The Financial Conduct Authority (FCA) has reviewed the compliance frameworks and governance structures of firms trading and broking across the energy, metals, and soft commodities sectors, with particular focus on their market abuse controls. It found poor awareness and widespread complacency around market abuse risks and inadequate arrangements in many firms.
The FCA reports that some front office staff and senior management hold the misguided view that commodity markets are “too deep, too liquid and there are too many participants” to be manipulated. Few firms had conducted a market abuse risk assessment or had ever submitted a Suspicious Transaction Report (STR). STR procedures were generally ineffective. Firms with clear and effective governance structures were in better shape, but monitoring and management of risk intra-day and in respect of prudential risks was generally non-existent or poor.
More positively, recognition of market abuse and other front office risks generally correlated with better practices, especially where risk and compliance staff were present on the trading floor and integrated with the front office, and where training was compulsory and relevant.
Ofgem warning on market abuse in power and gas markets
On 8 September 2015, days after the FCA published the findings of its review, the UK energy regulator Ofgem published an open letter highlighting market manipulation and insider dealing concerns arising from its monitoring of compliance with the EU Regulation on Wholesale Energy Market Integrity and Transparency (REMIT). Ofgem identified various market behaviours it had witnessed as likely to be or potentially manipulative, including:
- Marking the close.
- Pre-arranged trading.
- Submitting small bids ahead of large offers (or vice versa).
Ofgem also raised concerns as to the confidentiality of inside information, especially information regarding the availability of assets, pending required disclosure, the timeliness of such disclosures, and the methodologies used to identify inside information. The letter concludes with a reminder of Ofgem’s powers to deal with breaches of REMIT – which include criminal prosecution powers since April 2015.