Quantifying risk in a global multi-commodity portfolio
Agricultural commodity firm Gavilon turns to SAS® BookRunner® to monitor market and credit risk
Risk is a reality of the commodity business: Every transaction is subject to a range of market forces, from price fluctuations to the creditworthiness of suppliers and customers. That’s why commodity-intensive organizations must be able to quantify all of their exposures across the enterprise and within each business unit.
For agricultural commodity firm Gavilon, the challenges of understanding those risks accurately – and managing them efficiently – are magnified given that it works with more than 250 commodities, has counterparties around the globe and operates worldwide physical assets in addition to its trading operations.
SAS BookRunner automates much of the time-consuming work that the market risk team faced. Now, we are able to input our positions and our prices, and the system takes that data and runs with it. Justin Kissel Market Risk Manager
Gavilon recognizes that managing this complexity with a best-practices approach enables it to make stronger decisions for sustaining a profitable business. To gain increased clarity into its market and credit risk, this $18 billion global organization uses the commodity trading and risk management (CTRM) solution SAS BookRunner.
Monitoring market risk
The market risk team at Gavilon is responsible for calculating and monitoring positions, P&L and value-at-risk (VaR) across the company. In adopting SAS BookRunner, the team sought to improve three essential areas of its daily operations.
“First, we were interested in overall performance – just the time to run the process every day,” says Justin Kissel, Market Risk Manager at Gavilon. “Then, clarity into the process so we have the ability to easily resolve and prevent issues. The final aspect was gaining better visibility into the granularity of our portfolio.”
In the past, the VaR process was based on customized code, which brought with it a variety of inefficiencies – some produced by minute errors that could delay the system’s ability to produce these key risk metrics. With SAS BookRunner, Gavilon was able to streamline its overall process so that it now runs in under 10 minutes – an 80 percent improvement. The enhanced transparency of the new approach allows the market risk team to easily identify hiccups in the data. Because the staff is not spending hours of the day resolving technical issues, their time is free to work on value-added tasks.
“SAS BookRunner automates much of the time-consuming work that the market risk team faced,” Kissel says. “Now we are able to input our positions and our prices, and the system takes that data and runs with it. Our productivity has increased substantially.”
The ability of SAS to take the complexity of our business environment and simplify it to a useable level for our credit team really sets it apart. It’s what makes us able to manage such a large workload with such a small staff. Alicia Burns Credit Manager
The new process offers Gavilon a level of clarity that was not possible before. In addition to providing an aggregated VaR for the entire company, the market risk team can now drill down into the risks associated with different business units, products lines and specific exposures that affect the portfolio at a granular level.
“If a product or division has a high-risk profile in relation to its expected profitability, a timely VaR process will indicate the elevated exposure quickly and allow for communication to team leads. This allows for potential adjustment or resizing of positioning to be done before market movements.” Kissel explains. “This helps ensure our business is positioned on the path for profitability.”
Keeping a close eye on credit risk
For credit risk, SAS BookRunner helps Gavilon oversee credit and performance risks for all of its more than 15,000 trading partners, whether suppliers or customers.
“From a farmer with four cows to a Fortune 500 company, we’re managing everything in between,” says Alicia Burns, Credit Manager for Gavilon. “Regardless of their size, we’re looking at credit risk, performance risk, whether our AR will be paid, if our suppliers will perform on their contracts, and a variety of other issues.”
Before successfully implementing SAS BookRunner for its credit risk management, the company experienced some substantial challenges with its legacy system, such as frequent issues with system stability and an inability to adapt to the diverse aspects of Gavilon’s business.
“The prior system would crash for a day at a time, leaving 15 users stranded. As we added additional volume to the system, there was a continual pattern of system crashes that we saw day after day, year after year,” Burns says. “Since we implemented SAS, we have not experienced a system crash. The service levels have been far superior to our prior provider, and ongoing maintenance is much more affordable.
“SAS offers us improved efficiencies. It’s more user-friendly, and the workflow drivers have been dependable. It's been fantastic to come into an environment on a daily basis that you know is going to be stable, and your users are able to interactively conduct their work without guessing if the system is correct.”
Another benefit is how seamlessly SAS integrates into Gavilon’s existing infrastructure without disrupting daily business processes. The company aggregates data from 18 separate domestic and international operational systems. This allows it to manage customers at a global level in one system instead of relying on a complex of individual operational systems.
Consolidating all this information in SAS BookRunner allows the credit risk team to get a true enterprise view, and to slice and dice into the details of their counterparty exposures. “The ability of SAS to take the complexity of our business environment and simplify it to a useable level for our credit team really sets it apart,” Burns says. “It’s what makes us able to manage such a large workload with such a small staff.”
Next steps: Historical VaR
Moving forward, Gavilon plans to continue to extend the capabilities of SAS BookRunner to perform additional simulations and stress tests on its portfolio. For example, a historical VaR calculation would apply the firm’s current exposures to a major market shift of the past, enabling evaluation of how the portfolio would respond to an event such as the 2008 financial crisis.
“We have always wanted to see how much risk our position could have currently if there was a historical event where the market has a big swing in one day,” Kissel says. “Using data from the past and software from today is just one more way we can make sure we’re prepared for anything.”
- Automate the process to produce daily VaR metrics in a timely
- Improve work flow and system stability in overseeing credit risks.
- Gain visibility into underlying data details in addition to an
- Timely risk output enables Gavilon to make better decisions, faster.
- System stability supports growth of the business.
- Increased productivity for risk teams.
- Diverse business requirements are addressed by the flexibility of the platform.