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The trader: Staying compliant in a virtual world

Energy commodity trading, both physical What’s less certain in this operating and financial, helps provide a reliable Are the compliance tools environment is whether regulatory supply of daily required to and practices enough to compliance risks have increased and support the continued operation of the whether transacting macroeconomy. Traders and marketers provide effective trading that are optimizing or speculating with who are charged with acting on their oversight and present a their trading positions have engaged company’s commodity trading mandates, in questionable behavior. face daily challenges in the execution of strong defense against Regardless of the intent, the question this mission. One such challenge includes increased regulatory emerges as to whether or not the maintaining margins and/or cash flows practices are defensible and whether in highly volatile environments compliance risks? the recordkeeping and reporting can exacerbated by ongoing depressed help support a company’s behavior in demand and uncertain supply dynamics. By all indications, the shift to a largely the marketplace. Additionally, are the This objective should also be balanced virtual trading mode of operation has tools and oversight practices of a trading against the necessity of having to make taken place using a wide variety of compliance function able to present a significant adjustments to enabling technologies and platforms. strong defense, and are they sufficient provide reliable supply. to enable on-going monitoring of remote trading practices? As parameters surrounding trading have changed, with a greater number of deals now being transacted in a remote environment, additional actions are required to assess if compliance obligations continue to be met. While companies have taken steps to build a solid foundation of capabilities, it has demonstrated to be more difficult given the remote environment, with indications of additional attention needed in three specific areas:

1. Reporting and recordkeeping

2. Monitoring and surveillance

3. Trading policies, procedures and guidelines

As trading compliance and risk Oil pipeline, major , and electric As an alternative to the standard CFTC voice functions continue in their enabling companies can request motions for recording requirements, a detailed written and oversight roles, we offer some extension of time to file and even request record of the communication is permitted perspective below for leadership to take waivers for certain data collection and along with documentation of alternative into consideration as you are adjusting report filing obligations such as natural supervisory methods for traders. The CFTC your operations to this shifting current gas transaction reporting and quarterly is also providing a 30-day extension for filing environment and uncertain future state. and annual collection of financial and Chief Compliance Officer Annual Reports to operational information. Under remote the Commission. conditions, companies have faced 1. Reporting and recordkeeping Challenges with alternate constraints and system connectivity issues recordkeeping methods that have challenged the coordination, Companies that choose to use the CFTC compilation, verification, and timely filing of alternative method of recordkeeping may FERC required reports. Remote electronic need to dedicate already strained resources trading activities test Companies that have filed for extensions to developing additional documentation could face a growing reporting backlog of supervisory methods and providing organizational reporting with some of the more frequent quarterly guidance on these new requirements and recordkeeping reports at the same time as resources to trading personnel to avoid non- are becoming more constrained and compliance. Companies will need to perform methods despite federal overburdened with the increasingly reconciliation of records to verify alternative regulatory requirements complicated logistics of returning to work as methods used align with permitted stay at home orders are lifted. Companies timeframes. Future audit requirements for easing. should pay attention to resource capacity documentation will also need to be adjusted and possibly seek outside assistance to accommodate the alternative methods. Regulated trading entities have mostly to recover from reporting requirement closed their floors to comply with Because these alternative methods are not bottlenecks. social-distancing directives and temporarily part of an already established process in moved to fully remote electronic trading, Likewise, the CFTC has temporarily relaxed continuity plans, these relaxed prioritizing focus on essential operational some requirements for market recording alternatives may be more services. Oversight agencies such as the participants, including floor traders, that challenging with many not wanting to break Federal Energy Regulatory Commission have been displaced from their typical the cadence of familiar recordkeeping and (“FERC”) and the Commodity Futures Trading locations. To accommodate remote trading, reporting procedures. To decrease the Commission (“CFTC”) took temporary steps the CFTC has allowed for alternatives risk of potential non-compliance due to to alleviate regulatory burdens. to recording communications related insufficient or improper recording using to voice trading and other telephonic alternative methods, many traders have Federal requirements easing communications required to meet audit trail been reporting to traditional business sites The FERC has loosened requirements for and recordkeeping requirements. Time- on a rotational basis to maintain a business ongoing reporting and recordkeeping during stamping requirements have also been as usual approach to recordkeeping and the recent crisis. relaxed until September 30, 2020. reporting. In addition, traders have had to increase With potential limitations of remote access As such, the number of reported deals coordination efforts as an increased number to those systems and intermittent access fell significantly in March 2020, according of hand-offs are occurring with a reduced to teleworking traders, timely and accurate to an S&P Global Platts webinar1. Internal number of staff and activities conducted by reporting of transaction data to price Audit teams will also need to conduct staff on a rotational basis. Given the ongoing reporting agencies has been at risk. additional data verification audits to support challenges of adapting trade policies and the movement back to normal business Additionally, with unprecedented procedures to remote environments, long operations in order to decrease non- volatility, companies term off-site activity for specialty traders compliance risk due to gaps in automated have been dedicating efforts to adapting may not be an option. verification processes. systems to accurately capture transactions Data validation challenges given unprecedented price movements. Amid all of the activity and work undertaken Current remote circumstances and These events have introduced new hurdles to support a transition to a virtual processes for data verification and in the transaction verification process environment and a continuity of operations, validation have strained the compliance executed between traders and compliance the global impacts of the crisis have also and risk oversight process via additional and risk teams. Enhanced focus and scrutiny led to a price collapse in the commodities time and steps introduced into the virtual will be required as companies go through markets reflected in the West Texas transaction verification process prior both regulatory audits and internal audits Intermediate (WTI) crude oil front-month to filing price reports with the reporting to verify complete and accurate transaction futures dropping to negative dollars per agencies. The second line of defense data capture and reporting was performed barrel for the first time since trading began from compliance and risk teams verifying during these exceptional times. in 1983. In turn, this has led to heightened transactional information should maintain concerns of potential market manipulation. As organizations were adjusting to the firm and complete segregation of while It is during times like these that the virtual environment and focused efforts maintaining speed and timely oversight importance of maintaining data accuracy, on sustaining operational reliability, under remote conditions. integrity, and completeness is paramount. communications processes between trading Compliance and risk teams, like traders, stakeholders and outside price reporting often rely on automated data verification agencies were still being streamlined. 1S&P Global Platts Looking Ahead: The Energy systems or verbal confirmations of data Transition & Future of Development accuracy with traders. Webinar broadcast online Thursday, April 16, 2020, 10 am – 11 am CDT. Considerations to help reduce non-compliance risk:

Review and Conduct regular Revise business Develop a scenario- revise methods of close of business day continuity plans to based business communication for reconciliation meetings document alternative continuity plan to help reliable and timely between traders and supervisory and ease procedural and communication compliance and risk teams recordkeeping methods recordkeeping uncertainty between the traders/ to help confirm extreme to provide continuity for given different obstacles supervisors and traders/ market conditions are accurate transactional and challenges. Promoting compliance and risk accurately captured during recordkeeping and and maintaining a culture teams. This will help deal entry and errors reporting activities going of compliance can be support timeliness and are dealt with in a timely forward. difficult under a range of accuracy of transaction manner to avoid reporting circumstances and stress data, reporting, and delays and inaccuracies. conditions. recordkeeping under revised regulations and work environments.

Keep in mind as recovery begins:

As cyclical reporting and auditing periods restart, special attention should be devoted to periods of remote activities to confirm adequacy of documentation for alternate processes and to confirm accurate transaction execution and compliance with recordkeeping and price reporting requirements were maintained. Additionally, the plethora of communication This challenges effective monitoring in the 2.Monitoring and surveillance options has impacted the uniform new remote environment. With so much monitoring of activity across organizations, focus dedicated to operational issues, including how to effectively communicate, real-time deal validation has suffered with Methodologies for monitor and continue surveillance outside potentially significant delays now present of traditionally recorded communication in deal validation. This can be exacerbated trade monitoring methods. by a potential increase in deal entry errors. A sense of more lax oversight in a work should be adjusted to Companies should evaluate the integrity from home culture and new technological of information captured through newly accommodate continued challenges, lapses in security protocols and adopted means of communication and processes, and different user access to remote operations assess the risk alternate methods could data and review processes could potentially introduce into surveillance matters. and remain compliant contribute to inadequate monitoring at Companies should assess whether internal times. with surveillance monitoring processes have been sufficiently requirements. adapted for alternative communication Companies should review and revise processes. If companies adopt temporary procedures for internal monitoring to non-recorded means of voice trading, be more adaptable to flexible work While an onsite presence continues to be such as detailed written records of environments. While most will return to limited for regulators like the CFTC and communications using alternate methods, normal business sites in the near future in FERC, surveillance efforts are continuing they should also adapt internal monitoring a staggered way, continued remote activity with minimal interruptions to uphold proper procedures to safeguard against incomplete will need to have ongoing support and market activities. While some regulatory information. Taking additional precautions monitoring. This could potentially to recordkeeping requirements have been as part of the CFTC’s temporary no-action concerns around safe harbor and incident adjusted to accommodate remote on voice recording requirements will help reporting from employees. Some companies operations, most surveillance activities protect the trader and the company, do not allow back office personnel to have remain in-tact especially within exchanges. on the off-chance written records of remote access to systems required to fulfill As companies have shifted communication communication do not satisfy reporting these responsibilities. methods and some trade capture practices requirements. to alternate means, methodologies for Companies should conduct an assessment trade monitoring should also be adjusted to Data validation challenges of unreported incidents due to restricted comply with surveillance requirements. Risk control teams, charged with compliance access rights and create additional means oversight for data integrity, accuracy and of reporting while maintaining appropriate Challenges with alternate reporting, rely on effective communication privacy protocols. Audits of internal communication methods in order to monitor internal alerts and processes and controls may be useful While having to adjust internal controls, especially in a remote setting. Both to help companies identify gaps in the communications processes, companies risk control teams and traders have been effectiveness of their monitoring procedures have changed how business is conducted forced to change how they interact and and systems and enable them to develop a with external parties to support surveillance communicate. more robust compliance program. requirements. With traders moving away from traditional transaction execution Whereas most prior communications venues, alternative methodologies for occurred in person, virtual environments trading and communication have arisen. require alternative communication While the wide variety of communication approaches and can introduce response platforms offer companies many options for time delays, increased coordination communicating, not all address security with challenges, and more scheduled interactions the same level of diligence required by many in order to review and resolve transaction market participants. discrepancies. Considerations to help reduce non-compliance risk:

As companies revise Establish additional controls for Maintain timely business continuity plans, policy exemptions when certain communications with all consider establishing and surveillance requirements are impacted stakeholders for when testing a variety of remote modified. Traders need specific temporary policy and regulatory communication methods to procedural guidelines and exceptions revert to business as determine consistency with vetted alternate compliance usual operations. approved security requirements documentation requirements and access protocols. Effective to be in place when exemptions and timely communication are activated to provide for is imperative to monitoring uninterrupted monitoring and and surveillance activities surveillance. including clear and time- sensitive communication of deal adjustments and executions between the first and second lines of defense.

Keep in mind as recovery begins:

While current federal agencies have paused onsite auditing or surveillance, trading organizations should remain within the provided compliance and risk guidelines to prevent the potential for future investigations and, as a precaution if they are, all appropriate documentation is maintained and retrievable. Remote surveillance should continue with increased vigilance given unprecedented market conditions and rising volatility. Be prepared for potential regulatory audits/investigations.

3.Trading policies, Governance documents also should be Some of the large and more difficult changes procedures and guidelines reviewed and adjusted to support trading include: in a remote environment. Specific areas • Business continuity plans to consider include: recordkeeping of deal Policies, procedures approvals; credit risk exposure verification; • Trade authorizations and credit risk and trade authorizations requiring multiple • Ethical practices and compliance and guidelines should levels of leadership review. Additionally, requirements quickly evolve to policies and procedures maintaining compliance surrounding trading practices • Counterparty due diligence accommodate continued had to quickly evolve to accommodate remote trading business remote business activities. Business continuity plans New and fast-enacted policies and As a result of the wide range of changes activities. procedures have been required, possibly already discussed, it is important through emergency protocol activation. the companies review governance While certain trading-related business However, the envisioned emergency documentation through the lens of making policies and processes scenarios were most likely not intended to permanent changes that will subsist even as are being challenged across the commercial address the extent of procedures necessary business move back to the traditional onsite landscape by the remote environment, it for remote trading activity for such an model. would be short-sighted to fail to recognize extensive period and not at a central remote the impact on trading policies, procedures operating site. and guidelines (“governance documents”). Business continuity plans typically focus For many companies, these activities were As such, additional procedures should be on intermittent events and sustaining not intended to be performed remotely and established to help promote ethical behavior immediate operational needs for a short thus present a challenge to executing them consistent with privacy expectations. One period of time. Current conditions, however, remotely yet in compliance with regulatory potential approach companies could take have required a longer-term adaptability of requirements. is to increase the scope of internal audits existing policies and procedures. Policies to verify all trading activities conducted Policies and procedures will need to and procedures should be adjusted as outside of “standard” means is conducted be reviewed and may need to change traders move from traditional business in compliance with policies and in a way that to address how the activities are being sites to remote environments to assure minimizes potential investigative actions. performed if the remote environment regulatory requirements for deal execution persists. Counterparty due diligence and documentation are followed and Like many other industries facing regulatory compliances objectives are met. Ethical practices and compliance challenges with third-party reliability, While many activities have been adjusted, requirements trading organizations may soon be facing the revision of applicable policies have As traders alternate between on-site and similar risks with trading counterparties. lagged as many companies’ focus has been remote activity, special attention should The current instability in the commodities on sustaining operations. be paid to maintaining awareness with markets is putting many companies on ethical practices and compliance policies Trade authorizations and credit risk high alert. Volatility in the commodity and requirements including whether Monthly solicitations, such as those done markets along with demand destruction changes need to be documented as remote during bid-week and seasonal origination from the crisis could lead to a reduction activities modify how companies monitor activities, typically may require deal approval in credit-worthy counterparties within the and track compliance with the policies and beyond standard trader level authorization commodity trading sector. requirements. with additional in-person deal verification Companies should begin evaluating and confirmation from counterparties. For example, if a trader is no longer non-performance clauses to verify The verification and confirmation can executing on a recorded line obligations have been met. Some include voice recordings and time-stamps and is using an alternative means of companies have adjusted internal policies for certain deals and data entered into communication, how do you guarantee to expedite contract reviews as traditional trade capture systems. It is not uncommon that same ethical approach and culture of counterparties may be dealing with for these systems to only be accessible compliance is maintained? During times operational issues and unable to perform. internally. when working from home can lead to a As a result, trading companies should more relaxed environment with a sense Additionally, certain gas-cost mitigation confirm proper policies and procedures of reduced oversight additional attention programs approved for need to have are followed as new counterparties are should be paid to ethical practices and additional documentation and support of established through secure document compliance policies as remote surveillance competitive bidding with sign-offs on credit sharing and e-signing even under remote continues and likely continues with risk across multiple levels of management conditions. Special attention should be additional scrutiny given unprecedented and multiple business functions. Under paid to counterparty on-boarding and the circumstances, volatility and commodity the current market downturn, the risk process of keeping the “no trade list” up to . of insolvency is increasing especially for date. With CFTC registration relaxation, new smaller counterparties. This has created the If an alternate means of trading is being procedures and policies for proper notating need for additional scrutiny across multiple utilized, certain confidential information of exceptions should be established business functions supporting traders to such as counterparty and price information to assure counterparty compliance is verify counterparty challenges are being could be at risk of exposure. maintained. identified timely and diligently especially for deals done over-the-counter. Considerations to help reduce non-compliance risk:

Assess performance Take stock of the policies Conduct additional Develop additional safety of existing business and procedures as assessments of compliance policies and precautionary continuity plans to evaluate operations frameworks to identify procedures as personnel how existing policies and return to on-site to help areas where enhancements are set to return to the procedures should be identify how triggers for to governance are needed office. A typical trade floor adapted to allow for longer- regulatory requirements to verify compliance with consists of closely placed term alternate scenarios exceptions were treated and all company policies during quarters of individual desks. and work environments. how the return to standard remote activities took place. Companies should rethink This should be done in the requirements is being their reintroduction policies context of maintaining the effectively communicated to and procedures, including same level of compliance all impacted stakeholders. • rearranging workspaces to diligence. Consider how Take stock of the policies and maintain social distancing integrating outside procedures as businesses requirements and additional perspectives can help operations return to on-site safety requirements. This provide a thorough - to help identify how triggers could include added time wide comparison of existing for regulatory requirements to get personnel in through procedures, identify potential exceptions were treated and security as these safety solutions in technological how the return to standard measures are enacted. capability gaps that could be requirements is being limiting effective adjustments effectively communicated to in processes, as well as help all impacted stakeholders. companies enhance their policies and procedures.

Keep in mind as recovery begins:

Companies may need to re-evaluate business continuity plans and the associated policies and procedures through a new lens, testing scenarios across functions and against longer timetables for returning to normal operations. As revised business plans are adopted, companies should hold workshops and training sessions to clearly communicate changes and to test newly adopted operating models.

The bottom line.

Previously anticipated crisis emergency of remote operation should be tested. Evaluate how temporary plans were only foundational, however, Organizations will likely need to provide never activated. These have been regulators robust documentation for any adjustments in practices unprecedented times with longer than system outages and incidents of incomplete are best incorporated anticipated stay at home and work from reporting. Organizations should also be home requirements resulting in bigger prepared to handle regulators’ requests into core policies and and deeper adjustments to many more from cross-functional resources within their procedures, with the processes than previously anticipated under respective businesses. Additional support emergency conditions. will likely be needed to clear the backlog of objective of keeping reporting requirements as new processes As organizations return to traditional work are being developed based on lessons businesses compliant. sites, the effectiveness of procedures learned. for ongoing, remote reporting and recordkeeping should be evaluated and When it comes to monitoring and likely enhanced. As operations ramp-back surveillance, timely and efficient up, the accuracy of records and supporting communication and data capture is key. documentation during the current periods Companies should reevaluate their As a result, companies should: Let’s talk. procedures and tools to assess their • Evaluate how existing policies and Howard Friedman performance during the last several months. procedures for compliance performed Managing Director They should, as part of that exercise, through the remote setting and where Deloitte & Touche LLP consider whether the timeliness and gaps in frameworks should be addressed; +1 630 215 7564 accuracy of the communications and data [email protected] capture are sound. Clear communication • Recognize “lessons learned” from and accurate documentation for incidents technological challenges and limitations Mike Prokop and exceptions may ease the potential to support remote activity from a Managing Director burden of regulatory inquiries should they recordkeeping, transactional, and Deloitte & Touche LLP come your way. compliance governance perspectives; and +1 713 982 2998 [email protected] Finally, companies should develop • Identify a path for upgrading and Steve Engler responsible plans for reintroduction. expanding technological capabilities, if Managing Director They may need to evaluate how warranted. temporary adjustments in practices are Deloitte & Touche LLP +1 973 454 8374 best incorporated into core policies and Such enhancements will likely need to [email protected] procedures. Companies made changes to become integrated as a permanent part Tim Metts policies and procedures with the objective of a company’s business continuity plans Senior Manager of staying in business. and trading policies and procedures Deloitte & Touche LLP creating an opportunity for a more resilient +1 703 656 6940 and compliant trading function. These [email protected] improvements to operating plans will help increase preparedness in anticipation of the next potential global crisis.

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