The needs of energy trading companies have expanded over the years, increasing the importance of middle office functions, such as profit and loss (P&L), mark-to-market, and risk. There is also a desire to have these functions performed at greater speed and visibility for middle office, trading managers, investors, and fund administrators.
The middle office function has transitioned to playing an increasingly important role in energy markets. This function is the conduit between the front office/trading function and the back office accounting. The primary functions that the middle office performs are risk management, position management, cash flow management, settlements, and marking open positions.
Understanding your mark-to-market (MtM), and the risk associated with all your positions, is particularly important on the heels of FERC Order 741 and the GreenHat default. FERC order 741 aims to protect wholesale markets from default by market participants. The result is that if participants have to adopt certain risk practices, and if their positions degrade enough, they have to post more collateral to mitigate market risk or liquidate the position.
A common accounting method used to assess risk associated with future positions is MtM, which compares the value you purchased a given position for with the current value of the position. Calculating MtM for one or two positions is fairly straightforward. However, if you have to calculate MtM on thousands of positions, particularly FTR positions, things can get messy quickly.
Market participants historically have needed to either build an internal system/process or manually mark the books. This process also needs constant maintenance due to ISO node re-maps and changes to how auctions are processed/posted by the ISOs.
Companies that have implemented effective middle office systems and controls see efficiency improvements in performing their day-to-day activities, their FTR MtM calculations and have greater confidence in the risk being taken by the front office. By utilizing an automated system, monitoring positions, P&L calculations, FTR MtM, and risk metrics can be done in real-time.
To discuss how your middle office can unlock insights from automated mark-to-market, P&L, and risk metrics, contact us for a complimentary consultation.
About the Author: Stephanie Staska is the director of trade and risk products at Yes Energy. She has worked in energy risk management and compliance for the past 20 years, including time at Twin Cities Power, Cargill, and Split Rock Energy. Stephanie received her MBA and her bachelor's degree in actuarial science and mathematics from the Carlson School of Management at the University of Minnesota. She enjoys traveling and spending time with her family.