Energy Trading Companies Challenged by Compliance Costs and Shifting Enforcement Priorities

Facing increased scrutiny from regulators, energy trading companies are acknowledge the many risks entailed in failing to establish effective compliance programs, but are currently challenged by compliance costs and shifting enforcement priorities, according to a survey released by compliance software provider NICE Actimize, a NICE Systems Company, and international law firm Fulbright & Jaworski L.L.P.

The energy trading representatives that participated in the study did not believe that audit and enforcement actions taken against energy trading firms will decrease, says the report based on the survey.

However in the face of increased scrutiny from regulators, over one-quarter of the respondents believe their organizations are not devoting sufficient staff and resources to compliance priorities, notes survey report.

“Similar to the risk management arena a decade ago, the energy industry is becoming convinced that the failure to implement effective controls could lead to significant risks, regulatory enforcement, potential penalties and reputational harm,” said Jim Heinzman, managing director of trading markets at NICE Actimize. 

Heinzman said that the research indicates that the industry recognizes the risk and harm associated with not investing in compliance, yet most organizations are not currently using systematic compliance programs but rather manual or first generation systems for compliance analysis.

The research finds that many in the energy trading industry recognize that regulators are increasing their enforcement activity, resources and infrastructure. A majority of the respondents, around 80 percent, believe regulatory audit and enforcement actions against energy trading firms will increase.

Additionally, nearly 40 percent of the respondents believe regulators already have the capability to examine energy trading activity. The survey report notes that some believe regulators will increase surveillance capabilities in the coming years.

The survey report also finds that there is an apparent gap between how respondents perceive their own compliance capabilities versus those of the industry as a whole. The data suggests disconnect between the industry’s understanding of, and execution against, current and proposed regulations which require daily, and in some instances, intraday, monitoring. 

Erik J.A. Swenson, a partner at Fulbright & Jaworski, said that the regulatory requirements and oversight expectations have increased, but the industry is challenged with how to respond to the evolving expectations.

“We expect firms to continue to adapt to this new regime by implementing new programs in the next 12 to 24 months as the regulatory front continues to evolve,” Swenson said.

Earlier this year in July, Caja Madrid deployed NICE Actimize Market Abuse solution to comply with strict requirements imposed by the Spanish regulator Comision Nacional del Mercado (News - Alert) de Valores.