A switch to electronic trading of company shares in the 1980s was part of a technology-led ‘Big Bang’ that transformed market activity, prompting both spectacular growth and innovation in the sector but also laying the groundwork for unprecedented complexity across all kinds of markets, including energy commodities.
Compliance, that absolutely necessary but often despised activity, failed to keep pace. When cracks appeared in the system over the following twenty years, they were papered over in the faith that free markets would self-correct. As 2008’s financial crisis demonstrated, we severely underestimated how painful that correction could be.
In a world of algorithmic trading and transactions completed in a fraction of the time it takes to blink your eye, compliance all too often remained a world of forms that were filed on paper, and where computerized systems still relied on someone “trained” in the program to complete, file, and perhaps most importantly, understand the requisite forms.
But the Big Bang of technology has arrived in compliance, and the next month represents a step change in an accelerating race among financial institutions, companies and intermediaries like exchanges to gain access to the best, fastest compliance technology in an echo of their two-decade race to elevate trading technology. New rules (finally) finalized by the Commodity Futures Trading Commission under the authority of the Dodd-Frank financial overhaul mean companies have a short 60-day window from late May to demonstrate that their technology and reporting requirements for a number of futures products, including some energy contracts, are up to the new standards.
“You can’t rely on humans to meet these Dodd-Frank requirements,” MetricStream Senior VP for Industry Solutions Brenda Boultwood told Breaking Energy during a conversation about the implications for energy companies, and for the banks that finance them and trade energy. Boultwood is a former member of CFTC’s Technology Advisory Committee and former Chief Risk Officer of Constellation Energy, and now helps build MetricStream’s business in the US and Europe. MetricStream is a technology company with enterprise solutions that include regulatory compliance, risk management and corporate governance, all company activities potentially impacted by Dodd-Frank.
Companies are looking to tell their boards that they are affirmatively in compliance, rather than noting they aren’t aware of being non-compliant. This seemingly small difference actually represents a significant shift in thinking for many firms, Boultwood noted.
Many larger firms have been tracking the changes underway at the CFTC and have been making significant technology investments to keep up. “Larger firms are ready,” Boultwood said. “But that drops rapidly once you leave the larger firms,” she added, noting that many companies are choosing to opt out of the broker-dealer space and avoid complex hedging activities because of the cost associated with compliance.
The information technology requirements to handle compliance are driving consolidation too, another echo of the 80s Big Bang that led to rapid consolidation in the trading and banking world. Mid-size firms cannot support their own large-scale IT and compliance infrastructure, Boultwood said. While energy companies mostly don’t face the same mandate as banks on reporting and compliance, they also are looking for platforms like the ones MetricStream implements to integrate their data and ease compliance rather than keeping data collection and reporting in operational silos in the firm.
The CFTC itself may have trouble meeting its own technology standards, Boultwood noted. “The CFTC struggles with its own infrastructure,” she said, noting a recent statement from Commissioner Scott O’Malia on the subject and limited funding from Congress for new IT systems at the regulator.
Banks have experience implementing technology platforms outside of compliance, but it is firms that are financially complex but not financial institutions that now face the steepest learning curve. Mid-size energy companies, airlines and refineries – all of which have strategically central activities that fall under Dodd-Frank reporting requirements – all face challenges, Boultwood noted.
In the 80s, technology changes that opened markets made unlikely figures on the trading floor the new kings of finance. It is hard to imagine compliance staffers as the new stars of the energy sector, but we live in strange times. Get to know your IT team; they may be the future.
See earlier reporting on Dodd-Frank and on energy sector disruption by Peter Gardett here.
