Listen: Masters of Risk | Episode 1: Discussion with Natalia Hunik, CRO, Cubelogic

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Yashi Yadav

Hi, everyone. Thanks so much for listening in. I'm Yashi Yadav, Market Development Analyst here at S&P Global Market Intelligence, where I help drive our commercial strategy around our credit and risk solutions. I am so excited to welcome Natalia to be a part of the conversation today. Hey, Natalia, how are you?

Natalia Hunik

Hi, Yashi, thanks for inviting me. I'm super excited about the talk.

Yashi Yadav

Awesome. So just to introduce Natalia, she is the Chief Revenue Officer at CubeLogic, a complete credit decisioning workflow platform that services clients across multiple industries ranging from energy to insurance. She is focused on helping credit-driven institutions transform to rethink their approach to risk management and may get a dynamic source of competitive advantage. Did that just about cover it, Natalia? Anything else you'd like to add there?

Natalia Hunik

Thank you. No, that it covers some of what I do, yes. Thanks, Yashi.

Question and Answer

Yashi Yadav

No, of course. So really excited today, guys. I think we're going to be talking on a lot of different topics, picking Natalia's brain around her experience with credit transformation, automation, the technological landscape in terms of the clients that she's dealing with. And so I think to kick things off today, Natalia, do you mind just giving us maybe a brief backdrop on what some of the largest macro events that are directly impacting your clients and potentially probably some of ours as well?

Natalia Hunik

Yes. Yes, absolutely, Yashi. Our clients -- majority of our clients currently are in energy and commodity space. And so obviously, last year has been very challenging for some and great for others depending on which side of the equation you're at in that sector. But the event, the macro event that we all keep watching around the world and obviously, energy and commodity sector, in particular, is the ongoing conflict in Russia -- between Russia and Ukraine.

The potential -- there's still potential, obviously, for further military escalation, which will bring more disruption to the energy chains in Europe, in particular, and will lead to significant volatility in energy prices and supply of energy, which ultimately impacts our client's business, and it also drives demand for our platform, and we've seen that over the past year as a lot of firms are rethinking their approach to risk management. There is -- there are some frameworks that they've been utilizing for decades and those frameworks do not work anymore in this very challenging environment. There is a need to be able to get your risk metrics and do your risk analysis a lot faster and more agile manner.

And it's not a trivial task for a large organization like a Fortune 500 companies because there is so much data being siloed within different systems, between ERP systems, ETRMs, some of the reporting databases. And to get that whole picture, a holistic view of your overall enterprise risk, you really need to be able to marry this data up and that's what our software does. And we've seen the spike in demand over the past year in terms of demand for risk management solutions, but also another area we are playing into from the enterprise risk perspective is compliance risk and specifically in the area of market surveillance, and obviously, the demand there is also driven by market volatility.

We've seen what happened to markets, in particular in Europe, especially during the summer, caused a lot of insolvencies in the sector. And obviously, there's a lot of regulatory scrutiny to follow and organizations are seeking appropriate tools, the fit and proper tools to be able to monitor their trading activity and identify any abusive patterns, and that's what our product does as well. The product is called CubeWatchTS, transaction surveillance.

Yashi Yadav

Interesting. So I think a couple of things that I wanted to dive into a little bit more there. So you did talk about Europe. Have you seen any impact of sort of the Russia/Ukraine conflict in Asian markets with any of your clients in that space or not nearly as much.

Natalia Hunik

It's a very good question. We do have, obviously, some Asian clients as well, mainly their European operations. And just like about everybody else, they are also looking for better tools. The Asian markets, obviously, probably impacted a little bit more by other macroeconomic factor, which was Chinese reopening, closing and then reopening. So while perhaps just like for us here in the States and the European energy crisis, maybe less of an issue. We have other macro factors that have played into their risk picture big time and so that also drives demand from the Asia -- from the Asia Pacific region.

Yashi Yadav

Okay. Got it. And then also in terms of you talking a little bit about the regulatory scrutiny, do you mind diving in a little bit more on that topic in terms of what you've witnessed and what -- I guess, how they impact different markets differently?

Natalia Hunik

Yes, absolutely. Obviously, we've -- as an industry, I'm not talking just energy commodities, but generally financial industry. We faced a lot of regulatory scrutiny post 2008 crisis. There are a lot of regulatory frameworks that evolved around the globe, purpose of them was to create a solid governance and solid regulatory framework where organizations that were participating in finance.

However, in the type of situation that we are facing right now, some of these market events are known in the space as black swan events, right? We turned that from clients and from a financial side, from the energy side, some of the tools that they utilized and to assess and measure their risk, for example, one, value at risk, it may not be very helpful when you're looking at the black swan event, Russian invasion of Ukraine, right?

Do your -- the current tools that -- are the current tools that you're utilizing, are they helpful in assessing your risk? And from the compliance perspective, in particular, the areas that we're playing in with our CubeWatch market compliance product suite is surveillance.

And we witnessed the unprecedented volatility in the energy markets and we are seeing some of the -- especially in the energy commodities over the past several years, right, that you have pandemic, the oil prices in burden, then you have the price of oil going above $100, and all this type of volatility created breeding grounds from this conduct, right? And our software attempts to identify the abuse of patterns -- abuse of behavior in the market and helps firm identify those behaviors and detect them and we investigate them.

And the regulators are obviously worried about this type of misconduct happening because the kind of conditions, the ideal conditions, ideal backdrop with volatility that creates it. And we see warnings coming from the regulators saying that you really need to deploy system -- proper systems in place to be able to protect the abuse of behaviors.

Yashi Yadav

Yes. No, I think a lot of what you're saying resonates with us as well. We are also putting a lot of investment towards data and surveillance systems and looking more to alternative data sets. Because now there's so much noise in the market, I think the goal is how can we streamline that noise into a meaningful data point that we can then fly to our decision-making, our client's decision-making process.

So I guess, going on that topic, how do you see the credit climate differing today? We talked about since '08 things are starting to look -- it's almost a little bit reminiscent of '08, right? But there are still key differentiators. How would you identify those differentiators, I guess, is my question? What are the concerns of the market today compared to what they might have been at this point, what, 15 years ago?

Natalia Hunik

Yes. Right when I started my career in the financial markets, yes, it's interesting times. It is quite different, I think. Obviously, in 2008, it was all about the subprime mortgage crisis. I think if you look at the statistics now, obviously, we don't anticipate the bubble to burst from that side of the market. However, there's been other tenants that have been happening since 2008 financial crisis.

And we talked earlier about the solid regulatory frameworks that were put together by regulators post the crisis. However, if you think back over the past 10 years, have we seen -- we haven't really seen much of innovation coming from the banking sector because banking sector has been pent-up many regulatory rules and scrutiny, but we did witness this emergence of challenger banks, fintechs, alternative lenders. I guess, collectively, you could call nonbank financial institutions.

And I think some of the statistics that we found when doing our research in alternative lenders is that about 60% of loans in the United States are issued by nonbank lenders. And the way that those lenders or regulators that completely depend on profiles of their loans generally tend to be riskier. And the way the regulators look at them are different, some of them are able to, in certain jurisdictions, fly under the radar because there's uncertainty about you regulate them as a technology company or financial services company, right?

There's kind of a new breed, and there is no clear answer as to how they're supposed to be regulated, we're still finding that out. But obviously, that creates another type of challenge from the regulatory and credit risk perspective, right? What are the portfolios of those firms collectively looking, right? Are they concentrated? What type of risk we could be facing stemming from the alternative lenders?

And I think that's the major difference from 2008. Like we don't see the same issues we've seen in the banking sector -- as we've seen in the banking sector back in 2008, but we do see completely different breed emerging that we don't really know much about, and there is much less oversight and much less understanding also what potential risks could be.

Yashi Yadav

Yes. No, that makes a lot of sense. You almost had to come up with like, I guess, a starting point for how firms can start understanding this risk, lifting the hood and really getting into the weeds of what are a couple of steps that they should be taking. What would be some things that you would recommend or think about there, right? Who should we be asking these questions to?

Natalia Hunik

Yes. No, absolutely. And I think, obviously, every firm kind of has their own different risk profile and they playing into different sectors, right? And again, going back to CubeLogic's core sector, energy and commodities by nature, there is highly concentrated credit risk for those organizations. And so it's all about risk mitigation and what are the risk mitigants that you apply from, do you track them, those are the things that you should be looking at, and that's what CubeLogic does, right?

Again, we've integrated with multiple data sources, and you really need to have a holistic picture of your risk in order to understand where the potential issues might lie. But the challenge that a lot of organizations are facing is that data is spread out in different systems. And so you still resort to the good old spreadsheet out together, and it takes time, sometimes a week or 2 to pull combined report together and time is of the essence when you're witnessing a once-in-a-century type of life-changing event in the markets, right?

You need to be able to pull this data a lot faster than a couple of weeks. And so what you should be doing is looking at the risk management system that will allow you to bring all that data together as opposed to having bits and pieces in different systems. It's not an easy exercise for a larger company. It does take investment of time and resources, but the payoff is great at the end. It's building your own house, and I went through that. It was very painful, but great reward at the end.

Yashi Yadav

Now I'm sure like when we talk about the time and energy, like how hard is it to implement a risk system like this? And what do time lines look like for this type of a project?

Natalia Hunik

Yes, it could be a complex process, right, which requires a lot of plan and execution. The time lines, again, it depends on scope and complexity of the system that you're trying to implement the number of sources that you're pulling your data from, how clean is your data. Many organizations have made steps over the past 5, 6 years to get their data in the data lakes so that it's easier for external third-party vendors to pull the data from the data lake and have a normalized format.

I think it's something that you should think about before you start to scale your operations. Think about it this way, it's obviously a bit more challenging when you're already running hundreds of thousand people company and a lot of regional offices and a lot of different systems become a much more challenging exercise. And if you are thinking building, let's say, trading organization, those are the things that you should think about, it's a foundation, right? Like you should think about that ahead of time.

Start thinking about it early. And if you do your typical time line of a system like CubeLogic, when we're talking about the client that doesn't run a super complex operation, our shortest implementation cycle could be 6 weeks. And it could go anywhere from 6 weeks to 1.5 years, right, depending on complexity. So it varies. It varies again dependent on the company and depending on the system and data landscape that we have.

Yashi Yadav

No. I mean, that -- definitely that makes a lot of sense. It's just it's, I think, hearing that variation in terms of time frame is definitely -- it could be a step back and seem a little shocking at first. But I think even for a type of implementation that could take 1.5 years, I think the broader payoff is worth it just because it seems like right now for both your clients and ours, there is this pseudo-confidence they're after where everything feels fine.

It's been sunshine and rainbows, where the last 15 years, we might have had a couple of hiccups here and there, but they're just -- we haven't seen a whole lot of risk or a whole lot of defaults and the markets haven't been super volatile, but we see the tide turning and we see it changing now. When we think of the risk management teams at these type of organizations, what are some questions that you would pose to a risk manager? I know I definitely have some that I would go ahead and ask, but what should they be asking themselves before someone like us, an external third party, comes in and kind of sits down and has a conversation with them?

Natalia Hunik

Those are some really good questions. I think obviously, looking at -- we hear that a lot, right, the status quo, right? It isn't [indiscernible] I'm sure we'll tire of hearing that, but we've certainly heard that many times. However, if you look at your day and spend your day on really routine tasks, your day is filled with manual work, you're filling out spreadsheets, pulling some spreadsheets together. You should really question yourselves as are you thinking strategically? Are you adding -- like what value are you adding? Can you be more helpful for organization? Can you help the organization to identify risks that they haven't thought about?

And if you don't have time in your day to step back from the routine and look at your portfolio in a more holistic way, you probably should start thinking about whether or not what you're doing is the right way of doing it. Yes, it's not broken and you've been doing that for many years. However, faced with the change in circumstances, like, for example, obviously, everyone is concerned and especially in the energy space, everyone is concerned about credit risk. And that I think everyone is talking about 50% of the risk officers think this is the #1 risk that organizations are facing.

When you look at that from this angle and you understand that there might be a major event in credit coming your way in the next few years, how can you use the data that you have and perhaps review your counterparties on a more frequent basis, look at -- scrutinize your portfolio from multiple angles that you haven't thought about before.

Are you able to do that using the tools you have at your disposal? Or do you need something that will be able to save you 50% of the time that you currently deploy on manual tasks and free you up to really think strategically about credit risk and strategically look at your portfolio and really harness the power of that data and power yourself and your organization by making really educated decisions based on data.

It's very challenging to step back when you have those ways set back 10 years ago and it's working. But I think you and I seen the pattern over the last year that is concerned about credit risk, you need to do things a lot faster. You need to review the counterparties in a lot more frequent basis. And you can't -- if either you are scaling up your headcount or you start looking at the systems.

Yashi Yadav

Even with the headcount piece, right, we look in the market and we keep hearing repeatedly how difficult it is to actually get headcount nowadays for like even for roles like being a credit risk analyst. And then I think outside of that, the challenge that we run into a lot is this idea, exactly the question you asked, how do we challenge the status quo because change management is one of our biggest hurdle to jump over.

And I think that -- look, I think firms do start realizing is that digitizing is almost -- it's no longer a nice to have, it's a need to have because you might not be doing it, but your peer group is. How do you stay ahead of the competition and also ahead of the risk, which is what we've been chatting about. So I guess in lieu of that, are there particular segments in the market that you think would -- will be hit harder given the volatility in the current macro climate and kind of what we're seeing with interest rates and all the energy crisis? Like all this, is there areas that are less resilient to these type of shocks?

Natalia Hunik

Yes, absolutely. It seems like the recent market proves that no one is resilient, and we see all the tackling, that's in the news every single day, but the area that both CubeLogic and S&P are playing in like energy spaces, obviously, credit risk is a significant issue. For the industry, market volatility, obviously, is a significant driver for everything that happens in the industry.

I think we talked earlier what I called collectively nonbank financial institutions. I think they're probably particularly vulnerable because we know that the loan portfolio there is probably a lot riskier than in traditional banking institutions. I think that's -- and I'm a little bit biased because, obviously, CubeLogic is looking to enter that sector that's on our road map and we prepared the go-to-market strategy to go after alternative credit lenders.

And so I've obviously been looking at that sector for, I don't know, 6, 8 months, and I understand that the risk management frameworks and in general, risk management is much less of an established function within those organizations. And so you would think that because it's less established if there is a change in environment and trade is one of them, it's going to impact them. I mean it's going to have a significant impact on the way they do business and on their risk profiles.

Yashi Yadav

Yes. It's actually funny bringing that up, Natalia, because we -- not for nonbank financial institutions, but we've been having a lot of conversations and have realized that managers actually run into very -- almost fall into a very similar mentality as these nonfinancial corporates, energy companies, where they just get so used to their industry and they get comfortable with the sectors that they're covering, whereas opposed to following the data, they follow the relationship or the history that they may have with a particular need that they're assessing for their portfolio. And they'll go ahead and make an investment decision based off of the look and feel of a credit versus what the actual risk rating looks like, which is, of course yikes.

Natalia Hunik

Exactly, exactly. And we have validated that over the past year. Certainly at CubeLogic, we've spoken to a few organizations that yet. So they just do it exactly the way that you described based on the gut feeling, the kind of the back of the napkin approach.

Yashi Yadav

No, exactly. And so I think it's almost like one of those things where that might have been able to fly for the last x amount of time. But rest assured, either -- if they're not giving us a phone call, they're obviously sitting down. And I think a lot of senior leadership at those types of firms sits down with their more middle to back-office functions to really understand, okay, what gaps exist in your day to day?

What data points are you looking at? Do we need to revisit the risk metrics and the risk factors that we utilize to actually make our decisions complete or analysis whatever the particular workflow might be? And so I think it's just interesting when we have this conversation to realize that the disconnect does not occur only in nonfinancial institutions. Also, it still occurs in financial institutions, which is a little surprising, I think, for 5 years at least.

Natalia Hunik

Surprising in this day, but I think it's interesting that you mentioned about senior leadership. And obviously, these credit officers have been with the process you've described like they've been doing it for the last, I don't know, 10, 15 years. They're comfortable with their process and everything and they haven't had any defaults, but then it seems like everything is great, but the senior management, investors when they look at the bigger picture and they see what happens in the market, they are worried about whether or not we actually have a solid framework in place.

And if we don't, maybe that's the time to start putting it together. And yes, absolutely, those are the conversations that we have, all kinds of firms, I'm just pointing out a few sectors where we've seen those gaps itself in a more obvious manner over the past year, and those are organizations, a lot of the initiative comes from the top where executive-driven initiative because executives are getting increasingly worried about what impact the business will experience from everything that goes on a macro level.

Because perhaps they have a portfolio -- if it's an investor, they have a portfolio of companies, and some of them have been impacted of what's happening in the tech sector right now. So they are worrying about the ripple effect. Could it impact other companies in the portfolio?

Yashi Yadav

Yes, of course, and that's where things like having good systems for portfolio analytics are beneficial just because there's only so much time in the day, and oftentimes, trends that we've seen is you end up spending most of your day doing work that's not actually your job, but simply you're doing manual. Think of it as like data entry, right, which is important, but if there's a way to automate that piece so that you actually have time to get into the weeds and complete more of the deep-dive analysis and uncover sort of the hotspots before you get burned, I think that's the goal, what we would think is...

Natalia Hunik

Yes. I think it's our -- it's a nice segue to that, that workload that we built together, CubeLogic and S&P, we're solving a real issue that actually is an issue for many organizations where they're looking to automate their credit onboarding. And at the moment, it's not only manual, but it's also logging into different systems, trying to pull -- mention about your client supplier, counterparty and you end up and then 3 to 5 business days onboarding your client, a supplier or counterparty because information on the firm is all over the place.

And so if it's a private firm, it's not rated. It becomes even more of a daunting task. And that workflow that we've built really solves that issue. And think about reducing the task that typically takes you 3 to 5 business days to just under 5 minutes, it's life changing.

Yashi Yadav

I think on top of that, it's like almost bringing us back full circle to the beginning of the conversation. It's once I've done those initial steps, surveillance is a huge component of ensuring that once the decision has been made or it will then fall through and stay on top of that decision, whether it's through data that you're obtaining directly from your vendor, your supplier, et cetera, or is it, again, alternative data sets.

As in us for instance, we're still in the process, but trying to see if there's any way for us to translate social media, tweet, Facebook pages, website, like how can we take these sort of intangible pieces of things that we find on the Internet in relation to a company and convert that into a tangible risk metric that actually, again, that has a meaningful impact on the broader portfolio, if you can do that for every single name, because public companies we know there's no issue in terms of obtaining data, but it's that larger private universe that I think a lot of clients struggle with staying on top of.

Natalia Hunik

Yes, we definitely see that as well. And obviously, there's a lot of worry in the companies that have this kind of portfolio that is skewed more towards private companies given the change and the shift in environment with interest rates and everything and that's exactly having the time in a day to look at your portfolio and I think about the KRIs that you should be measuring because every company is different and the metric that someone in the energy is monitoring could be completely irrelevant to someone who is in an equipment finance type business.

But thinking back perhaps looking at your data, looking at the type of companies that you are servicing and your portfolio and actually coming up with those metrics that is also is quite an exercise. It takes a lot of strategic thinking, a lot of going back in time, reevaluating your historical performance and then trying to come up with those forward-looking metrics that help you. That's, again, something that risk departments absolutely can do, but they do need to have time in a day to be able to think about those KRIs. And think about how do they measure them, know they are and how to visually display it out to, let's say, the C-suite, for example.

Yashi Yadav

I completely 100% am on board with you. I think all of those things make sense on an extremely valid point because it's not just about what's happened historically from a performance perspective, it's what's going to come and how am I my best suited to face whatever turbulent times are here on the horizon.

Those are all great points, Natalia. And with that, thank you, Natalia, for joining us on Masters of Risk, and chatting with me today for our very first episode of this podcast. Always an insightful conversation with you, and I definitely had a lot of good takeaways. I hope our audience did as well.

Listen, if there's any questions that anyone listening on here has for myself or for Natalia, please feel free to reach out. I'm really looking forward to hosting again next month, hope to meet everybody here. And Natalia, hope to have you on again in the future. This was great. Thank you so much.

Natalia Hunik

Thanks, Yashi. It's been a pleasure, and I'm looking forward to seeing it live and hope you invite me again.

Yashi Yadav

Of course. Of course. All right. Take care.

Natalia Hunik

Thanks. You, too.