How to Prevent a CTRM Spreadsheet Catastrophe
August 21, 2017
Companies involved with commodities management are very well aware of how price fluctuations, geopolitical risk, and other external factors beyond their control make it very challenging to retain a competitive edge. However, in a volatile business environment where every advantage counts, many companies are still relying on antiquated, error-prone spreadsheets to manage functions including trading, risk management, operations planning, origination, and scheduling.
If your company is still using spreadsheets for commodity or energy trading and risk management (C/ETRM), they most likely contain errors that are already causing irreparable damage.
Spreadsheet errors are common and dangerous
If you think spreadsheet errors will never impact your company, think again. Several studies show that almost 9 out of 10 spreadsheets (88%) contain errors – the majority of which are caused by humans and therefore can been avoided. And the results of a ComTech Advisory survey on the use of spreadsheets in commodity trading revealed that 68% of respondents were aware of at least one incident where the use of a spreadsheet created operational or financial issues.
Furthermore, if your company is on the larger side there is even more cause for concern: according to financial modeling and training firm F1F9, approximately half of spreadsheet models used in large businesses have material defects, and almost one in five large businesses has suffered financial losses as a result of spreadsheet errors.
Here are just a few real-world examples of how spreadsheet errors have caused severe and lasting damage:
- JPMorgan Chase was hit with an estimated $5 billion in trading losses and substantial damage to its reputation after a spreadsheet error caused the company to misstate VaR presented by trades in their Basel II.5 model
- A multi-million dollar error in a spreadsheet used to calculate the pension fund valuation for Mouchel Consulting led to a profits downgrade of over $10 million, the resignation of the CEO, and the collapse of Mouchel’s share price
- A spreadsheet error at money manager AXA Rosenberg that caused client investment losses by exposing their portfolios to excess risk was discovered and then concealed by management. The company agreed to pay $217 million to cover client losses and a $25 million fine to settle related SEC civil fraud charges. They also settled a subsequent lawsuit by investors for $65 million.
These examples clearly illustrate some of the worst-case scenario consequences associated with spreadsheet errors. But while your company may never experience anything quite like these extremely public debacles, odds are that mistakes are lurking in the spreadsheets your company depends on to run its operations thanks to the complex, data-intensive nature of commodity management. And these errors are slowly but surely damaging your business and eroding your competitive edge because decisions are being made using information that is inaccurate thanks to common errors like a trader accidentally transposing a number, or a formula pulling data from the wrong cell.
Embrace modern technology now
It’s crucial to ditch the spreadsheets now to stop any further material damage and prevent an innocent mistake from turning into a crisis of epic proportions. Modern technology solutions designed specifically for trading and risk management alleviate the issues associated with human data entry and spreadsheets in general by automating manual processes and providing one version of the truth that’s used across all areas of the value chain to drive business decisions. Specific advantages of these solutions include:
- Decreased risk and increased productivity: Advanced C/ETRM software platforms eliminate the operational risks associated with spreadsheet usage and increase productivity by automating data entry, data reconciliation, and other tasks and processes. The vast amount of time once spent manually managing information can be re-allocated to more high-value activities like evaluating markets and acting on profitable opportunities.
- Enterprise-wide transparency: Modern C/ETRM solutions integrate front-, middle-, and back-office operations so all departments are working with the same information and have a completely transparent view of what is occurring across the entire commodities value chain. This enterprise-wide transparency, which is critical to running an efficient business and making informed decisions, is just not possible with spreadsheets which, by their very nature, create dangerous information silos that do not enable effective collaboration.
- Better regulatory compliance: Meeting the requirements of Dodd-Frank, EMIR and other regulations requires the ability to maintain audit trails, accurately record large amounts of transaction data, and generate reports in a timely manner. Spreadsheets are not designed to handle compliance, and using them for that purpose puts companies one fat-finger error away from a breach, fine, and even jail time. CTRM software solutions, on the other hand, are developed with regulatory requirements in mind, and provide the advanced functionality required to maintain compliance.
- More profitable decision-making: A real-time view of all positions at all times is vital to profitability in volatile commodity markets – and is virtually impossible to obtain with spreadsheets, which aren’t sophisticated enough to generate the required data. Today’s advanced commodity management software solutions provide the real-time data required to make profitable decisions and jump on market-making events. They offer a real-time, consolidated view of exposures, cash flow forecasting, and single-truth reporting along with advanced risk management techniques such as “what-if” scenario modeling to ensure the most profitable decisions are made with the right data at the right time.
Despite all the advantages offered by modern CTRM solutions, some companies are still hesitant to make the move away from spreadsheets because they are inexpensive, convenient, and easy to customize. However, modern CTRM platforms like Eka’s Insight CM solution can be all these things too.
Eka’s cloud-based InSight CM CTRM platform provides companies with everything they need to successfully compete in today’s commodity markets without painfully long deployments, significant IT investments, or expensive, time-consuming customizations. InSight CM maximizes operational efficiency by automating manual processes, integrating third-party data, and providing complete transparency across the entire value chain. It also enables companies to make more profitable decisions by providing real-time data, advanced analytics, and sophisticated risk management tools for trade execution, position management, logistics, processing, marketing, and hedging.
Unlike price and geopolitical risk, the high risks associated with using spreadsheets can be eliminated by transitioning to a modern technology platform. With advanced solutions like InSight CM available, there is no reason not to ditch the spreadsheets and all the damaging consequences that go along with them.