Our partners at marcus evans conducted an interview with Mr. Christian Ferrer,,Director, Head, Global Commodities Trading Market Risk at Bank of America Merrill Lynch and a Speaker at the marcus evans 5th Annual Risk Management in Energy Trading Conference recently and kindly gave us a preferential permission to publish it on our website.

 

Energy trading continues to experience rapid growth across the globe. Risk management continues to play a big part in corporate strategy and effective risk management practices are now recognized to be of primary importance to not only mitigating risk, but taking hold of new trading opportunities. In recent years, the energy trading market has been characterized by enormous amounts of volatility, as well as new challenges in the form of increased regulation.

The marcus evans 5th Annual Risk Management in Energy Trading Conference comes at a time where financial institutions are increasing their investment in the physical energy business and energy companies are diversifying their portfolios by entering the realm of trading in financial products. This conference will explore emerging trends in risk management, including the identification and application of risk appetite as a cornerstone of risk management strategies.

Christian Ferrer, Director, Head, Global Commodities Trading Market Risk at Bank of America Merrill Lynch and a speaker at the marcus evans 5th Annual Risk Management in Energy Trading Conference, answered a series of questions provided by marcus evans. The views expressed in these answers are those of Christian Ferrer, and do not necessarily represent the views of Bank of America Merrill Lynch.

marcus evans: What are some of the essential skill sets that every risk management department should try to maintain? Why are they so essential?

Christian Ferrer: Assuming risk has front-to-back responsibility for the risk calc, the team should ideally have data management/organization, financial engineering/quant, risk methodology and reporting databases skills and experience. A large, mature organization may have compartmentalized groups that execute on specific areas that also benefit risk (e.g., quant group). Risk can then focus more specifically on VaR methodology and limit monitoring. On the other end, a newly formed risk group within a small utility may contemplate a spreadsheet-based startup risk team. In both cases, there will be the need to manage voluminous data. Thus, the need for forward-looking data design and organizational skills apply to both. This makes the difference between spending one‟s time getting crowded out due to data cleanup and managing complexity, versus time spent on meaningful risk analysis.

marcus evans: What makes unhindered workflow between the mid and front office so vital to an organization’s risk management practice?

CF: Front is an upstream provider to Mid of price marks and trades. Risk is a downstream consumer from Mid of price marks and trades. Thus, any Front-to-Mid workflow that materially impacts the accuracy and/or timing of market or trade data will also directly impact Risk. In general, this dependency is data and process around source systems, curves from market databases and portfolio hierarchy from static/referential databases. The efficiency of the quality-check process, flow of data and communication of issues is directly proportional to the number of „seams‟ between Front, Mid and risk workflow. Workflow inefficiencies may result in a labor “substitution effect,” with reconciliation activities crowding out decision-support analysis activities.

marcus evans: From a risk systems perspective, how do you maintain the relevance of information with such a large amount of data available is too much information a problem?

CF: The large-data issue poses a problem across a number of fronts. First, how do you organize, store, and manage the large amounts of market, trade and static data required for an enterprise-wide risk calc? Second, is there a way to reduce the dimensionality of this data within the actual risk calculation? This lowers computational overhead, increases timeliness and reduces operational risk due to data quality. Third, how do you wade through the streams of risk output and design concise dashboard reports for senior management, where „less is more‟? The first requires forward-looking data organization and architectural considerations. In a large organization, the Market Database team, Static Data team and Mid Office may already have databases in place that you merely access. For the second, a combination of statistical techniques (PCA), as well as business-reduction rules (e.g., curve proxies, hierarchies, historical spread relationships, materiality thresholds) may be useful. The third comes with frequent management interaction, client focus and forward looking report design templates. You know you could do better if spend more than two-thirds of your time handling data issues. You know you have done your job if management would have made the same decision based on information from a dashboard report.

 

Christian Ferrer will be leading the session, “Strengthening Existing Risk Management Systems through Stress Testing and Live Results,” on Thursday, November 8, 2012 at the marcus evans 5th Annual Risk Management in Energy Trading Conference. Attending this session will enable you to:

Utilize stress testing to identify flaws in current risk management systems
Study live risk management systems to understand the strengths and weaknesses of the system
Understand company needs to ensure accurate improvement of risk management systems
Take advantage of employee feedback to build stronger systems

“In addition to listening to the presentations, [the 5th Annual Risk Management in Energy Trading Conference] is an opportunity to step outside the office and get your head out of the data, to network and listen to the experiences of similar shops and risk managers, and to share lessons learned, particularly if you can avoid having to go through the lesson firsthand yourself,” said Ferrer.

For more information regarding this conference and to register, please contact Robin Yegelwel, Marketing & PR Coordinator, at (312) 540-3000 ext. 6483 or robiny@marcusevansch.com

About marcus evans

marcus evans conferences annually produce over 2,000 high quality events designed to provide key strategic business information, best practice and networking opportunities for senior industry decision-makers. Our global reach is utilized to attract over 30,000 speakers annually; ensuring niche focused subject matter presented directly by practitioners and a diversity of information to assist our clients in adopting best practice in all business disciplines.

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