Energy traders ignore legal risk at their peril

Legal risk is a challenge for energy trading organisations, as it eludes traditional quantitative risk management techniques. But its effects can be just as disastrous as other risk management failures, and sometimes worse, warns Vincent Kaminski

Vincent Kaminski

From the point of view of quantitative modelling, legal risk is one of the least explored exposures hidden in the business of any energy company. This is not surprising: legal risk is heterogeneous, multidimensional and defies efforts to analyse it in a quantitative way.

Nevertheless, it is important. Legal risk tends to metastasise into price or credit exposures, reputational hazard, lost business, excessive litigation costs and the diversion of managerial energy into unproductive activities