Originally published in Markets Media
By Joseph Schifano, Global Head of Regulatory Affairs, Eventus
Since the introduction of the EU’s REMIT regulation, many headline prosecutions have exposed weaknesses in the surveillance of market abuse in wholesale commodity and energy market trading.
Prompted by severe punitive actions by global regulators against a number of the market’s participants, governing bodies responded by issuing detailed guidance on various aspects of market manipulation. The biggest obstacle for market participants is staying abreast of the influx of changes.
For this particularly challenging asset class, we look at the cases and guidance, and offer our top five do’s and don’ts for successful surveillance platform implementation.
1. Do ensure global oversight, but with a regional focus
Regulatory action has been taken across the globe against a variety of energy suppliers and traders, large and small. In particular, though, significant fines have been levied for market manipulation on a variety of regional energy markets, futures exchanges and benchmarks
2. Do look across the whole of your trading operation
The nature of commodity and energy markets makes surveillance for cross-product and cross-market activity essential. Correlating events to provide actionable alerts from such disparate sources across physical and financial assets requires the best of the latest technologies.
3. Do consider on which markets you trade, and ensure you have full coverage
Data, in many different forms, is the lifeblood of transaction monitoring. Consuming and understanding non-standard and proprietary datasets without the requirement for intensive normalisation is key to reducing costs and time to implementation.
4. Don’t ignore your monitoring parameters just because you haven’t detected any cases
Most recently, regulators have fined traders whose monitoring capabilities are substandard, regardless of whether fraudulent activity has taken place. Cases include participants who were penalised for poor configuration of alerts. The latest technology platforms can provide the right level of oversight, whilst minimising the risk of over- or under-calibration through automation techniques, which include machine learning.
5. Do rely on guidance about surveilling for market abuse in the energy markets, specifically
Regulatory bodies like the EU’s ACER, the Agency for the Cooperation of Energy Regulators, have been providing step-by-step guidance on market abuse in their sector for some time. Ensuring your surveillance capabilities align with their reviews is essential.
Building a stronger foundation for energy surveillance
Surveilling the energy markets is complex. A deep understanding of the data, market models and products is fundamental to building the monitoring systems of the future. Global oversight is key, meaning from the ground up, platforms must be able to consume and process vast amounts of data from multiple disparate sources. The plethora of different interfaces and product types makes strong but flexible data capabilities a key prerequisite for building energy market monitoring algorithms.
Using this cross-market and cross-asset visibility, surveillance logic may then be built, interpreting the nuances of regional, OTC and on-exchange transactions alike, to offer a comprehensive view of potential market abuse.
Flexibility within the platform to adapt to the regulatory guidance in this market is essential, as well. Tools enhanced by advanced automation and machine learning techniques can help optimise the delivery of actionable alerts to the user, which is especially relevant against a backdrop of frequently issued guidance.
The regulators’ message is clear – market abuse in commodities and energy markets must be taken seriously.
The new breed of surveillance systems provides energy trading firms with a complete cross-business view, uniting global coverage with regional insight, enabling them to rise to the challenge.
Joseph Schifano is Global Head of Regulatory Affairs at Eventus. Mr. Schifano is an attorney with more than 20 years of experience in market surveillance matters, most recently as Deputy General Counsel and Global Chief Compliance Officer (CCO) of Tower Research Capital in New York, along with senior regulatory roles at two global banks and the New York Stock Exchange (NYSE).