Last week saw more publications on the topic of surveillance technology in the energy and commodities markets. The key driver for this is REMIT, which outlaws actual and attempted market manipulation of the EU’s gas, power and LNG markets, as well as the use of Inside Information (expect in certain cases).

Sanctions against breaches of these rules (under articles 3 and 5 of REMIT) are being rolled out, and in some cases sharpened (e.g. criminal sanctions in the UK). There is therefore an argument that a market participant would be wise to improve their internal technology in order to detect such activity before a regulator does.

An article published on the Risk.Net web site (subscription required) notes that the uptake so far of these systems in the energy sector has been low. This could be for many reasons. One is no doubt that this type of legislation is new for the energy sector. Another is that under REMIT there is no actual requirement to install surveillance technology unless you are either an Organised Market Place or a “Professional Person Arranging Transactions” (PPAT).

So you may well get fined, or jailed, for a breach of Articles 3 and 5, but not specifically for a lack of surveillance technology. It is also worth noting that recent fines for manipulation in the FX markets did not cite lack of systems as a big factor. Rather the issue was the lack of a “compliance culture” across the institution.

Despite this, there are arguments for improving on internal surveillance ability, as has been put forth in this article by Baringa recently. The senior management of a Market Participant will certainly not wish to find out about breaches when a regulator tells them about it, or by reading a newspaper. And part of REMIT requires each National Regulatory Authority to use the data that will soon be collected by ACER to monitor the market for abuse. The article itself makes many other good points to consider.

As a result of REMIT, many surveillance technology companies are bringing their products from the financial markets to energy, although one needs to look closely at how suited each product is for the complexity of the energy market. Many others are encouraging investment in such systems. So the question is, what is the correct approach?

Pragmatism and data collection
There are two lines of thought to consider when deciding on an approach:

Firstly be pragmatic – there are many ways of improving monitoring within your company, and there is not always a reason to jump head first into a large project. Consider what your actual needs are, and will be. Make sure that the path you wish to follow is the one that suits you, rather than one that suits someone else. And remember that taking a simple approach for now does not preclude a more sophisticated one later.

Secondly, collect your data wisely. The upcoming data collection deadlines will require data to be gathered somewhere for sending to ACER. This could be an on site system, or an off site service. Both of these approaches will offer good opportunities to ease the roll out of a surveillance system later. Many vendors will offer either surveillance ability, or partnerships with other vendors to reuse the data by a pre built connection. So the ability to monitor may well be influenced by the choice of reporting solution.

Many options
Whatever path you choose, remember that that you have options. Any surveillance project should be part of a wider programme which also includes training, controls and other activity.