Commodities firms ramp up monitoring to protect employees, reputations and profits

Radar scopes the considerable change in monitoring that is afoot among multinationals in this sector as they expand their focus on internal conduct and behavior to capture fraud, financial crime, misconduct and insider threat.

Commodities firms are undergoing a transformation in their approach to monitoring. The Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) is an EU regulation that was designed to increase the transparency and stability of the European energy markets, while combating insider trading and market manipulation. It has been in place since 2011; to compliance veterans in the oil and gas markets, it can be viewed as the predecessor (a mini- MAR) to the Market Abuse Regulation that the rest of the financial services market has been wrestling with since 2016.

Ofgem, the UK energy regulator, recently fined Engie Global Markets (EGM) £2.1m after it found that a trader working for EGM had manipulated UK wholesale gas prices to increase trading profits. EGM agreed to settle the case early and has proactively taken measures to prevent such activity from happening again.

“Ofgem’s enforcement action sends a strong signal to all energy market participants that we have the powers to tackle market manipulation wherever we find it, and are ready to use them.” Dermot Nolan, CEO of Ofgem.

A market counterparty had alerted the regulator to suspicious activity in the UK wholesale gas market in November of 2016. Ofgem’s investigation showed that EGM engaged in “spoofing” during a three-month period between June and August 2016. A number of bids and offers to trade, on a one month UK wholesale gas forward, breached Article 5 of REMIT. Ofgem said that while EGM did have some supervisory measures in place, they were inadequate at the time to detect and prevent breaches of REMIT.

Radar attended an interesting London conference in May this year for risk managers at commodities firms (ComRisk); we took some time to discuss the biggest issues that are prevalent in a fast-changing sector. One operational risk consultant, who had been an energy trader at a large commodities firm for many years, painted a slightly dark view of the current state of compliance and culture in some energy markets trading houses, saying “fraud and bribery are rife in the soft metals trading space. The march towards governance and compliance will be long as the traders and the revenue-makers rule the roost. They won’t advocate strict compliance as it will hurt themselves. These firms very rarely get any interaction or scrutiny from the regulators; the biggest obligation is to do reporting under MiFID 2. It’s still the wild west out there.”

“There are a number of big financial scandals that have occurred that never see the light of day because senior management are too embarrassed to reveal them. It’s happening on their watch.”

Asked for some more detail, he stated that “corrupt invoicing, internal kickbacks and insiders with shell companies to route deals through and enable skimming are really run-ofthe- mill.” Radar asked if there is any drive to clean this up, “some firms are employing better risk people and they can smell this stuff easily. As soon as you start asking tough questions, these bad apples move on quickly to a new firm where they won’t get the same attention.”

With this backdrop, there are now positive signs that the attitude towards a more searching understanding of how employees are conducting themselves is starting to take hold within the larger commodities firms. Radar spoke to a senior compliance executive at a multinational commodities firm that majors on oil trading and he said, “there is a new imperative, which is to extend our monitoring beyond pure markets compliance. The universe of coverage is growing to take in all the risks that might be identifiable in the corporation’s data set. Obviously, market abuse and the way we treat clients and counterparties is key but now we are interested equally in financial crime, misconduct such as sexual harassment/racism, and even the mental health of our employees. The focus is changing.”

Consulting firms that are active in this sector are noticing this evolution and it is attached to an increasing awareness of risk; this is based on more introspection, more aggressive regulation and better availability of the underlying data. A consultant from one of the Big Four, who wished to remain anonymous, commented, “they are shaking things up in the boardroom. Risk assessments are much more frequent and there is more linkage between incurred liability cost and those risks. And the gamut of potential risk is growing.”

The reality of being a public company has accentuated the perils of “dents” to the reputations of these companies. While financial crime risk is far from new, with some cases related to bribery and money laundering already well-documented, there are newer abuses that are rising in importance for the monitoring teams. “Conduct is very much the latest area for attention,” the same consultant states, “the #metoo exposure and more recent examples of some embedded cases of the wrong culture, such as in the Lloyds Insurance market, have been noted at the highest levels. There is an awareness that the commodities markets are not immune and this needs to be dealt with to protect shareholders, reputations and most importantly, the employees.”

This new, inward focus is a welcome development for big corporations that have been left largely to their own devices by the regulators. In some ways, the commodities markets remain specialist and decoupled from the traditional markets that dominate financial services, such as equities and fixed income. So why is there this shift to an almost self-regulatory approach? An operational risk director at a large commodities trader explains:

“I think everyone is aware that our time will come when the regulators will be knocking on our door. The banks got the brunt of regulator ire after the financial crisis. They will get to the more opaque markets in time.”

“We also are starting to extend our own scope to analyse our employees and the way they conduct themselves. This is for their own good as well as that of the corporation.”

And new technology is assisting the process significantly. One large oil and gas trading house is increasing its coverage of data types (to include voice), communications channels and the number of employees that are being monitored. One of their ops risk managers states, “we used to focus solely on markets compliance and this represents just 0.005% of our employee base. But we know there is other unquantified risk lurking within – there’s so much anecdotal evidence of what we might need to monitor that can help reduce our annual liabilities. The tech is now more affordable, so why wouldn’t we start to monitor this?”

He goes on, “we’ve done so much to recalibrate our image physically and externally as an organisation that is caring, thoughtful and sustainable. It feels like it is time to actually walk the talk in terms of our employees and the way we treat each other. An inclusive, diverse workplace with zero tolerance for sexism, racism and bullying, plus awareness of colleagues under unusual stress, close to burnout or in mental decline has got to be the goal of all responsible corporations in the next five years. The data and systems are available to achieve this. We need to invest in the sort of governance framework and compliance systems that ensure we can retain our most talented employees and attract those we need to recruit.”