A better look at financial risk scenarios

Using time series to model scenarios for financial risk calculations—A case study of the use of Pomax ECTRM at GDF SUEZ.

GDF SUEZ is one of the leading energy providers in the world, with activities across the entire energy value chain, upstream to downstream, in electricity and natural gas. GDF SUEZ relies on diversified supply sources as well as flexible and highly efficient power generation in order to provide energy solutions to individuals, cities and businesses. The Group employs 200,650 people worldwide and reached revenues of €79.9 billion in 2009.  For more information about GDF SUEZ, see www.gdfsuez.com.

In need of a better system for modeling time-dependent risk scenarios.

When the Global Gas & LNG business line in GDF SUEZ needed a system to perform risk metrics calculations while seamlessly integrating into a complex systems architecture, they chose to contract Navita for the installation of Pomax ECTRM. The system went into production in April 2009.

Better and faster decisions, improved risk evaluations.

GDF SUEZ' solution is based on the general concept of time series, which was originally developed by Navita as a generic concept for modeling structured contracts.   Anything with some kind of time dependence in it can in principle be modeled using time series, but the concept is particularly relevant for modeling physical and financial assets, and is especially so for modeling physical energy assets such as power plants, gas storages, and pipelines.  Further, Pomax includes full functionality for creating and combining time series, using a formula wizard. 

This concept allows a Pomax user to take an arbitrarily complex structured contract type, model it in Pomax as a mere configuration job, and thereafter instantiate any instance of such contract through essentially a wizard.  The business value of this is obvious: full validity of the modeling of complex structured contracts, rapid implementation of new contract types, and increased end user productivity / accuracy. Ultimately, this translates into better and faster trading decisions, and better management of risk associated with such decisions. 

Seeing a broad variety of scenarios.

GDF SUEZ uses this time series concept to create scenarios on all time-bucketed data, including market prices, interest rates, currency rates, contract volumes, gas storage levels, injection, and withdrawal rates.   In addition, the system allows to have scenarios on all time series in the system, and to run all analysis and reporting based on scenarios rather than one forecasted value. 

Such solution allows GDF SUEZ to calculate and report mark-to-market and cash-flow-at-risk at a very detailed level in very many dimensions.  Since all the mark-to-market and cash flow results are provided as scenario output in a massive cube, GDF SUEZ can customize and report the output from the system in all the available dimensions, by counterparty, location, time period, strategy, asset type, currency and many others. The users can also analyze the data in the reports by slice-and-dice functionality to view the data in different combinations of dimensions, as well as the capability to graph the results.

Romain Rochas, Market and Credit Risk Management IT Manager of GdF Suez, said:

"Considering the multi-dimensional exposure to risk a group such as GDF SUEZ faces on a daily basis, we needed a product robust enough to handle large amounts of data and interface with systems used in other parts of the business.  A product also capable of performing complex calculations and generating detailed reports in a timely manner. As of today, we can say that POMAX has managed to deliver on all fronts."

From complex theory and technicality to tangible and significant business benefits.

We are enthusiastic about presenting the GDF SUEZ' solution to Business Management EU's readership as an example of how the seemingly technical concept of time series at the intersection of financial modeling and complex computer algorithms, can translate into such tangible and significant business benefits in the area of energy trading and risk management.

About Navita and its customers

Navita is a premier provider of software and services to the global energy and commodity trading community.  Pomax, Navita's core product and a best-of-breed solution for energy trading, commodity trading and risk management, supports trading in a number of segments: electric power, gas, crude oil, coal, emissions / carbon, freight derivatives, weather derivatives, interest rates, currencies, and equities.  Pomax has an extended functional footprint in the area of physical power and physical gas.  Energy producers, energy consumers, trading houses, banks, hedge funds, and shipping companies the world over extensively use Pomax, and there are more than 100 Pomax installations in Europe, North America, Australia and Asia. Customers include Abitibi, Bruce Power, Clarksons, DB Energie, EdF Trading, E.ON, Finotec, GdF Suez, KS&T, Louis Dreyfus Armateurs, Mercuria Energy, SMUD, and Statkraft.  Navita is Microsoft Gold Certified Partner, Oracle Solution Partner, and ThomsonReuters Solution Partner.  Navita has offices in Los Angeles (US), Toronto (Canada), London (UK), Edinburgh (UK), Halden (Norway), Oslo (Norway), and Stockholm (Sweden).  More information about Navita can be found at www.navita.com.