23 May 2012, Energy Risk team, Energy Risk
TriReduce is a portfolio compression service for over-the-counter derivatives dealers and offers compression cycles in physical and financial commodity products including natural gas, power, oil, coal and metals. Although this service has been available to the energy market since 2005, it’s only in the past year that TriOptima has increased its focus on the energy sector in anticipation of regulatory changes that look set to transform the risk management practices of participants in OTC energy derivatives markets.
During August 2011, TriOptima conducted a triReduce energy pilot to assess the potential for portfolio compression across a range of energy asset classes. The participants – 28 leading energy traders – submitted over 60,000 trades, both physical and financial. The triReduce energy pilot showed that well over 80% of the energy trades could be terminated, demonstrating the potential for significant reductions in outstanding trades. Translated into volumes, the energy pilot showed termination potential between the parties of 3,500 terawatt hours (TWh) in natural gas and power, and close to 400 million tonnes in coal. This equates to a total gross mark-to-market of over $18 billion that could be terminated.
“Most people were very surprised to find that such a large part of their portfolio isn’t contributing to their position,” says Mattias Palm, business manager, commodity markets at TriOptima.
Since the pilot, TriOptima has offered live cycles in European and UK power, European and UK natural gas, and coal. “The existing client base has re-initiated its use of triReduce since the pilot and also some larger players that weren’t part of the pilot have come in,” says Palm.
There are currently 41 participants on triReduce Commodities. Half of these are larger banks and the other half are major energy houses. There have been five new subscribers since November. “In addition, there are currently nine parties on the path to becoming subscribers that are actively taking part in test runs and simulations, and that are processing legal documentation to become participants,” Palm adds.
The other service that has been recently adapted for the energy market community, triResolve, is a counterparty exposure management service. Of particular relevance to today’s regulatory environment is the portfolio reconciliation tool. Currently, 90% of all collateralised OTC derivative trades are reconciled on the triResolve service – over 5 million daily. The results of the portfolio matching are displayed on the triResolve website, where both counterparties are able to review, investigate, dispute and resolve trade information, mark-to-market valuations and margin calls for their transactions. The process eliminates spreadsheet comparisons and e-mails, and allows sophisticated analytics and report writing.
A pilot group of 15 leading energy houses and financial institutions implemented triResolve’s portfolio reconciliation process during the first half of 2011, with the result that their match ratios increased to over 95%, the differences in portfolio value between participants decreased by 75% and the number of trades reconciled increased by 200%.
“With proposed regulations in the US and Europe requiring proactive portfolio reconciliation across the OTC derivatives landscape, including participants in the energy markets, the pilot validated the importance of triResolve to the energy community and attracted several new energy majors to the service,” says James Hollands, head of triResolve sales.
Currently over 200,000 energy trades are being reconciled on triResolve – a 300% increase from the beginning of 2011. TriOptima is now in final negotiations to have six large energy firms signed up by the end of June.
Both triReduce and triResolve are web-based services with no installation work required to get them up and running, notes Hollands. “There is also no need to have a strict data format,” he says. “Users can upload data in their existing formats for TriOptima to standardise.”