London, 14 August 2009 

CommodityPoint's recent study on the issues facing global commodity trading firms quite clearly indicated that credit and counterparty risk was considered to be a serious issue under current market conditions. Indeed, risk management overall was cited as the top issue among the respondents in that study and this has driven much procurement activity over the summer months. 

Meanwhile there is also activity in the software vendor community. Last year, Triple Point acquired Rome Corporation and its credit risk solution, while Temenos is now the owner of Rome's biggest competitor—Raft International—via its acquisition of Financial Objects who had acquired Raft some time ago. Additionally, many traditional ETRM vendors have or are beefing up their credit risk functionality; most recently exemplified by Allegro's announcement of its version 8.1 Credit component. But the energy credit software category is actually rather confusing.

Energy Credit Risk Software Solutions

Software solutions such as Rome (now Triple Point) and Raft (now Temenos) were really designed to serve the needs of the credit department at major energy firms. Many trading firms by necessity actually have multiple trading (ETRM) solutions implemented and these credit solutions were designed to integrate with all the trading systems utilized internally by their users firms. Additionally, the applications are very functionally rich. Other providers have also tackled this side of the market including House of Code, SpectrumPrime and Paragon Consulting for example.

At the same time the issue of credit has gained a more significant profile on the trading and risk management side of the business meaning that ETRM software vendors have also been adding functionality around credit risk management to their solutions. But in reality the two areas (credit and trading/risk management) have slightly differing requirements albeit these may be converging. The acquisition of Rome by Triple Point may also have served to accelerate the movement by ETRM vendors into more comprehensive credit risk functionality as Triple Point now has a fully fledged credit solution that it can sell either on a stand-alone basis or as an incremental add on to its ETRM software platform and other ETRM vendors are seeking to replicate this strategy.

Where Is This Market Headed?

CommodityPoint spoke with Aviv Handler, co-founder of Redshift International Limited, a specialist credit risk consulting company that offers expertise and services for the energy, commodity and investment banking markets, to gain another perspective. "Rome and Raft are targeted more at credit departments with quite heavy credit needs," he told us. "I can't really see the ETRM vendors catching up as they have to face the obstacle that most trading firms have multiple trading systems in place and that trading data needs to get into the credit solutions." In fact, he also sees that most ETRM Vendors credit solutions are aimed primarily at meeting a reduced and different set of requirements in the trading & risk management area.

CommodityPoint agrees with Handler's assessment in that there are two different sets of requirements and two different targets for the software vendors in the credit and trading/risk management areas. But, with credit risk so high a priority at all trading firms there may yet be significant convergence in requirements in our view and Triple Point's acquisition may serve to be the catalyst that accelerates that convergence on the vendor side as well.

In reality, the market for energy credit software is quite complex as like most energy software markets it is horizontally tiered and vertically comprises of many different types of end users (marketers, utilities, oil companies, banks and so on). While many top tier energy companies will have significant credit departments that would primarily procure true energy credit software, many others do not and here the ETRM vendors may find fertile soil offering a smaller footprint credit module extension to their ETRM platform. Over time, as ETRM vendors add more and more functionality they may end up offering complete energy credit solutions. Indeed, this is where Allegro seems to be headed with its new credit component.

At this point in time, CommodityPoint research would seem to suggest that in fact the majority of credit departments in the industry still utilize homegrown, custom or even spreadsheet-based solutions and is something of a virgin market. Triple Point and Temenos (Rome and Raft) have certainly made headway into the market but it is still quite early.

Help CommodityPoint with Our Credit Risk Survey!

In order to try to understand the energy credit risk software market in more detail, CommodityPoint is undertaking a short survey seeking to obtain more data on trends, installations and future plans. We seek your input and in return will offer the management summary of the study to those firms that participate. The survey is being conducted in relatively short order and so if your firm would like to participate, please do so before the end of August. The survey can be found at:

www.utilipoint.com/2/creditrisk2009

By Gary M. Vasey, Ph.D., CommodityPoint, General Manager, UtiliPoint Europe 

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