25 million euros – Can you afford NOT to have Trader Surveillance?

07 July 2016

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A few years ago surveillance in commodity markets was just a conceptual idea, implemented by only the biggest or most cautious players in the market. As a result of the LIBOR and FX scandals, the eye of the regulator was focused heavily on the trading activity of banks and investment firms in equities markets, enabling commodity traders to evade the onerous regulatory requirements.

Fast forward to 2016 and we are in a new world. Whilst the wholesale gas and power markets are already subject to market abuse prohibitions under REMIT, the Regulators have turned their gaze to commodity markets more widely, expressing their concern for the poor awareness of market abuse and the absence of effective surveillance. The result is new regulation and increased scrutiny of commodity trading markets. 

Let’s look at the 3 critical factors pushing surveillance up the executive agenda.
• Financial fines
• Smarter regulators
• Market Abuse Regulation (MAR) – July 2016

Financial fines
Last November, an energy utility was fined 25 million euros for market manipulation – the first major fine for an energy trading company in Europe. 25 million euros is a lot of money. The ice has finally been broken and regulators are not afraid to go after violators of market abuse. People ask what the return on investment would be for investing in a surveillance capability but it’s clear that fines alone justify the investment. Can you afford NOT to have surveillance?

Smarter regulators
Regulators are looking to understand how commodity traders operate and are taking more of an interest in their impact on financial markets. 

  • FCA Thematic Review. The FCA thematic review was the first warning shot to commodity traders, revealing the gaps in current industry practice. It outlined the FCA’s expectation that commodities traders implement market abuse monitoring and surveillance, ready to meet the requirements of upcoming regulations.
  • Trader Surveillance software. ACER has implemented trader surveillance software and is currently analysing more than 40 potential cases of market abuse. They are learning how the industry operates and using live data from REMIT Phase 1 reporting to identify potential red flags for investigation. ACER is also sharing market intelligence and best practice with local regulators, such as the FCA, so you should consider implementing the same types of analysis to ensure you’re playing the same game if they come knocking on your door.

Market Abuse Regulation
MAR went live on 3 July 2016, extending the scope of the existing Market Abuse Directive (MAD) to include commodity derivatives. While market/trader surveillance may previously have been viewed as a ‘nice to have’, this new regulation lays down formal requirements for market abuse monitoring which must be implemented by all commodity traders. Our previous blog (The Market Abuse Regulation is imminent: 7 things you need to know) discusses the differences between MAR and REMIT and will help you better understand the underlying requirements.

What does this mean for our company?
Surveillance is no longer a ‘nice to have’ capability, but a ‘must have’ capability. Many of my clients are either beginning to or already have created surveillance capability inside their company. If you have not already implemented surveillance capabilities across both non-structured data (voice, email, instant messaging) and structured data (trade data, order data, system data), now is the time to act. Your first step is to understand what your business needs and to define how this function will operate within your current business model. Our next blog will explore the steps in designing a Surveillance programme in your company. Sign up to our Commodities Management blog here to make sure you receive the latest updates and articles.

Eren Erman | Commodity Management
 +44 (0) 20 7804 3455

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