Energy is a booming business which has attracted a significant group of new corporates as demand and importance have increased and the diverse options for its production have multiplied. The challenges of climate change and current geopolitical conflicts have only accentuated the opportunities.

This rise in importance has systemic implications for economies and society, a shift that has not escaped the notice of governments and national regulators.

The energy markets have historically not been as closely scruitinized as pure financial markets but this is starting to change. There has been a notable uptick in enforcement and the sizable penalties meted out have resulted in a more rigorous approach to compliance at corporates that extract and produce commodities, but also trade them in the markets. 

There has been a slew of significant enforcement actions related to financial crime breaches by big energy and commodity groups. These are often related to bribery where government officials in third world countries have been paid personally to award large contracts to a certain company.

Companies such as Vitol, Glencore and Trafigura are examples of this and these actions are usually initiated by national agencies responsible for the prosecution of fraud, such as the US DoJ or the UK SFO. In many instances the level of punishment inflicted on a company can be significantly reduced with cooperation, self-reporting, and crucially the quality of that entity’s current compliance program.

Rise of REMIT

REMIT stands for Regulation on Wholesale Energy Market Integrity and Transparency,’(Regulation (EU) 1227/2011). It provides a regulatory framework specific to wholesale energy markets and defines market abuse, including market manipulation, attempted market manipulation or insider trading. An update to REMIT came into force in May. REMIT II was designed to improve integrity and transparency in wholesale energy markets.

Some of its key changes were:

• expanded scope of data reporting to encompass electricity balancing markets;
• algo trading;
• enlarging scope of REMIT market abuse provisions to wholesale energy product that are financial instruments;
• supervision of reporting parties;
• harmonized fines across national regulators; and
• more cooperation between the EU Agency for the Cooperation of Energy Regulators (ACER) and the European Securities and Markets Authority (ESMA) to deliver robust regulation of derivative wholesale energy product.

This regulatory scrutiny is matched at the highest levels of power in Europe. Mario Draghi, the former prime minister of Italy and also ex-president of the European Central Bank, published a report in September recommending stricter energy derivative trading rules to limit potential speculative behavior. The EC-commissioned report asks for more coordination across the EU and powers for EU authorities to set position/price limits for trading, especially during crises. Position limits would reduce the ability for a large entity to corner a market and abuse/manipulate that position.

REMIT is certainly the regulation grabbing the attention of surveillance and compliance teams at large energy trading firms.

Draghi also recommends review of the MiFID exemptions that allow non-financial companies to trade energy derivatives (which are financial instruments) without the regulatory supervision that financial companies face. Some large non-financial players can distort the market and create divergence between spot and derivative energy prices. Regulating them in the same way as financial firms would make the markets more transparent and less vulnerable to misconduct.

But REMIT is certainly the regulation grabbing the attention of surveillance and compliance teams at large energy trading firms. National regulators have been particularly active from an enforcement perspective. ACER published that there were 13 actions in 2024 and they were initiated by the following countries:

• Romania (7);
• Italy and Belgium (2);
• Germany and Spain (1).

Enforcement fines can be related to a percentage of a corporates revenue and this can be extremely punitive for larger organizations. The transgressions for those 13 fines break down in this way:

• manipulation – €114m ($124m);
• insider trading – €300,000 ($327,000);
• non-disclosure of inside information – €85,000 ($93,000);
• non reporting – €25,000 ($27,000).

Manipulation cases have certainly been in the spotlight recently. The CNMC (Spanish National Regulatory Authority) announced that it fined Energya Gestion de Energia €1m ($1.1m) for “marking the close” on the MIBGAS Organised Market Place in Q4 2022. This means each order was placed within the last minute of market close, affecting the daily settlement price in a direction favorable to the client’s existing interest in that contract, and is alleged to have happened over 32 sessions where in general the activity involved submitting bids in the last few seconds of trading just below the best bid.

TOTSA, the Swiss energy trader owned by the energy giant TotalEnergies, faced enforcement from the US CFTC in August for benchmark energy price manipulation in EBOB-linked futures. Traders employed a strategy with activity in both the physical and derivative markets to influence the benchmark and improve returns on a current position. Notably the firm was pulled up for its failure to produce and preserve WhatsApp messages between traders.

The ongoing zero-tolerance campaign to enforce strict recordkeeping requirements by banking and capital markets regulators in the US where off-channel communications have not been captured across the capital markets sector, has started to bleed into the energy sector. In an unusual enforcement, Ofgem fined Morgan Stanley £5.41m ($7.07m) in August 2023 under REMIT after the wholesale energy trading unit could not produce requested WhatsApp messages that were communicated through their personal phones.

Record ASIC fine

The most recent case of note saw the Australian Securities and Investments Commission (ASIC) hand out a record fine of AUS$4.995m ($3.4m) to Macquarie for failing to prevent suspicious orders being placed on the electricity futures market. On 50 occasions, from January to September 2022, Macquarie breached market integrity rules by permitting three of its clients to place suspicious orders. Each order displayed characteristics of an intention to ‘mark the close’.  

ASIC stated that the size of the penalty reflected the serious, prolonged and potential systemic failures by Macquarie to detect and prevent suspected manipulation in the ASX 24 market for energy derivatives.

ASIC further found that Macquarie had failed to appreciate the seriousness of its obligations as a Market Participant to act promptly and appropriately upon what were obvious risks of deficiencies in its surveillance system and had not, at the time, taken full ownership or responsibility for its conduct.  

It also noted that Macquarie is responsible and accountable for the conduct of its staff and if matters were not escalated when they should be, it may suggest more systemic issues regarding the culture and reporting within the company.

ASIC is starting to be more active as an energy regulator proportionate to the size and global dependence that its market represents.

This was not the first enforcement action of significance from ASIC, which is starting to be more active as an energy regulator proportionate to the size and global dependence that its market represents from a commodities extraction and trading perspective.

In addition to the fine issued on Macquarie:

• in May 2024, it fined J.P. Morgan Securities Australia Limited $775,000 for market gatekeeper failures in relation to suspicious orders by its client in the ASX24 wheat futures market
• in July 2024, ASIC commenced civil penalty proceedings against COFCO International Australia Pty Ltd and COFCO Resources SA for alleged manipulation in the ASX24 wheat futures market

As the enforcement drumbeat gets louder and the mix of different regulators taking action is multiplying, a number of energy producers and trading firms are starting to invest more in the right systems and processes to capture and monitor a mix of trade and eCommunications data.

Not only does this provide comfort around the increasingly aggressive agenda to ensure data completeness (the latest action against JP Morgan relating to incomplete records for 30+ trading venues is the most alarming case in this developing story) but it also delivers an extra line of defense for the identification of a number of potentially expensive activities and misconduct related to market abuse, financial crime, fraud and behavioral misconduct.

Voice capture and monitoring (ideally with the ability to transcribe and translate these records) is especially important for markets where the majority of the interactions are conducted using that form of communication.

Senior management attention to this enforcement trend needs to be acute. The fines are considerable, the indictment can be criminal, and in some egregious cases individual liability is not uncommon. With deferred prosecution agreements and monitorships increasingly in vogue, the stakes are high.

Relatively small investments in decent systems and a solid compliance program that is regularly calibrated to match the type of business and attached risks will pay off in the long run.