In today’s rapidly changing and volatile energy and commodity markets, trading firms and commodity brokers must constantly assess the ongoing impacts to their business. Black swan events such as pandemics, wars and regional banking crises seem to be happening more frequently. The portfolio margin system, while designed to protect against defaults, is not enough in some cases to prevent firms from going out of business.
Notable recent market events have highlighted the shortcomings of backward-looking portfolio margin models in managing risk. As such, best practice for energy traders and commodity brokers is to have robust stress testing capabilities to supplement the portfolio margin framework and optimize risk vs return for their businesses.
One such example of the shortfalls in portfolio margining is the nickel short squeeze in March 2023 when nickel prices on the London Metal Exchange’s (LME) surged 250% in intraday trading amid supply chain concerns triggered by the Russia/Ukraine conflict and highly concentrated short positions. The LME suspended nickel trading on March 8 for eight days, leaving firms unable to manage their nickel exposure. Another example is negative WTI…
