Energy and Commodities Trading Sector: Addressing Counterparty Lifecycle Management

The energy and resources sector has suffered over the last year due to the drastic decrease in demand for oil and refined products. This resulted in the FY2021 reporting period ending with huge losses for numerous players in the industry. Despite this, some organisations have posted almost record-breaking revenue figures as they sought to take advantage of the increased volatility in the global market, caused by the coronavirus pandemic, and capitalise on the OPEC-Russia price war.

While the financial rewards recognised by the trading arms of energy and commodities companies have provided much needed financial support during the economic downturn, there is a renewed focus on profit margins and cost optimisation, to bolster financial protection and mitigate against future unprecedented events. It is increasingly important for organisations to nurture their counterparty relationships and build solid foundations – anchored by a robust compliance programme – for a successful and sustainable business going forward.

Like financial institutions, however, energy and commodities trading organisations encounter many of the same challenges in handling their business relationships, which need to be mitigated in order to optimise their approach to counterparty lifecycle management (“CLM”). Common problems exist across all facets of the counterparty lifecycle, including:

• Delayed responses to regulatory risk management obstacles and changes, such as handling of new sanctions designations and enforcement actions;
• Increased exposure to financial crime risks compounded by poorly communicated or undocumented counterparty risk appetite;
• Inconsistent and uncoordinated onboarding processes, making it difficult to obtain comprehensive due diligence information and undertake appropriate compliance risk assessments on counterparties and transactions;
• Heavy reliance on manual counterparty outreach, data gathering and data processing; and
• Limited system integration within and across business units and a lack of robust data governance, resulting in data duplication and ineffective counterparty management information (“MI”).

Given the challenging approach to regulatory compliance and due diligence across industries, it is not surprising that some organisations are struggling to provide a seamless counterparty experience while simultaneously meeting their requirements. A recent report indicated that 48% of respondents continue to be frustrated with the length and complexity of onboarding timeframes, highlighting the inability to validate or maintain up-to-date counterparty information as the biggest hurdle. Increasing workloads and pressures further continue to impact costs and profit margins, as organisations look to streamline business processes and invest in personnel and automation to optimise customer due diligence ( "CDD") expenditure in the longer term.¹

While these challenges are not new, they have typically been addressed with temporary quick fixes. The complexities derived from legacy technology coupled with increased regulatory focus, however, are now driving organisations towards taking a more strategic and holistic approach to combatting these issues. We consider that enterprise-wide investment to implement a robust system infrastructure with streamlined capabilities is required to make a significant impact and is critical to long-term commercial growth and business development.

1. Cost optimisation and business growth constrained by historic technology

Technology infrastructure in large organisations, agnostic of industry, is often fragmented and cumbersome; the product of distinct platforms and applications built, bought or inherited over the years with little or no integration. Consequently, business development and front office teams struggle to deliver a joined-up service to prospective or existing counterparties. As the major energy and commodities trading companies begin to overhaul outdated systems, self-service and digital channels are becoming ever more desirable in the market to create a more seamless experience to benefit both sides of the relationship.

Organisations further need to consider how technology can streamline due diligence, data lineage, data processing and validation activities for cost optimisation and enhanced user experience. Using manual tools, and working offline where legacy systems cannot support operations, increases the likelihood of human error and data breaches. Making do with outdated systems and convoluted workarounds can indicate either distinct under-investment in technological infrastructure or an inability to evolve. While long-term ambitions should include achieving an enterprise-wide single customer view supported by a quality risk management framework, organisations can take initial steps by (1) deploying digital tools to address identified business requirements and (2) automating labour-intensive activities to reduce expenditure and focus resources more effectively, for example.

2. Increased regulatory scrutiny on trading and supply businesses

Rising enforcement action has highlighted that organisations need to be alert to the wider financial crime risks posed by their counterparties. Authorities are introducing more targeted regulation to tackle illicit activity, and we’re seeing penalties increase into the millions of dollars for breaches of sanctions regimes and financial crime legislation globally. As a result of these developments, it is prudent for trading arms and organisations to take a proactive approach in addressing these risks. This can be achieved through operational transformation underpinned by CLM enhancements, and implementing effective controls to meet regulatory requirements and expectations.

In summary, organisations are increasingly acknowledging that their existing CLM processes and tools are perhaps not adequate to support their ambitions of a more customer-centric and long-term sustainable value relationship business model. Technology is often being placed at the forefront to deliver simplicity and efficiency; however, businesses should consider the more holistic transformation opportunities rather than just automation of existing processes. Migration to new ecosystems cannot be done in silos; Business Unit, Data and Compliance SMEs should work cohesively to ensure the technology best serves the purpose and needs of the organisation while supporting compliance with company policies and country regulation.

Here at Deloitte, we are working with our commodities trading clients, particularly in the energy and resources sector, on enterprise-wide transformations to optimise management of the counterparty lifecycle and unlock further value to be accessed for both organisations and their clients.

In our next blog post, we will explore how organisations can address these industry challenges and embed an effective CLM framework.

^[1] 2019 Thomson Reuters ACAMs Anti-money laundering insights report