This blog is taken from an interview by Stella Farrington, Head of Content at Energy Risk with Ellen Stars, Practice Lead at Brady Technologies.
The discussion centres around the latest advances in energy credit risk technology and how they are improving the energy credit function. Stella Farrington sets the scene stating there is currently a greater focus on energy credit risk due geopolitical risk, requiring firms to have better visibility of counterparty risk across entire supply chains. Furthermore, extreme market volatility is giving rise to the need for better visibility into margining and collateral management. She adds that longer term concerns around climate and ESG risk are raising the credit risk of much of the energy sector.
Stella Farrington:
What do you see as the most significant advances in energy credit risk technology in recent months?
Ellen Stars:
Over the past two years we’ve seen firms that have an integrated approach to credit risk management have survived and emerged, whereas those with a defragmented approach have suffered and in a lot of cases failed. This has resulted in a convergence of interest in having a central credit risk management function where credit risk managers seek more effective tools to monitor the ever-changing risks related to things like credit operations and geopolitical risks, and are able to work more collaboratively with their trade finance teams, CFO, investors and creditors.
From a technology perspective, we have seen the focus shift to real-time pre-deal counterparty limit checking, real-time or near real-time exposures and PFE calculations. Also, there is more attention on how to manage collateral more efficiently, collateral financing, and the deployment of new credit mitigation techniques that have come onto the market.
Stella Farrington:
Brady purchased the company CRisk in 2021, but you’ve been in the energy risk management market a lot longer than that. Tell us a little bit about your history and bring us up to speed.
Ellen Stars:
Brady Credit Risk (BCR), also known as EnergyCredit, started its life at a company called Raft back in 1995. It went on to be owned by Financial Objects, Temenos, and was bought by Brady in 2016. BCR is a rich system in terms of functional and market coverage. Its development has been largely vendor-led. On the other hand, CRisk is an energy credit risk management system that has evolved via customer requests. Thus, Brady is in a unique position of being able to offer customers the best of both worlds – vendor-led and user-led energy credit risk management solutions.
Brady CRisk is a cloud-enabled solution, enabling customers to manage the software with greater efficiency and scale up with ease, to meet future business requirements. It’s also got a rich set of standard functionalities with the flexibility for additional customisations if required.
Stella Farrington:
Going forward, I understand all your new customers will be put onto Brady CRisk. Tell me why.
Ellen Stars:
Brady CRisk, being a more modern cloud-enabled solution brings a lot of advantages. A lot of people find it really intuitive and easy to use. It’s also got a great set of data analytics. The database itself is easily navigated because it’s well architected. Speed and performance have most often been cited as priorities by market participants and CRisk meets these criteria really well. Performance is vital in a counterparty credit risk solution, particularly when you have to revalue quite a lot of, in some cases, the entire portfolio, in near real-time. Thus, performance has always been something that’s been a top priority at each version and release of CRisk.
Stella Farrington:
Could you give us some examples of the kinds of things that your customers are using CRisk for and what they are achieving?
Ellen Stars:
Most of our customers are using CRisk to efficiently manage their collateral and margining requirements, which has been particularly tough given the recent liquidity environment. Having a solution that helps you to make the best use of optimising credit mitigation techniques has really been helpful in volatile and less volatile times. A lot of our customers are using CRisk for pre-deal limit checking, monitoring their exposures, and liquidity risk, which is also something that’s been really important given the turmoil of the past few years.
Stella Farrington:
What would be your recommendations for firms considering moving off spreadsheets, implementing a credit risk solution or even switching credit risk solutions? What do people need to think about for getting ready for these types of projects and what questions would you recommend they ask vendors?
Ellen Stars:
We have had customers in all of these scenarios. Customers appreciate the buy versus build approach because there’s a lot of data that needs to be gathered for measuring and managing credit risk. Things like agreements, securities, reference data, counterparty data, transaction data, may all be coming from multiple ETRM systems as well as other systems. Therefore, data challenges alone are quite important to look at up front and analyse. Ask yourself what data sources do we have internally and externally that are required to go into measuring and managing our credit risk?
From a technological perspective, the solution needs to be robust because, you’re continually trading, your volumes are going to grow, hence it’s got to be performant and scalable. At the same time, an energy credit risk management solution needs to have the capability of measuring and managing data in real-time quickly, to provide you with insights into where your portfolio concentrations are, and to identify hidden risks that you may not necessarily see in a spreadsheet.
From a project implementation perspective, I would tell people to really start with the business objectives. What are the business objectives you need to achieve? Then look at the data that’s required to achieve those objectives and look at the technology that you need to achieve those objectives.
Stella Farrington:
What do you see now as being the next big focus for energy credit risk managers?
Ellen Stars:
We believe having a central counterparty risk management team is becoming vital for organisations. Senior managers want to be able to see their exposure aggregated and get a true picture so that they can proactively manage that exposure and how to maybe implement new credit mitigation techniques. They seek the right business intelligence to help them to make optimal decisions.
We are seeing energy trading market participants take more of a top-down approach to credit risk management, and a key component of that top-down approach is having the centralised credit risk solution in place. Brady strives to be at the forefront of technology for the energy trading sector. We develop our solutions to deliver the latest data analytics and the best advancement in data visualisations to our customers so that they can proactively understand and manage their credit risk.
Stella Farrington:
Could you give me some examples of the types of projects that people are using CRisk for? What are they achieving?
Ellen Stars:
This year we went live with one of the world’s top LNG exporters, who’s activity involves physical trading, freight trading, portfolio optimisation, trading and risk management. They are using CRisk for pre-deal counterparty limit checking and exposure management. They’ve really achieved a lot with CRisk and are very happy with it. They were previously using spreadsheets where they spent a lot of time on manual tasks, which was prone to human error.
We’ve also migrated a long-term BCR customer to CRisk this year. They are a large energy trading organisation trading wind, solar, gas and oil in over 30 countries. They’re now using CRisk as their core energy credit risk management solution for pre-deal limit checking, monitoring exposures, potential future exposures and managing their margining and collateral. They are using CRisk on their private cloud and experiencing much faster end of day batch runs than previously. They’re very happy to rerun calculations even on the fly due to the fast calculation run times.
Alongside customer projects, we’ve enhanced CRisk’s capabilities for collateral management, liquidity risk calculations and monitoring and business process workflows.
