How commodity trading and risk management relates to the cloud: A guide

Commodity trading companies are rapidly switching from on-premise commodity trading and risk management solutions (CTRM) to cloud-based systems.  Research from Commodity Technology Advisory LLP shows that cloud-delivered CTRM solutions now outsell on-premise solutions and will significantly outpace spend on traditional deployments over the next five years.

Small commodity companies lead the way

One reason for this shift is a change in the commodity industry. Early adopters of cloud-hosted CTRM solutions tended to be small firms, usually trading a single commodity. A spate of divestitures, the trend to downsize trading desks, and the arrival of more niche start-ups created more of these smaller players in the market. Recognizing that generic spreadsheets (still the main competitor to CTRM systems in this space) were wholly inadequate to the task, this new cohort is taking advantage of the cloud to implement a single, uniform platform across all their commodities.

For these firms, having an implementation time in the region of 10-16 weeks rather than 10-16 months is obviously advantageous, as are the minimal upfront financial and technical investments. Having the software’s experts in charge of maintaining, upgrading, and securing the solution adds extra assurance, and small firms with big plans for new geographies, commodities and business lines, see cloud-deployed CTRM as a vital enabler of growth.

Equally, those firms operating in the more remote areas of the commodities supply chain found access to mission-critical information through mobile devices essential. And, since the success is often dependent on the ability to respond to rapid shifts in commodity markets, an equally agile and responsive CTRM platform like Eka’s has obvious appeal.

Large companies follow as they see the value

Increasingly rigorous regulations are driving larger, more established firms to recognize the value of CTRM solutions in place of traditional spreadsheets. Mitigating risks associated with extensive supply chains, multiple business lines, a network of overlapping counterparties, and volatile markets is challenging. Cloud-deployed systems can be implemented in just 12 weeks, robustly addressing regulatory and stakeholder mandates quickly and effectively.

Commodity markets are volatile, and commodities businesses have to respond to market shifts in a shorter timeframe because the consequences of delays are severe. The simplified scalability and elasticity of cloud-based CTRM solutions enables commodity trading companies to add new users, customers, counterparties, credit limits, commodity types and trading functions in hours rather than months. There are no capital expenditures required to expand.

The environment management services, upgrades and updates, DBA support, helpdesk, and technical support that accompany cloud systems have obvious appeal to CIOs who have seen maintenance of the status quo absorb ever greater amounts of their budget.

And lingering concerns about security – one of the biggest hurdles to take-up so far – have been eroded. Vendors like Eka have been working hard to build data encryption, HTTPS protocols, field-level security and role-based hierarchy controls into their products. Public cloud providers can also take much of the credit, having invested heavily in cybersecurity measures at an economy of scale that individual players cannot hope to repeat.

Real-time insight

Competitive and regulatory pressures have driven much of cloud take up to date. But cloud also addresses one of the long-standing problems within commodities trading. Highly compute-intensive tasks, such as end-of-day reporting, are traditionally run at fixed times – usually overnight – when no other mission-critical requirements are placed on the system.

But spinning up the compute power of cloud-delivered systems exactly when required overcomes this problem. Anyone can access real-time insight into chosen key metrics from counterparty exposures and risk reporting, to derivative P&L reports, or value at risk (VaR) whenever they are needed – not just when the IT system allows.

That changes the calculus around risk management and compliance, productivity and innovation, with long-tail consequences for the entire business.

It has taken some time for mainstream commodity trading and commodity management markets to fully embrace cloud. But functional, technical and financial arguments are breaking through – and it’s increasingly clear that cloud-delivered CTRM solutions will dominate the market in the coming years.