Posted by Paul Campbell, Principal, Deloitte & Touche LLP and Ron Chovanec, Specialist Leader
Trade surveillance is a rising concern in the energy industry, and regulators have an increasing expectation that companies in the industry will have trade monitoring solutions in place. At Deloitte’s Dodd-Frank Compliance Leadership Academy on October 2, 2014 we joined a group of industry representatives in a panel discussing where trends are headed.
Establishing a trade monitoring and surveillance program isn’t just to avoid regulatory scrutiny. Internally, it can also make the gathering, review, and presentation of trade data a lot easier. But there are challenges involved. When you gather more data, regulators may ask for more data. Compliance teams will need to partner with people on the operational side to review what they learn. Management buy-in, budget, and other resources can stand between the blueprint and the reality. And while a monitoring system may be simple in concept, applying it across multiple divisions can be less simple, especially in a global organization.
Our panel also noted it’s important to include business stakeholders, not only in using a compliance monitoring system, but in building it as well. That can help make sure the final system addresses the compliance risks that are most relevant to the business units, and keep lines of communication clear and open. However, the bottom-up awareness has to go hand-in-hand with a top-down sensibility. As one panelist emphasized, it’s important to manage controls at a holistic level that addresses the thresholds regulators bring to their work.
Who are the right people to manage a compliance monitoring regime? One panelist said his organization looks for people with IT and business backgrounds. Risk control and compliance control aren’t necessarily the same skills, and one participant said it’s easier to take people who understand trading and then teach them about compliance.
Why not simply co-locate monitoring and surveillance groups inside the risk management function in each commercial group? According to some, there’s value in an arm’s-length relationship between compliance and traders, and compliance should have a direct line to the board. Financial institutions have been moving toward the same kind of segregation of duties. And when the functions are distinct, compliance can fulfill its “second-line-of-defense” role.
Once a compliance monitoring and surveillance system is in place, how frequently should it report out its analyses? One panelist said the team should study and adapt to the patterns of trading activity, and look for “hot spots.” With that information saved for reference, the compliance team will have a reference to use over time.