MARKET STUDY Why today s perfect storm in energy & commodities makes technology king. Accelerate.

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1 MARKET STUDY Why today s perfect storm in energy & commodities makes technology king Accelerate.

2 BECOMING THE ADAPTIVE ENTERPRISE a look at how technology is helping traders to become unencumbered and agile for improved competitiveness The perfect storm in energy and commodities is the result of a confluence of events; any of which, in a normal market, would require time for the markets to absorb and return to equilibrium. These events are: 1) weakening energy and commodities demand due to slow global economic growth, 2) overinvestment in, and a return of previously constrained, production capacity leading to an extended period of excess supply, 3) a strong dollar policy reducing the value of dollar denominated commodities and 4) increasing regulatory intervention in commodities markets that impacts broad segments of the commodities value chain. In this perfect storm, the value of commodities and the infrastructures that support their production and transportation have fallen, and uncertainty as to the future direction of the markets has increased. In this uncertain market, price volatilities will increase, offering opportunity for traders that have a clear and up-to-the second view of the markets and the tools to act quickly as conditions rapidly change. Patrick Reames, Commodity Technology Advisory

3 SunGard Market Study 02 In this environment, effective energy/commodity trading and risk management (E/CTRM) systems are more important than ever. Unfortunately, too often traders and risk managers find the performance and efficiency in their software lacking. For example, systems cannot always communicate with other incompany software or third party data feeds. This integration barrier creates time-consuming inefficiencies. In other cases, data is not used to its fullest. A company may generate vast amounts of information, but its system lacks the capability to fully analyze it. The result is lost business opportunities. Such functionality weaknesses are more than just annoyances; they threaten profitability due to poor productivity and potential breaches in compliance. Current challenges cannot be solved by continuing on as before. While it s natural to try what s familiar, changing conditions require different ways of thinking and acting. Simply reapplying existing solutions not only leads to diminishing returns, but also allows competitors to redefine the rules in their favor. With margins shrinking, competition increasing and growth opportunities requiring bold thinking, energy traders and risk managers can t win just by doing more of the same, only faster. Success takes continuous shifts in thinking and capabilities. To survive and thrive today, a company must become a true adaptive enterprise. Study scope To better understand the specific problems and needs of the market, SunGard conducted a study of over 100 energy trading and risk management professionals from around the world. The study focused on companies that trade agricultural products, oil, natural gas, power, and metals as well as renewable energy credits. The survey participants come from a cross section of sectors, including oil and gas, transportation, utilities and retail supply, along with investment banks and hedge funds. Key findings The top challenges identified by the study participants were system integration followed by data management, analytics and business intelligence, usability, compliance reporting and cloud. Single Platform & Integrated Approach Disparate systems create gaps in workflow, increased error rates and duplicative work. Sophisticated Analytics & Business Intelligence Existing trading platforms can t perform advanced analytics to take advantage of the vast amounts of data their companies generate. Traders and managers are unable to quickly and accurately meet compliance reporting requirements. Ergonomic Trading & Usability Much of the dissatisfaction expressed by study participants stems from using cumbersome, inflexible technology, making it hard to operate effectively in a changing environment. Compliance Reporting Traders often find that their time spent on reporting is a nuisance and deters from their primary tasks. In order to unencumber them from these non-value tasks, traders seek improved reporting technology. According to the study, traders see compliance reporting as the greatest E/CTRM weakness among various system components like accounting, contracts and position management. Ultimately, it is the last thing that they would like to spend time doing. Cloud Reflecting concerns about data security, 56 percent of the survey participants said their companies haven t or wouldn t consider cloud-based E/CTRM solutions. Figure 1: Nearly 40 percent of energy traders and risk managers state that their E/CTRM systems do not help adapt to changing market and business challenges No 38% Yes 62%

4 03 SunGard Market Study 1. Poor Platform Integration Creates Barriers Figure 3: 41 percent of energy and commodity traders don t have a consolidated view repository of trade, pricing and risk data The top challenge identified was system integration. This category represents the greatest challenge facing energy trading and risk management professionals in using their software platforms effectively and efficiently. Integrating software across business operations enables cross commodity reporting while providing better transparency and data accuracy, leading to lower costs. Figure 2: System integration and data quality are top challenges for E/CTRM system usability Data quality Lack of functionality Performance 14% 12% 24% No 41% Yes 59% System integration 28% User experience User training 12% 11% For energy trading, poor integration increases operational risks, reduces productivity and hinders heightened performance, which hurts profitability. It makes it harder to extract the value and insights from their company s own activities that energy professionals say they want. In addition to lack of integration around the trading platforms, about 22 percent of survey participants said their E/CTRM platform are unable to integrate pipeline operations creating a drop in process and workflow. Similar issues are likely with integrating power operations. In the second-most cited issue for traders and risk managers, access to data / analytics and reporting posed a significant challenge. Poor data quality hampers efficiency, with extra time spent verifying data and potentially increasing compliance issues. Advanced analytics and improved insight allows energy and commodity traders to identify trading opportunities enabling traders to use the platform to make business decisions. With improved insight, companies can make faster and better decisions, increasing overall productivity and profitability. Figure 4: 41 percent of energy and commodity traders say their platforms are not equipped to handle advanced analytics and business intelligence Integrating pipeline and power operations with trading activity through the same E/CTRM system improves gross margin reporting and reduces P&L swings due to inaccurate data. The bottom line is system integration and heightened data quality can help energy companies adapt to this quickly changing environment. Advanced analytics and business intelligence ISO integration Lease crude production / marketing 5% 11% 41% 2. Improving Insight and Operations with Sophisticated Analytics In this period of transition and evolution, energy trading and risk management professionals said that advanced analytics and system integration were the top issues that their systems aren t equipped to handle. Pipeline integration Refinery scheduling for refined products Transportation and logistics 8% 14% 22% Custom analytics can also be used to pull value from big data, the massive, and growing, volume of information gathered every moment.

5 SunGard Market Study Demand for Improved Usability and Ergonomics of E/CTRM Platforms Figure 6: 35 percent of respondents say that their current E/CTRM system limits their business responsiveness to new business opportunities Much of the dissatisfaction expressed by study participants stems from using cumbersome, inflexible technology, making it hard to operate effectively in a changing environment. Figure 5: Time lost because of deficiencies in software trading platforms Maybe up to 5 minutes per day 5-15 minutes per day minutes today 20% 29% 24% Yes 35% No 65% More than 30 minutes per day 28% Traders and risk managers operate in an environment where commodity prices are highly volatile, compliance requirements proliferate and market uncertainty prevails. Unfortunately, their current platforms leave them unable to navigate this difficult environment. For this reason, many enterprises rely on spreadsheets creating compliance issues as well as potential error. While this practice allows them to be more responsive on some levels it is ultimately a symptom of the E/CTRM system not offering the right level of support. In fact, 35% of the respondents say that their current E/CTRM system limits their business responsiveness to new business opportunities. More than one-third of the study participants said that their E/CTRM platforms: Failed in helping adapt to the changing market environment and new business challenges. Their current system limited their company s ability to respond to new business opportunities. Nearly half seem to think it is time to look for a new E/CTRM system; they believe that a new system would fix the business challenges they re facing. The problem? For one thing, poorly implemented systems are keeping traders and risk managers from performing to their potential. In fact, one quarter of the traders and risk managers said that they spend up to 15 minutes a day on manual workarounds to deal with deficiencies in their trading platforms. Worse, 28 percent spend more than half an hour a day on manual workarounds. This saps their time from more productive tasks. In another sign that trading and risk management systems could be improved, 42 percent of survey participants said their systems lacked a consolidated repository of information for trade, pricing and risk data. Price volatility and narrowing margins highlight the need for operational efficiency. In the second half of 2014, for example, the price of WTI crude oil fell in half to about $50 per barrel while U.S. natural gas prices dropped from about $4.20 per million British thermal units to about $2.75/MMbtu. And more volatility could be on the horizon. Efforts to cut greenhouse gas emissions, for example, could affect natural gas use and power demand, affecting commodity pricing and putting new pressures on energy trading and risk management operations.

6 05 SunGard Market Study 4. Compliance Reporting Seen As Top Weakness With companies facing increased regulatory requirements under Dodd-Frank and European Market Infrastructure Regulation (EMIR) regulations, as examples, compliance reporting presents the most serious E/CTRM weakness among various system components like accounting, contracts and position management, according to the study. Figure 7: Compliance reporting is seen as the greatest E/CTRM platform weakness Respondents were asked to rate the capabilities of their systems on a scale of 1 (low) to 10 (high). Compliance reporting was by far the weakest. Compliance reporting Market risk E/CTRM systems take flight; a slow but steady acceptance of the cloud Cloud computing offers something of a conundrum for energy traders and risk managers. It s easy to see why concerns exist about cloud computing, given the heightened publicity about cyber threats to energy infrastructure. Last year, there were 79 cyber-attacks against energy companies in the United States. That s down from 175 hacking incidents the year before, according to the U.S. Department of Homeland Security. Still, it s an obvious worry. Reflecting concerns about data security, 56 percent of the survey participants said their companies haven t or wouldn t consider cloud-based E/CTRM solutions. One respondent, for example, said concerns about cloud-based solutions include security issues, data ownership issues, cost, and reliance on Internet connections to access the cloud. Credit risk Accounting Market data Contracts Position management Figure 8: 56 percent of respondents are not planning on moving to cloud Deal entry Valuation Scheduling Under Dodd-Frank and EMIR, companies need to be able to monitor their position limits, report to swap data repositories and calculate regulatory capital requirements. Further, requirements continue to evolve. In November, for example, the US-based Commodity Futures Trading Commission clarified its interpretation of certain physical commodity transactions to ensure that they aren t as heavily regulated as swap transactions. No 56% Yes 44% Problems with an E/CTRM system s compliance reporting capabilities pose significant regulatory risks for companies. It also represents an area that could drive up costs, possibly from failing to adhere to reporting requirements, but also in extra time spent sorting through compliance reporting issues. Custom analytics can be developed to handle compliance reporting, providing a competitive advantage through more efficient operations and reduced regulatory risk. But at the same time, cloud-based computing can save money and offer greater efficiencies than traditional in-house computing systems. So the energy industry is trending toward increased use of cloud computing, even as it has reservations about the move. The solution lies within the information technology industry. Pressure is on IT to heighten security and instill confidence in the cloud, so that energy traders and risk managers will gain confidence in making the transition to its greater capabilities.

7 SunGard Market Study 06 What s happening now redefines what you will do next The study results make clear that trading and risk management professionals grapple with legacy technology that cannot meet today s operation and regulatory challenges. Many realize their system deficiencies and are ready to make a change. These limitations are preventing companies from managing volatile energy markets and increasingly stringent and complex regulatory conditions as effectively as they must in the current highly competitive environment. The key to effective energy trading is swift decision-making based on intelligent analytics and planning, backed by reliable and timely data. Inadequate E/CTRM systems too frequently stifle prompt action. Lack of system integration interrupts work and slows day-to-day operations. Meanwhile, poor data causes delays as analysts and decision-makers must recheck inputs. All of this happens in an arena where profits are won and lost in minutes. But possibly worse, traders and risk managers are not looking as far over the planning horizon as today s sophisticated analytics would allow. Futures trading, hedging, contracts-fordifferences, long-term agreements all require a firm grasp of the big picture. Large volumes of in-house data from multiple sources stored in multiple places and not leveraged in a single repository which could assist in these decisions, simply go unused because of system limitations. Conclusion In today s perfect storm, underpinned by uncertainty and price volatility, technology emerges as key to surviving and thriving. However, implementing an ETRM platform is just one part of the solution. Getting all the processes, systems, integration and reporting right, ensures that the proper business needs are met. In reality, the final ideal-state architecture may be years away; but there needs to be a practical roadmap to that final state, implementing projects on the way, guided by the overall enterprise architecture vision and guidelines. Defining a future state, which promotes transparency, efficiency and usability, and meets the business needs of that organization, is the first step. SunGard Consulting Services can help defining the future state and setting a viable roadmap, giving incremental value to the business while making technology improvements. That will ensure a consistent and incremental approach to the ideal future state, while delivering what business needs in a reasonable timeframe. No company can avoid the market and regulatory pressures inherent in energy and commodity trading. But with the right tools, they can manage the variables and demands with greater insight, speed and efficiency -- and gain a competitive edge. The information is often at hand for best decision-making. But can your operation access it? And can you do so quickly and easily? These are questions energy traders and risk managers must ask themselves as they evaluate the software and technology that they use. The answers may reveal a great deal about a trading operation s wins and losses for the year, the quarter, the day or even the hour.

8 Enabling the Adaptive Enterprise Sitting at the intersection of technology and finance, SunGard is focused on delivering fresh ideas and inventive solutions to help our customers adapt and thrive in an ever changing environment. With a blend of software solutions, cloud infrastructure, global service capabilities and deep domain expertise, SunGard is capable of supporting virtually every type of financial organization, including the largest and most complex institutions in the world. For more information, please visit twitter.com/sungard getinfo@sungard.com linkedin.com/company/sungard 2015 SunGard. Trademark Information: SunGard, and the SunGard logo are trademarks or registered trademarks of SunGard or its subsidiaries in the U.S. and other countries. All other trade names are trademarks or registered trademarks of their respective holders. CS4289