Liquidity biggest worry for RWE Supply & Trading CRO

The varied career of Uwe Schulz, CRO of RWE Supply & Trading, has led him to appreciate the dangers of liquidity risk – something that is particularly relevant in today’s energy market environment

Uwe Schulz, RWE Supply & Trading

A veteran risk manager, Uwe Schulz says the single most important piece of advice he would give to aspiring younger colleagues relates to liquidity. "Keep an eye on the development of liquidity, at least in those markets where it is not abundant," he says. "It can go away very quickly, and then you might be stuck with a position. And all of a sudden, your value-at-risk has become completely irrelevant."

The Essen-based chief risk officer (CRO) of RWE Supply & Trading, which carries out trading and asset optimisation on behalf of the German utility giant, has seen liquidity dry up many times throughout his career. Those episodes make it particularly important to understand the limitations of models such as VAR, says Schulz, which can be rendered useless when traders cannot readily exit positions. "All your quantitative models more or less rely on smooth price curve behaviour. And when push comes to shove, the limited liquidity or the then-reduced liquidity all of a sudden makes these models much less applicable."

Schulz grew up in the northern German city of Hamburg and studied industrial engineering at the University of Karlsruhe. He started his career in 1988 working for Metallgesellschaft, the German industrial conglomerate that would later become notorious for suffering crippling losses on oil futures. Schulz's first job there was as a member of the technical trading products department – effectively, a quant.

He was later elevated to the role of group controller for metals trading, but Schulz says he quickly became bored in the job, so opted for a "complete change of tack". In 1992, he joined Dresdner Bank, where he served as co-head of bond options trading in Frankfurt. The time he spent working on the desk was exciting, he says, as it came amid a continuing evolution of valuation models for the instruments. But his time there also coincided with the shock decision of the US Federal Reserve to raise interest rates in early 1994, causing an outbreak of volatility in bond markets. Schulz found himself on the wrong side of those moves – "a painful experience", which made him "less keen on remaining a trader", he admits.

Fortunately, his talents had been spotted by Dresdner's head of finance, who encouraged him to join the bank's newly independent risk control function in 1996. It seemed like a perfect fit. "[Risk management] was clearly a growth area, it involved managing a larger team – it was a challenge from a managerial perspective - and it still allowed me to apply my technical knowledge," he says.

Keep an eye on the development of liquidity, at least in those markets where it is not abundant

Schulz held various risk management positions at Dresdner Bank and its subsidiaries, including as head of risk controlling for Asia-Pacific, based in Tokyo. After leaving Dresdner and spending three years as an independent risk management consultant in Germany, he was hired as CRO of RWE Trading – later to become RWE Supply & Trading – in 2006.

Currently, Schulz manages a team of around 100 people, who work in areas such as market risk, credit risk management, model validation, business engineering and regulatory reporting. The larger teams are located in RWE's three main trading hubs – Essen, London and Swindon – with a smaller presence in New York and Singapore. "We are basically a combination of product controlling, risk management and middle-office support. We do a lot more than the average risk department in the industry," he says.

One of the biggest tests for Schulz's diverse team came amid the 2008 collapse of Lehman Brothers. After the US investment bank filed for Chapter 11 bankruptcy in September that year, the team had to work quickly to quantify RWE's exposure to the failed firm. With uncertainty rocking financial markets, they also had to rapidly review RWE's portfolio for other risk or product concentrations that would have caused problems if another big company went bust.

"Fortunately there are only very few moments when the quality of a risk department is really put to the test," notes Schulz. "The Lehman disaster was one of those times. I have to say, I was very proud of my team, how they coped with it and how quickly we were able to take all the necessary steps."

The post-Lehman era has brought different challenges – notably, a flurry of financial regulation, including the US Dodd-Frank Act and Europe's Mifid II. The consequences of such rules are a major concern for Schulz. "I think the biggest risk is that regulation kills the markets by trying to make them safer," he opines.

While transparency and trade reporting rules are relatively easy to implement, particularly for a sophisticated utility such as RWE, Schulz finds capital and margin requirements more worrying. He says he has already seen a perceptible decline in liquidity in European energy markets during the past few years, which he blames partly on the fear of future regulation.

Schulz's sentiments are echoed by other risk professionals, who point to the number of large banks that have scaled back or closed their commodities businesses, leaving fewer market-makers in some corners of the energy market. Although this can make life tougher for risk managers, it is something of a double-edged sword for RWE as a whole, suggests Schulz. "It reduces your ability to hedge, which is bad for our asset positions," he says. "On the other hand, it might also offer up an opportunity for the trading side of the business to step in when someone else needs the market."