In modern energy risk management, there is no such thing as a “safe” price direction. Whether the forward curve climbs, plateaus, or drops, every trajectory carries unique liquidity and credit risks for trading firms.
As market volatility persists, relying on reactive measures is no longer sufficient. Firms must proactively insulate their portfolios to manage exposure and prevent costly limit breaches.
The impact of price movements
Regardless of market direction, unoptimised portfolios quickly accumulate significant financial resource constraints:
- Scenario 1 – Prices rise: Initial Margin (IM)/ variation margin (VM) increases and liquidity risk materialises. Bilateral MTM/VM exposures cause limit breaches. New trades at high prices lock in significant settlement risk.
- Scenario 2 – Prices stabilise: IM/VM and bilateral MTM exposure remains elevated. Trades at elevated prices continue to build up bilateral settlement risk.
- Scenario 3 – Prices fall: High priced trades drive high bilateral and exchange VM. Settlement risk is elevated until high price trades roll off. The longer prices remain high, the more pronounced these risks become.
Mitigating risk through multilateral optimisation
To prepare your business from whatever tomorrow’s curve looks like, continuous portfolio optimisation is essential.
OSTTRA triBalance provides a highly scalable and consistent optimisation process specifically designed to tackle modern energy trading risk. Our algorithm systematically targets numerous risk metrics simultaneously, enabling comprehensive risk reduction across exchange and bilateral markets that is necessary in an increasingly complex market environment.
This process allows participants to rebalance their portfolios without altering market risk profiles, effectively freeing up credit lines and reducing the funding costs associated with volatile margin calls.
Build a more resilient portfolio against price swings
Irrespective of market conditions, proactive optimisation provides a clear path to reduced risk and lower costs.
To learn more about how OSTTRA triBalance can help optimise your energy derivatives portfolio, contact us below or click here.