You'd think that we were a few decades into the days where adding an "e"(for electronic) was newsworthy - but here we are.
Settlement matching, of course, is understandably quite difficult to simply digitalise and this is precisely what expert in the field, Jens Bartenschalger (CEO, Fidectus) aims to explain below.
Ahead of his participation at ETOT in this October, we got the chance to ask him a few questions relating to the current state of eSM.
In a nutshell, why does FIDECTUS exist? And what do you effectively do?
The idea was born in November 2015, when an industry colleague and I found that lack of automation in the OTC trading lifecycle translates to being error prone, high operational costs and increased risk exposure. Settlement and invoice remain the last vestige of a manual or partially automated process in the OTC deal lifecycle. We quickly agreed to improve the industries’ situation by proposing a solution to a wider industry audience that started with us speaking at ETOT 2016.
Fidectus is approaching settlement & netting and closes the last process gaps in the OTC energy trade lifecycle. Fidectus brings an interoperable and standards-based solution. Developed in conjunction with members of the European energy trading industry, it is meeting industry requirements today and building a foundation for the future.
Is it just the operational risk affected or other forms of risk that are minimised or optimised as a result?
Initially, the eSM standard primarily aimed to reduce operational risk and improve cash flow management. The industry very well understands creating this is just the basis for future benefits. Building the platform from the ground up rather than simply augmenting existing software for e.g. confirmations, enabled an architecture to deliver future features and innovation right out of the box.
"The concept of eSM was already on the minds of many as early as 2006. However, traders were busy maximizing other areas of the business to achieve the greatest impact on the top line."
Best practices used for today’s settlement process are limited by the mechanics and limitations of a semi-automated or manual process. For example, the industry standardized on a settlement window after the delivery month which inherently adds risk during the invoice cycle. The legacy process provides continuity and consistency but does not enable business to influence the process when there is a competitive advantage in doing so. Once eSM is implemented and traders are on Global Energy Network (GEN), settlement becomes another tool in the toolbelt for controlling cash-flow and managing risk.
Why do you think it has taken so long for eSM to really become momentum?
It’s a matter of priorities and limited resources. Industry leaders have long understood there is an opportunity to significantly optimize and create new business tools through automation of the settlement process. The concept of eSM was already on the minds of many as early as 2006. However, traders were busy maximizing other areas of the business to achieve the greatest impact on the top line. Today, we are back at a point in the business cycle where the industry is looking inward for opportunities to optimize and improve the bottom-line. Electronic settlement’s time has come. eSM is the low hanging fruit when it comes to improving the bottom-line.
Blockers have been removed. EFET released standards in April/May of 2019 and Fidectus proactively built the industry a platform which allowed early movers to experience eSM first-hand. Additional drivers include little to no CAPEX required to deploy on the Global Energy Network and Fidectus is providing list pricing for the first four years. Line of sight to all the costs associated with eSM make the decision to move forward with eSM easy as there are no hidden operational or development cost which can taint the business model in the future.
"Confirmation matching started out as an industry wide initiative embraced by EFET but over time it became a single vendor solution for a mission critical process."
Finally, first movers like the standards-based, interoperable approach and have started asking counterparties to engage the GEN so all can maximize the benefits of both the 1.0 solution and new features just over the horizon.
The discussion for the panel at ETOT is on towards the next major industry standardisation. In your own opinion what do you think that looks like?
In my experience new technology is defined and released with the best intentions but if we are not careful users can become trapped by circumstance. Early in the process, technology companies jump in to creating high-value solutions based on industry input and experience. The enthusiasm for a given solution is typically focused on the initial development and launch. Additional considerations such as long-term operational cost and developing competition in the market sometimes get lost along the way leaving the industry in a challenging spot. An example of unintended consequences can be seen today if one looks at the history of confirmation matching. Confirmation matching started out as an industry wide initiative embraced by EFET but over time it became a single vendor solution for a mission critical process. I would argue the industry would be better served with multiple vendors leveraging open standards and interoperability. This would force all vendors to continue to innovate and provide the best possible pricing. To avoid history repeating itself it is important to remain focused on interoperability and open standards throughout the lifecycle of eSM.
In a practical process or phenomena. What do you think people would standardise?
Standardisation starts with speaking the same language. The first major step has been made by releasing EFET eSM Release 1. The next iterations will cover additional physical and financial products and commodities. There is also some work to be done around integrating eSM into the CpML schema. Traders will implement interfaces in their ETRM, Settlement and/or Accounting systems to benefit from automated and electronic data exchange of invoices, shadow invoices, netting statements etc. To get the full benefit out of eSM (e.g. credit risk reduction and not just automation), several players will also streamline existing legacy processes.
"The first major step has been made by releasing EFET eSM Release 1. The next iterations will cover additional physical and financial products and commodities."
Getting finance/accounting, risk, back office and IT together at one table is going to accelerate implementation. The quicker benefits can be achieved, the longer a competitive advantage can be maintained.
In your opinion how long do you think we have left until eSM is mainstream?
It depends on what you mean by mainstream acceptance. If you want to put a high number of energy trader logos out, it is likely to be 3-5 years. But if you look at the actual business impact – and by this meaning full change – it is happening now. The larger players ensure that the most meaningful counterparties are on the platform early and that real acceptance (driven by market volume) happens quickly.
See more from Jens at ETOT 2019 - see the agenda here