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Commodity trading firms face new challenges in today’s market landscape.
This article, an overview to Accenture’s Trading Operation’s “Transforming Trading Operations” series, identifies four key potential challenges for trading firms over the next few years; driving efficiencies in the trading landscape, Using analytics to monetize technology, Focusing on cost reduction, and Adapting to Regulatory Changes. Additional "Transforming Trading Operations" articles in this series:
The past three years have brought a variety of challenges for commodity traders. High costs of borrowing, increased capital reserve requirements, and stagnant commodity prices have affected revenue levels, which are their lowest in years. For example, the top 10 largest investment banks witnessed a 20 percent decrease in their commodity trading revenue in 2011 as compared to the same period in 2010, and a 56 percent decrease when compared against 2009.
Many regulatory and market environment changes following the 2008 financial collapse uncovered issues our clients have had for many years (e.g. lack of controls or segregation of duties) while others have created new issues of their own, namely depressed energy prices. The downturn has had a particularly sharp impact on natural gas and power prices, which are still less than 80 percent of their 2008 highs, having a direct impact on many firms’ long positions that, in turn, can mean lower revenue. For asset-backed traders, this trend has also affected profits for the asset outputs as well.
Over the coming months, our clients are looking for ways to improve performance and agility in their commodity trading operations. There are four key actions market participants can take that may improve performance in their commodity trading operations:
Driving Efficiencies in the Trading LandscapeSince 2008, many institutional commodities traders have undertaken major initiatives to implement or consolidate their trading and risk management (TRM) systems.
Using Analytics to Monetize TechnologyIn order to gain a competitive edge, trading groups are increasing their investments in innovation, with the hope of discovering a variety of new analytics engines capable of modeling the complexities of many commodities market trends. When these technologies are paired with cloud computing and other analytical platforms, they offer traders a new opportunity to uncover patterns that previously went undetected.
Focusing on Cost ReductionThe most obvious trend we see among all commodities trading clients across all industries is a focus on cost-cutting. While many cost reduction programs began in earnest for many clients over the past few years, we anticipate an even greater appetite for lean operations now and into the near future.
Adapting to Regulatory ChangesFinancial regulation continues to evolve. Concurrently, our clients have taken immediate action. Recent updates added some clarity to Dodd-Frank, but other clarifications are still in the works.
The impacts of the global economic crisis and subsequent regulatory changes have forced companies to operate in a much more competitive and tightly regulated environment than before.
But a price rebound alone might not increase shareholder value in an increasingly challenging regulatory environment. The regular clarifications and interpretations of the Dodd-Frank law, along with the ambiguity surrounding enforcement of the Volcker Rule, have served to create significant apprehension for market participants. Many participants believe costs and capital requirements will continue to drive down margins in commodity trading. To mitigate these risks, they may look for partners to invest in the business and infuse capital. Some banks may even divest their proprietary trading operations entirely, while providing opportunities for asset-backed traders to take their places as counterparties.
The soft demand for many commodities in the past several years may seem like the new normal, but what happens next is anyone’s guess. However, even a price rebound may no longer be counted on to improve margins and drive revenue.
A potential way forward is to optimize trading operations. No matter the market direction, designing processes and a scalable technical infrastructure that can navigate this challenging fiscal and regulatory environment could help better position commodities clients to compete in the new trading landscape.
F. Schonfeld—serves as the North America Trading Operations Lead and is a member of the Accenture Management Consulting - Finance and Enterprise Performance practice. Schonfeld has worked with clients to evaluate and implement trading and risk management strategies and operational solutions across energy, utility and financial clients.
A. Vo—serves as the Global Trading Operations Lead and is a leader within the Accenture Management Consulting - Finance and Enterprise Performance practice. Vo has worked with leading clients across energy, utility, products and financial clients to evaluate and implement world-class commodities trading and risk management solutions.
April 17, 2013
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