1. 5 reasons why
Spreadsheet based
Risk Management
Systems Don’t Work
Whitepaper
Should Commodity Trading and Processing companies continue using
spreadsheets for managing their Risks? What are they losing if they do so?
2013
Risk Edge Solutions P Ltd.

2. Whitepaper
©Copyright 2013
The prevalence of spreadsheets in managing various functions of business is very high today.
And so is the prevalence of errors in most of them! Research has shown that almost 94% of the
spreadsheets in use today contain errors. In fact, this issue has gained enough prominence
over the past 5 years that there is now a term for that - Spreadsheet Risk Management.
Obviously we find it ironical that many organizations use spreadsheets to manage their risks!
This has been further confirmed recently by both the Switzerland-based Basel Committee on
Banking Supervisioni
(BCBS) and UK’s Financial Services Authorityii
(FSA).
However, even assuming that there are no errors in your spreadsheets (a HUGE assumption),
here are the top 5 reasons why you should look beyond spreadsheets when it comes to
managing risks on your portfolio:
1. Data Management
Spreadsheets typically require you to input your transactions, price data, even volatilities and
correlations manually, in the format that is pre-specified. The result is not only massive amounts
of time spent by the entire team on preparing that data, but also not checking for any errors in
the data or data integrity. Frauds often perpetrate from such loopholes, where a trader (or a
colluding operations person) changes his positions before the data is given for risk calculation.
Besides, lack of audit ensures that these frauds never come to light till it’s too big to be ignored
and only then does everyone notices the elephant in the room!
2. Analysis and Simulations
The spreadsheets typically just take in the data, and spew out the results which are
incomprehensible to a non-geeky business head. Not only does this create gaps between the
Risk Function and the Business Function, it also ensures that analysis of that data is another
humongous effort, which, by the time it’s done, is already outdated and no decisions can be
based on them. Storing daily data in usable format to create trends of exposures and risks, by
portfolio / positions is another critical area where spreadsheets completely fail. Moreover, due to
all the time required for data preparation and data analysis, simulations or scenario analysis
done on your portfolios are fewer, rarely compared and analyzed and almost never stored for
future reference. All of this plays its part in breaking the Risk Process which should really be
seamlessly integrated across the organization.

3. Whitepaper
©Copyright 2013
3. Scalability & Flexibility
Even systems that are spreadsheet based, like the ones that run various add-ins for valuation
and risk calculation, can rarely be changed to suit your changing business requirements (some
that can be changed, need significant efforts for even minor changes). Moreover, as your
number of transactions increase over a few months, spreadsheets slow down significantly and
are always at a risk of crashing. Such flexibility and scalability issues cannot be carried for long
by even smaller organizations (sub-$ 200mn sales), and will soon result in risk division being
rendered as a redundant expense.
4. Process Automation
Given the issues in data management and analysis, the Risk Process can never be completely
automated within a spreadsheet. The automation of data integrity check, automation of various
control and monitoring processes, automating reconciliations with the source systems, etc. are
also critical areas of concern which are never usually addressed by spreadsheets. Besides, tons
of spreadsheets in the network, some of which are interlinked with each other, ensure that even
whatever automation is there, is never really in control of the organization.
5. Responsive / Active Risk Management
With the complexity involved in running Risk processes with a spreadsheet, there is added
disadvantage of passive response to risk management. Your favorite reports are almost never
mailed to you at the end-of-day and the alerts generated on various limit breaches are never
notified to the respective user automatically. This puts the entire onus on operating and
understanding the risk numbers on different users (Finance, Trade, Operations, Risk
Management, etc.) thereby significantly increasing the risk of missing a critical risk-area of the
portfolio.
While one is inclined to also consider the extremely low-cost associated with such spreadsheet
solutions, but when we stack up all the disadvantages of such systems, we can clearly see that
spreadsheet based solutions not only add little value to your Risk Management Process, they
even give you a false sense of security of running an efficient Risk Function. While on one hand
they reduce your costs of procuring a risk solution, they significantly increase your costs of
internal risk management (people required to do data / report generation work) and costs of
reducing risks on your portfolio.

4. Whitepaper
©Copyright 2013
i
Consultative Document - Principles for effective risk data aggregation and risk reporting
(http://www.bis.org/publ/bcbs222.pdf)
ii
Solvency II: internal model approval process (and) data review findings
(http://www.fsa.gov.uk/static/pubs/international/sii-imap-data-review-09-12.pdf)