Navigating the Commodity Trading Compliance Landscape: The AI evolution 

The compliance landscape of commodity trading has historically been less stringent than the financial sector. While some trading may resemble banks and financial institutions, most regulatory compliance hasn’t relied on mature infrastructure and technology that’s central to the world of finance.  

But now, as markets, technologies, and regulatory enforcements evolve, that’s all changing. 

We recently hosted a webinar, moderated by Alex de Lucena, director of product strategy and in-house SME at Shield, who sat down with Aviv Handler, head of ETR Advisory, Niv Bodor, senior manager at Deloitte Risk & Advisory, and Shlomit Labin, VP of data science at Shield. Their conversation centered around the diversity of commodity markets, who the players and regulators are, and the role of new technology in shaping the compliance landscape for commodity trading. 

What makes the commodities market different from other markets?

Handler kicked off the conversation with a high-level overview of the commodities market, noting that it’s a very traditional market that far predates financial trading.In many ways, it lags behind financial institutions in terms of the maturity of its infrastructure and technology.  

Compliance is also a bit different in commodities and energy firms, which are more focused on transaction order and surveillance than deep communications surveillance and looking for market abuse. Handler noted that since most trading isn’t carried out by financially regulated institutions, it impacts how compliance works, both practically and in terms of the mentality—the perception of risk, including reputational risk.  

The regulatory landscape: Who are the players? 

Each player, from banks to merchants and commodity traders, face distinct regulatory frameworks, depending on the nature of their trades—whether futures, options, swaps, or spot trades—and where they’re located, according to Bodor. 

In the EU, the commodities market is dominated by complex regulations such as REMIT (and most recently REMIT II) and MiFID II, which serve as the backbone of market operations and compliance. In the US, it’s more about the Commodities Exchange Act and the Dodd Frank Act.  

“When we talk about energy and commodities trading, we’re talking about a few different types of instruments, really,” Bodor pointed out. “And the reason is that these instruments and these trades can be interconnected — there could be different ways of manipulating one market using the related instruments.” 

The role of the regulatory authorities is to follow and enforce the regulations, so they’re looking at insider trading, conflicts of interest, and market abuse and manipulation—but at the same time, these regulators also have their own requirements around record keeping and communications monitoring.  

Regulatory authorities in the US include: 

• Commodity Futures Trading Commission (CFTC): Sets compliance requirements for commodity swaps, futures, and options in the United States. 
• National Futures Association (NFA): Responsible for market participants’ registration, education, and participation. 
• Federal Energy Regulatory Commission (FERC): Works to ensure a fair energy trading market by regulating the trade of electricity, natural gas, and oil. 

Regulatory authorities in the EU include: 

• Agency for the Cooperation of Energy Regulators (ACER): Regulates the European energy market. 
• National Regulatory Authorities (NRAs): These authorities are referenced in terms of their role in monitoring and regulating energy markets within their respective countries. 
• Financial Conduct Authority (FCA): Regulates the financial services industry in the UK to help protect consumers, maintain industry stability, and promote healthy competition. 

Who’s being monitored? 

Who, exactly, is being monitored? Essentially any entity or participant that is trading products that are also being monitored—especially gas and power, which Handler pointed out are more closely monitored than other commodities, largely because energy is a newer market.  

While some sectors are heavily monitored for market manipulation, insider trading, unethical practices, and other specific types of risks, others might not be as stringently watched, depending on the regulatory focus and the physical versus financial nature of the trades. 

One major reason for the maturation of regulations is the increasing ease of quality monitoring, thanks to the advent of more sophisticated surveillance technologies that incorporate AI to handle the complexity and volume of data in modern commodity trading.  

De Lucena suggested that as monitoring technology becomes more user-friendly and integrated into everyday compliance practices, regulators are also ramping up their expectations for what companies can and should monitor. 

Monitoring commodity trading 

The players in these markets are adapting to a regulatory environment that is not only expanding in scope but also deepening in its demands, pushing firms towards adopting advanced technologies to ensure compliance.  

Labin elaborated on how monitoring technologies have evolved to become easier to use and more approachable, especially with the integration of AI. “AI allows us to look for more subtle indicators in the communication, since we can look for them in a wider context and throughout longer periods of time and actually pinpoint the risk itself,” Dr. Labin said.  

This enhancement in technology not only improves the efficiency of monitoring systems but also makes them more accessible to users who may not have specialized technical knowledge. AI-driven surveillance tools are capable of analyzing vast amounts of data to detect nuances and patterns that might go unnoticed by the human eye or more likely, get buried in a mountain of false positives. 

Labin reiterated that AI technologies are not just supplementary tools, but central to advancing monitoring capabilities. Beyond simplifying monitoring, AI enhances accuracy and predictive capabilities, making it possible to proactively address potential compliance issues before they escalate. 

Use cases for proper dComms surveillance 

There are many cases where proper risk management and communications surveillance may have drastically changed the outcome of a regulatory fine. Here are a few noteworthy examples in the commodity trading field: 

Morgan Stanley & Co. International 

The Ofgem regulatory body in the UK requires energy companies to record all communications around transactions. But between January, 2018 and March 2020, some Morgan Stanley wholesale energy traders were using private phones and WhatsApp to talk about deals—and the company failed to record and retain these electronic communications.  

In August, 2023, Ofgem fined Morgan Stanley £5.4m for failing to enforce its own policies prohibiting the use of WhatsApp and for neglecting to monitor and save those communications as required under REMIT. The fine, which was reduced from £7.7m for settling, was the first of its kind issued in Great Britain for failing to adhere to the rules.  

How could surveillance have protected Morgan Stanley?  

Modern surveillance tools help monitor all communications, detect references to unmonitored channels, and bring them to the attention of compliance teams—and help avoid fines like the one here. Perhaps more importantly, newer, AI-driven technologies with advanced language detection can even identify the cryptic hints of someone trying to tell another person to talk about it offline. This technology, Labin noted, “is definitely one of the big interests in the financial industry at this moment.” 

Eneco Energy Trade 

The Netherlands Authority for Consumers and Markets (ACM) enforces compliance with REMIT rules, including a regulation that prohibits market participants from trading with inside information and states that incorrect orders may constitute market manipulation.  

On March 7, 2022, an Eneco Energy Trade (EET) market trader accidentally added an extra zero to the price of an offer on 500 MWh of natural gas, leading the Dutch transmission system operator for natural gas, Gasunie Transport Services (GTS), to pay €2,450 instead of €240 per MWh.  

An investigation by ACM found that EET discovered the typing error right away but failed to take action, and when other participants in the market offered similarly high prices, EET did so again, benefitting from elevated prices in two balancing transactions.  

Following the ACM investigation, EET agreed to pay back the €2.4m overage and committed to taking measures to prevent similar errors in the future.  

How could surveillance have protected Eneco Energy Trade?  

A reliable dComms surveillance tool can detect price spikes and other anomalies and inconsistencies and determine whether or not errors occurred—and AI-supported tools enable companies to look into a wider context, which Labin stressed is particularly important in the case of commodities, since risk indicators are often more subtle and more complex.  

Swap dealers 

Swap deals now have stringent regulatory requirements in both the US and European markets—swap dealers must record and maintain all communications records, including audio phone conversations.  

In September, 2023, the CFTC simultaneously imposed civil monetary penalties on Goldman Sachs ($30m), J.P. Morgan ($15m), and Bank of America and Merrill Lynch ($8m) for failures related to: 

• Supervising a wide range of swap dealer activities 

• Swap data reporting and the disclosure of Pre-Trade Mid-Markets Marks (PTMMMs) 
• Correctly reporting swap transactions to swap data repositories 
• Complying with swaps reporting obligations 

How could surveillance have protected these institutions?  

Modern surveillance software helps organizations effectively monitor swap transactions by using AI to look at large amounts of complex data and find connections that might otherwise get missed. Instead of manually looking at information, compliance teams rely on these new technologies to quickly surface even subtle risks.  

The bottom line: Commodity trading compliance is changing  

The commodities trading environment is evolving rapidly, driven by new regulatory requirements and a new era of personal liability for compliance officers in the industry. Compliance departments are increasingly relying on AI-powered surveillance tools that provide a 360-degree view of risks, identify issues that human reviewers and older technologies would likely miss, and connect the dots across huge volumes of data from multiple sources.  

Watch the webinar to find out what other insights our experts shared to make your life easier.