The Price is Right? Strategies for Market Discovery & Optimum Pricing Challenges

GARP Webcast Series

AUGUST 2016

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The Price is Right?Strategies for Market Discovery & Optimum Pricing Challenges

Eric KavanaghCEO, The Bloor Group

Eric has more than 20 years of experience as a career journalist with a keen focus on enterprise technologies. He designs and moderates a variety of New Media programs, including The Briefing Room, Information Management’s DM Radio and Espresso Series, as well as GARP’s Leadership and Research Webcasts. His mission is to help people leverage the power of software, methodologies and politics in order to get things done.

Robin BloorRobin Bloor, Chief Analyst, The Bloor Group

Robin is co-founder and Chief Analyst of The Bloor Group. He has more than 30 years of experience in the world of data and information management. He is the creator of the Information-Oriented Architecture, which is to data what the SOA is to services. He is the author of several books including, The ElectronicB@zaar, From the Silk Road to the eRoad; a book on e-commerce and three IT books in the Dummies series on SOA, Service Management and The Cloud.

He is an international speaker on information management topics. As an analyst for Bloor Research and The Bloor Group, Robin has written scores of white papers, research reports and columns on a wide range of topics from database evaluation to networking options and comparisons to the enterprise in transition.

Glenn LabhartIn March 2004 Glenn Labhart formed Labhart Risk Advisors Inc., a corporation providing expertise energy risk management consulting, analytical and business strategy services.A recognized authority on trading and risk control, Labhart has more than 15 years of experience in the design and implementation of sound risk management processes and policies and has been a leader in helping the industry define today's risk environment and plan for the uncertainties of the future.

Glenn is the first energy-industry risk officer to receive the Financial Risk Manager of the Year Award from the Global Association of Risk Professionals (GARP). Glenn now serves as the Chairman of the Energy Risk Diploma program for GARP and he is also a board member for the International Risk Who's Who Organization.

From August 1997 to March 2004, Glenn was senior vice president and chief risk officer for Dynegy Inc responsible for the corporate risk oversight of the foreign exchange, assets and energy commodities revenue pool.

Prior to joining Dynegy, Labhart was head of risk management at El Paso Energy for energy trading and marketing, and prior the merger with Tenneco Energy the trading control officer. Earlier in his career, he worked for Tricentrol PLC, the Metallgesellscaft Corporation and Neste Oy, the national Finnish oil company.

His professional affiliations include board memberships with GARP, the Mays Business School at Texas A&M and the Abilene Christian University College of Business Administration Advisory Council. He has also been a representative to the New York Mercantile Exchange (NYMEX) Natural Gas Advisory Committee and a member of the GARP Energy Risk Committee and the DEDMI (Development of Energy Derivative Market in India.

Labhart is a frequent lecturer on risk management issues, and, in particular, the implications of the Sarbanes-Oxley Act to audiences including industry associations, training seminars, MBA programs and universities such as Rice University, Texas A&M University and Columbia University on behalf of the New York Mercantile Exchange.

Glenn holds a B.B.A. from the Abilene Christian University and is a graduate of the Rice University Executive Management Program. He is also a life member of the National Eagle Scout Association.

Partner, Labhart Risk Advisors Inc.

Chairman, Energy Oversight Committee, GARP ERP Program

Michal PeliwoVice President – Business Solutions, ZE PowerGroup, Inc.As Vice President of Business Solutions at ZE PowerGroup Inc., Michal Peliwo leads a team of industry and technical experts to implement ZEMA-centric solutions to data management and business problems faced by ZE’s clients and the industry overall. He brings many years of software development and consulting experience and has been with the organization for 11 years. Michal directed the ZEMA implementation for the majority of ZE’s global enterprise clients, and through the process of automating key business processes acquired a unique understanding of the industry’s challenges and solution requirements. Michal’s capabilities are matched by his desire to exceed client expectations, and his expertise and leadership skills are key in producing world-class results for our clients. Michal works closely with organizations to identify and strategically manage risks associated with different market structures. He is a leader who serves clients from end to end, and contributes to the specialized talent that the financial industry demands.

Agenda• Overview – Robin Bloor• Challenges - Glenn Labhart• Best Practices - Michal Peliwo• Conclusions• Q & A

The Evolution of Risk

“It’s tough to make predictions, especially about the

future.”

- Yogi Berra

• For most businesses PRICE is the center of gravity of their operation.

• For every product or service there is, theoretically an optimum price for every specific transaction

• But in most circumstances that price can only be estimated and will depend on multiple factors some of which are contextual.– Supply– Demand– Direct or indirect competitor pricing– Stock on hand– Profitability– Temporal factors– Discounts– Associated costs– Etc.

• The optimum price is a moving target.

Price: A Moving Target

• Businesses grow and diversify

• The business environment changes

• Businesses restructure and evolve their processes

• Information resources change and multiply

• The fundamental technology of business changes

• Within the business, technology needs to evolveBusiness latencies are always decreasing

The Business: An Evolving Species

Risk Mitigation• Risk is mitigated by:–Well designed and well

implemented business processes

– Richer and timely information sources

– Analytical capabilities that are able to make reliable predictions

Risk Factors• Every risk factor cuts both ways. If you

reduce risk it is an advantage. If you respond quickly (to change) it becomes an advantage

• To be addressed, all the adjacent risk factors demand an ongoing investment in technology and systems and information gathering

• Most business rely on outdated systems. The major weakness of such systems is that they are poorly integrated in respect of data flowing to where it can be utilized

• Most businesses do not have easily extensible systems and hence cannot quickly take advantage of new knowledge and new information systems

• Most business calculations (such as price calculation) can now be driven analytically with precision and managed in a timely manner

• For many business technology exploitation needs to become a primary dimension of business strategy

The Net Net

To reduce risk is to become more competitive

Challenges

Complex view of Energy

Underlying Risks

CreditMarket

OperationalLegal

Production Transportation/Storage

Refining/Processing Distribution

Financial Disclosure

Underlying Risks

CreditMarket

OperationalLegal

Hedging

Underlying Risks

CreditMarket

OperationalLegal

Underlying Risks

CreditMarket

OperationalLegal

TradingHedging Trading TradingHedging Hedging Trading

Crude Oil, NGL, Refined Products, Natural Gas, LNG, Electricity

Financial Disclosure Financial Disclosure Financial Disclosure Compliance Compliance Compliance Compliance Risk Measurement, Structuring and Valuation, Financial

Instruments, Options

Supply

Demand

Predictive Analytics

Real Option Valuation

RISK APPETITE ResultsStrategic Plan

Risk ControlRisk IdentificationRisk AssessmentRisk Balancing Risk Limits

What risks can I take?

How much risk can I

take?

Who is willing to take the

risks?

When do we take the

risk?

Assessment Articulation Action

Management Committee

Agreement on Strategic

Direction and Business

Objectives

Business Initiative Brainstorming

session

Business Unit Articulation

of Viable Initiatives

Risk Management Highlights Potential

Risks of Offerings

Business and Functional Groups

Access Controls

Functional support areas play a critical role in evaluating a company’s strategic risks

Aggregation & Scoring Mechanisms to Establish Right Risk Appetite


Management Committee

Agrees on Risk

Appetite


Managing Energy Markets

EXAMPLE

Risk Dashboard

Enterprise Data Management for Risk – Best Practices

Enterprise EDM Challenges• Competitive environment is strong and fierce.

– Survival of the fittest– You snooze you lose …

• There is an explosion of data available for analysis, supporting trading activities or risk control– Markets have become much more complex and granular– Integration of related markets widens the scope of interest– Competitive edge to those who can effectively manage it

• Data is becoming a commodity (and an expensive one)– Must effectively manage data procurement, access to ensure you get the

value (and don’t over pay)• Increased requirements for the Enterprise to remain “compliant”

– Organizations are subject to a lot more compliance and need for auditability

– How were the values generated – what input data, what calculation / logic, who accessed or modified it, etc.

• Sub-standard or manual implementations of data management introduce risk

• The industry has not spent efforts to standardize the structure of data/reporting

Data & Reporting Challenges• Organizations have recognized that the solutions in place are

not meeting the needs of the current landscape• MS Excel is still the tool of choice for many activities and

processes• Dr. Jekyll & Mr. Hyde

• Related information is sourced from multiple systems• One system provides pricing data – what about Weather? Currency? Outages?

• Delayed data retrieval despite a real-time environment• Manual data collection, analysis and validation• “Hodgepodge” of subscription services across desks– Who’s using what? Who’s buying what and not using it? Redundancy? – And still not serving individual or aggregate needs.

• IT is forced to build the integrated enterprise solutions

Many solutionsMany systemsall not serving the individual orcollective needsof the Enterprise

Sounds Familiar? • Billion dollar company• Has a significant global presence• Trades multiple commodities• Generates thousands of curves daily• Integrates with multiple million dollar ETRM systems• Adheres to strict internal controls for everything

What technology is used to fuel the EOD process?

Excel???!• Excel is user friendly• Excel is highly available• Excel is flexible• Excel is familiar• Excel is not costly• Excel is quick

• Problem is that it also introduces extensive risk(Don’t tell Bill)

Common Risks with Manual Data ManagementIP Risk • Knowledge resides in a few select

individuals• Documentation is missing, sparse or

stale• Lots of custom code, or business logic

Security Risk• Stored on shared network drives (or

someone’s desktop)• Requires no authentication• Files can be easily overwritten or

corrupted• Provides no audit trails of who can or

has accessed• Systems need backing up

Audit Risk• What is the magnitude of changes• When did the change occur• Who changed the curves• Why were the curves changed• What are the dependencies

User Risk• “Fat finger” error• Cut and paste in wrong places• Forgetting to change reference dates for

calculations• The more human interaction, higher

probability of error)

Performance Risk• Processes not driven by events• Changes to curve logic can be significant

rework• Source data change formats (IT dependency)• Structural changes in the one spreadsheet

impacts other worksheets and other workbooks

Private and Confidential | For use by original recipient only 29

The “Data Mess”• Copy and pasting data

• Multiple sources for the same value

• Limited ability to track corrections and audit trails

• Limited awareness of processing status

• What is the version of truth?

• How quickly can IT fix the scrape?

• Who developed that macro?

The Four Pillars of EDMEliminate these risk by incorporating these key components in an integrated enterprise data management system:

I. Data Management and AcquisitionII. Unified Data Access and AnalyticsIII. Automation and Workflow Management

(Transformation)IV. Integration

Integrated Data ManagementIntegrate the four pillars to reduce risk and increase efficiency across the entire organization:

Data•Centralized data warehouse with flexible / real-time collection

•Normalized and described

•Automated data validation

•Provisioning and authorization

Analytics• Layered on top of

the data warehouse

• Better decision making

• Error reduction• Shared analysis• Control over IP• Auditable

Transformation•Automate analytics, triggered by data events

•Persist output back into warehouse w/ mapping

•Increased accuracy•Faster daily closeout•Transparent & auditable

•Manageable

Integration• Direct publication

to consuming systems where possible

• Leverage mapping layer to simplify integration

• Let automation do it’s job – integrate “ready results”


Process Simplification

EDM Best Practice• Automatically collect all “input” data into a centralized data

warehouse– Single “version of truth” for all models, calculations or data

processes• Data Validation

• Ensure data integrity - completeness, timeliness and accuracy for inbound, interim and outbound results

• Provide users with UIs for developing robust logic referencing on top of the data

• Tools for submitting marks, coefficients and other manual inputs through an integrated link

• Create data workflows, automatically triggering calculations and persisting the results on data arrival– Process on events, not schedules

• Distribute results to all downstream systems, avail results to the organization

• Permissions and security at all levels


Integrated Data Flow (FC Example)

Creating a culture of risk awareness®

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About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions. Membership represents over 150,000 risk management practitioners and researchers from banks, investment management firms, government agencies, academic institutions, and corporations from more than 195 countries and territories. GARP administers the Financial Risk Manager (FRM®) and the Energy Risk Professional (ERP®) exams; certifications recognized by risk professionals worldwide. GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels. www.garp.org

The Price is Right? Strategies for Market Discovery & Optimum Pricing Challenges

Economy & Finance

Transcript of The Price is Right? Strategies for Market Discovery & Optimum Pricing Challenges