Dealing With Volatility: Why Enuit’s Entrade is a Category Leader in CTRM

Few commodity traders will forget 2022. The year brought unprecedented volatility to energy markets and significant adjustments to long-established supply and demand dynamics.

The proximate cause was Russia’s invasion of Ukraine and the subsequent international response. The conflict disrupted global natural gas and oil markets and led to a significant increase in liquefied natural gas (LNG) procurement by European buyers.

Last year also saw momentum build behind certain trends that are reshaping commodity trading operations. One is the environmental, social and governance (ESG) theme and market participants’ pursuit of net-zero emissions targets. Another is the drive toward greater automation and risk management efficiency, which are seen as essential for managing market volatility and optimizing trading strategies.

All these factors have increased traders’ demands of commodity trading risk management (CTRM) systems. Enuit, an award-winning CTRM solutions provider, has risen to the challenge. The company was recently rated as a category leader in Chartis’ RiskTech Quadrant for CTRM solutions, in recognition of its CTRM solutions’ flexibility and ability to contend with fast-changing market conditions.

Chartis spoke with Ken Han, founder and CEO of Enuit, to discuss the major trends in the CTRM space and how his company has responded to them.

Navigating market volatility

Troubled markets elevated the value of CTRM solutions that can perform risk calculations in real time and streamline the deal lifecycle for hard-pressed traders.

Real-time risk calculations help commodity companies to identify and manage risks in a timely fashion, enabling them to avoid potential losses and ensure the stability of their operations in fast-moving markets. Enuit’s CTRM solution, Entrade, houses a sophisticated risk engine that can calculate and report position, profit and loss (P&L), and credit risk – along with other risk metrics – in real time. These capabilities can make all the difference when trading in volatile markets.

Han says the ability for traders to get real-time position data is vital, since with each small market movement, millions of dollars could be won or lost. Significantly, Entrade’s risk engine is responsive to each step in the deal cycle – from deal execution to title transfer – which means that every catalyst that affects a transaction’s P&L is captured and reported.

Faced with rapidly shifting market conditions, commodities firms also want up-to-the-minute information on their inventories, scheduling, credit limits and hedging portfolios, among other things. Furthermore, many regulatory bodies require commodity companies to demonstrate that they are actively managing the risks associated with their trades. Real-time risk calculations can help them meet these requirements and avoid potential fines or other penalties.

Han says that trading companies often use multiple systems to monitor these variables. Reconciling trading and risk information across multiple services can be a burden, however – one compounded by the need to integrate data produced by different, and sometimes incompatible, software. The need to transpose data manually from system to system can also introduce errors and slow down workflow processes.

If companies use multiple systems, this can also prevent them from getting a full picture of their balance sheets and trading books. In contrast, Entrade is an all-in-one CTRM solution that can handle everything from deal negotiation to trade settlement. ‘It’s not just for risk, it’s not just for accounting, it’s not just for putting the deal into the system – it’s really a collaboration tool,’ says Han.

Entrade also offers access-from-anywhere functionality. Han says this has become a must-have feature for companies with widely dispersed teams that work across jurisdictions and time zones. In the past, transactions would be managed by traders, schedulers and risk managers communicating via phone, email and web-based messaging applications. Now, companies expect their CTRM solutions to handle these communications. ‘This is one of the biggest changes we have seen over the past several years,’ says Han. He adds that the COVID-19 pandemic turned access-from-anywhere functionality from a nice-to-have to a must-have and elevated the value of Entrade for Enuit’s clients.

Cross-asset capabilities

Geopolitical strife has forced entire countries to diversify their energy mixes. Commodity traders have had to adapt accordingly. This has led to increased demand for efficient cross-asset CTRM solutions that can perform risk analyses across multiple positions in a variety of different markets.

It’s an environment to which Enuit is well-suited. Entrade was designed to optimize risk management across natural gas, LNG and natural gas liquids (NGL) markets. ‘From a risk management point of view, these are different commodities,’ says Han. ‘The risks are different, and they need to be managed differently. It’s valuable to clients to have them managed all in one system.”

This may be especially true for companies that have expanded their LNG activities in the wake of the Russia-Ukraine war. Huge volumes of the commodity have been shipped from the US to Europe as the latter region has sought to wean itself off Russian-supplied pipeline gas. However, for commodity traders, moving LNG point-to-point is a complex process, and very different from dealing with pipeline gas. There are liquefaction costs to account for and shipments to schedule and track. Primary and secondary fees linked with storage and transit to downstream points of consumption must also be considered.

Entrade is able to capture all these variables and value and monitor LNG cargoes throughout the deal lifecycle. It also provides companies with a portfolio-wide view of their risks, so clients can understand how specific risk factors affect their LNG, NGL and pipeline gas positions together.

‘With Entrade there is natural gas pipeline functionality, LNG functionality and NGL functionality. That’s a huge advantage for us,’ says Han. ‘It’s also an advantage for clients because they can use one system instead of three.’

ESG and net zero

In 2022, investors stepped up their scrutiny of companies’ ESG practices. Stakeholder pressures also pushed many companies to level up their climate ambitions and align emissions-reduction targets with 2050 net zero goals. Commodities firms were no exception.

CTRM solution providers are increasingly being called upon to identify, analyze and manage commodity firms’ ESG risks. Clients want analytical tools capable of assessing the carbon footprint of their activities and individual transactions. This is not only to gauge progress toward their own climate targets but also to ensure compliance with new environment-related regulatory requirements.

Many of these new requirements are still in the draft stages and are subject to change as policymakers hammer out the details of what information companies should report and how. Commodities firms and their CTRM solution providers are therefore working toward a moving target. Enuit’s agility has proved an advantage in this context, says Han. ‘We saw a big increase in new requirements related to ESG. Several existing and new clients have helped us refine Entrade to meet these requirements.’

The global effort toward net zero has also birthed new markets for renewable energy credits (RECs) and carbon offsets – commodities that have to be managed by companies just like oil, gas and power. Enuit has been quick to capitalize on this trend and cater to clients’ evolving needs in this space.

‘In the past year, we’ve seen a lot of demand from market participants for renewable credits. We were able to configure our solution to manage clients’ environmental requirements and internal commitments,’ says Han.

Conclusion

The CTRM solutions space is fiercely competitive and reflects the changing nature of client demand. Enuit’s recognition as a category leader in Chartis’ RiskTech Quadrant reflects the company’s flexibility in responding to fast-changing markets with a robust cross-asset risk engine.

It’s also indicative of the changing nature of client demand. Companies do not want to juggle multiple systems or navigate complicated platforms to access risk, pricing and workflow services. The trend is toward all-in-one enterprise solutions that can assist companies at every stage of the deal lifecycle across multiple commodities. Enuit identified this trend early on and tailored its Entrade solution to cater to it. As a result, its CTRM system has managed to keep pace with commodities markets in a year of unprecedented volatility.

‘Entrade not only has a great risk engine, it also enables monitoring of every event in the physical transaction workflow, so you can calculate your risk and P&L in real time,’ says Han.

‘It’s great to be recognized as a tier one player in this space,’ he adds.