White Papers The Importance of Real-Time Forward Curves | Page 3

The Importance of Real-Time Forward Curves
A ComTechAdvisory Whitepaper
MARKET DYNAMICS
A New Era of Risk Management and Controls
With increased market oversight following the financial
crisis of 2008, the practice of risk management and
enforcement of trading controls have become organi-
zational priorities for most, if not all, commodity trading
companies around the world. While facing a suite of
wide-ranging regulations in a number of jurisdictions
aimed at ensuring market stability via increased visibil-
ity and the elimination of market abuse, traders must
also continuously adjust their strategies and practices
to address increasingly complex and globally influenced
markets. Addressing and complying with regulatory
mandates, while simultaneously ameliorating market
risk and properly valuing positions, is an essential capa-
bility for any company seeking to maintain a profitable
business in today’s commodity markets.
Developing and maintaining adequate risk controls, in-
cluding proper valuation processes, is not only a regu-
latory mandate, but also a requirement of stakeholders
who have become far more adept at understanding the
inherent risks and exposures in commodity trading - and
the measures necessary to mitigate those risks. Financ-
ing banks, in particular, are much more sharply focused
on understanding the risk controls and systems in
place within their customers’ trading organizations, and
they have developed the expertise and ability to audit
and verify that such measures are adequate, properly
utilized and effective. Any perceived weakness in risk
management, either in risk processes or systems, that is
identified by the banks can and will result in a reduction
of available credit, higher credit costs or even elimina-
tion of credit facilities altogether.
Structural changes are mandating new approaches
Structural market changes, including globalization,
shifting supply and demand patterns, and technologi-
cal changes have encouraged, or in many cases forced,
market participants to evolve their business strategies
and market roles. For example, larger traders and mer-
chants, facing lower trading margins, are seeking to
leverage and monetize their trading and risk manage-
ment infrastructures by offering forms of direct market
access to smaller producers and consumers (similar to
those available via many of the exchange venues). This
strategy of incorporating third-party positions requires
a more systematic, coherent, and rigorous approach to
risk management than would otherwise be required for
a proprietary portfolio.
Asset holders, from generators to oil terminal operators,
are facing reduced competitive advantages as regula-
tors demand greater operational transparency to ensure
those assets are not employed to manipulate market
prices. Addressing these concerns, some markets have
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