This article first appeared in Commodity Technology Advisory’s ‘ComTechAlerts’ E-Newsletter.
Tell us a little about Quantifi, its background, focus and presence in the commodities asset class?
Avadhut Naik: Founded in 2002, Quantifi is a provider of risk, analytics and trading solutions. Quantifi was started with the goal of delivering the same sophisticated risk management and analytics used by the largest banks to all market participants. Quantifi has come a long way since then, having expanded its footprint to EMEA, North America and Asia and established a brand that is now synonymous with a commitment to innovation and a strong passion for what it does. Quantifi’s goal, however, remains the same – to provide its clients with the most advanced, intuitive and flexible solutions to match their business needs.
The process of trading, procuring and selling commodities has always been risky and intricate, and it’s only becoming more complex. Market structures have shifted, and so risk management solutions must respond to that change. Quantifi has a strong track record in the risk management space and has extended this capability to cover the needs of the commodity trading sector.
What is it about your solution that you think is relevant for commodity companies today?
Avadhut Naik: In recent years, changes in the global macroeconomic and geopolitical landscape have triggered huge swings in commodity prices. This has influenced firms to re-examine conventional ways of doing business and adopt a more holistic approach to managing physical, financial and sustainability risk to reduce losses and gain competitive advantage. Sophisticated firms require a solution that incorporates advanced measuring, modelling and analytics.
Global commodity trading firms have to manage an array of counterparty risks. Historically, firms have relied on multiple tools for counterparty credit risk management, including Excel spreadsheets for exposure calculations and reporting, and email to communicate credit decisions. Disparate spreadsheets and manual email communication tend to result in a high risk for human error. Major risk management failures within the industry due to a lack of solid IT infrastructure and control mechanisms have led commodity firms to reconsider the way they manage risk.
Firms that adopt a modern risk management system that provides a consolidated and accurate view of their business can manage their tolerance and capacity for risk, increase market penetration and improve competitiveness. Built on the latest technology, Quantifi’s Commodity counterparty risk Management (CCRM) solution is a high-performance, scalable and intuitive solution that can be seamlessly integrated into a firm’s existing processes and systems. Available as on-premises or in-cloud, the solution is designed to help reduce risk and operational complexity with more accurate analytics, consolidated reporting and simplified data management.
What trends do you see driving interest in risk analytics and risk management in commodities at the moment?
Avadhut Naik: Global commodity markets are highly volatile, with commodity prices sensitive to changes in the global macroeconomic landscape. A complex economic environment has led commodity trading firms to more closely manage their risk exposures to help mitigate price risk.
Against a backdrop of price volatility, cost pressures and competition, commodity trading firms are experiencing challenging times. Despite this, many firms still rely on traditional, manually intensive methods to evaluate and respond to risk. Some leading firms, however, have started to adopt more automated and sophisticated technology solutions such as Quantifi’s to increase market responsiveness, reduce risk and decrease costs.
With Quantifi, all participants involved in the credit decision-making and risk management process – from traders and risk management groups to risk committees – can use the solution to make credit decisions while managing the associated risk.
How have you fared in energy and commodities to date?
Avadhut Naik: Given Quantifi’s success working with COFCO and Bunge, two of the world’s largest agribusinesses, we have seen considerable demand for our CCRM solution
Quantifi’s CCRM solution was built in collaboration with Bunge, a leading global agribusiness and food company. This collaboration resulted in a world-class credit and counterparty risk management tool that’s designed to facilitate optimum business decisions and manage counterparty risk by implementing quantitative methods and procedures across the enterprise. Counterparty risk management is crucial to agribusinesses, and optimisation of this process has helped Bunge’s traders grow the business with greater transparency of data and automated processes.
Most commodity trading firms, across various sectors, face similar risk management challenges and use similar processes to monitor and control this risk. Although the solution was developed with Bunge, it was built for the larger commodity trading industry. We’re currently talking to firms in the energy and metal trading segments to address credit and counterparty risk management needs.
What are your future plans in terms of targeting the commodities markets?
Avadhut Naik: We have recently seen an uptick in activity from commodity market participants. Sound credit and counterparty risk management is an important component of industry best practice. This places additional emphasis on risk, analytics, reporting and governance.
While we have so far focused on agribusinesses, we’ve recently expanded into the metals and energy space. The energy space tends to be more sophisticated when it comes to the use of financial derivatives and the need for advanced modelling techniques. Quantifi has a longstanding history of working with investment banks and hedge funds and is well equipped to combine its understanding of the needs of commodity firms with the sophisticated modelling and risk management techniques used in leading financial institutions.
Geographic spread, competitive economies, price volatility and geopolitical risk make it difficult for risk managers to implement a consistent credit policy to manage exposures and the associated capital allocation. Quantifi’s high-performance, scalable solution for managing credit risk can be easily implemented, is intuitive to use and flexible to adapt to support the pace of change in the energy markets. The solution is designed to help firms manage and mitigate credit risk by providing exposure versus limits reporting, what-if analysis and stress testing. With Quantifi’s sophisticated credit risk functionality, clients can better manage their tolerance and capacity for risk, increase market penetration and improve competitiveness.
How about carbon and environment? What are you doing to prepare for a greater focus on environment and the various forms of environmental risks?
Avadhut Naik: Quantifi takes corporate social responsibility seriously and is always keen to work with clients on achieving their environmental, social and governance (ESG) goals. One of our clients that has an extraordinary commitment to the environment is Carbon Cap Management LLP.
Carbon Cap Management LLP (Carbon Cap), a London-based environmental asset management firm, recently selected Quantifi to support its emissions and gas trading strategies. Carbon Cap’s mission is to raise awareness about climate change and to provide solutions directly related to the capping and reduction of carbon dioxide emissions. With its fund expanding, Carbon Cap recognised that its current system was not sufficient to support all its emissions trading strategies. When looking for a replacement solution, Quantifi stood out with its expertise in financial and commodities modelling.
Global carbon markets have grown exponentially since emissions trading in the EU began in 2005, creating a range of opportunities for funds to participate in this sector. While carbon markets are volatile, this volatility can create opportunities for firms that have a highly skilled investment team and a robust risk management framework to construct strategies that do well in a fluctuating market. Carbon Cap has found a financially sustainable way of trading in carbon markets that benefits its investors, while at the same time benefiting the environment through a commitment of using 20% of its performance fees to purchase and cancel carbon allowances/offsets in order to have a direct climate change impact.