits for various forms of market
and/or credit risk. Often, the calculation of exposures, or at-risk capital, value or earnings, or
PFE, took a great deal of time to compute and if something went wrong, like a missing price
for example, the calculation might simply crash before completion. This meant that often, risk
exposures were only accurate well after the fact and were never available to inform the business
when needed.
With the speed of change in our industry; the renewed both expensive and difficult to find. For example, if a
and deeper scrutiny, regulation and geopolitical company choses to measure earnings at risk (EaR)
environment, the need to perform faster, more rigorous on a constant portfolio of trades, contracts and assets,
risk has broadened and now all entities in commodities how can changes in EaR be explained in a meaningful
need to demonstrate proper risk management. However, way allowing the business to use the tools effectively?
setting up a deep risk management infrastructure of This is a complex calculation and drilling into and
the necessary systems, processes and skills can be understanding all of the different components of risk
very expensive and add an additional cost burden to takes both significant expertise and the right tools.
eat away at those reduced trading margins. While this
may look like short-term thinking versus the impact Historically, the emphasis has been on market, price and
of a cataclysmic market or counterparty event, it is credit risk, often using simple reports as outlined below.
certainly an operational and budgeting issue that has to However, unexpected geopolitical or other events are
be addressed and it often slows the progress of moving now occurring more frequently and often with dramatic
towards a more risk management-focused corporate effect. Use of portfolio stress testing and simulations are
environment. one way to try to plan for these events. More rigorous
credit risk is also needed to help identify and limit
Even when the tools and methodologies are in place, exposure to weaker counterparties and partners. Trying
it requires the skills, knowledge and expertise to to find ways to identify and mitigate other forms of risk
understand what they mean, and this too can be from operational risks to legal risks is also now a focus.