Actimize Energy Trading Compliance Research 2010

Energy Trading Compliance
An independent study initiated by NICE Actimize and Fulbright & Jaworski L.L.P.
September 2010
This document contains proprietary information belonging to Actimize, Inc. and Fulbright & Jaworski L.L.P. No
part of its contents may be used for any purpose, disclosed to any person or firm or reproduced by any means,
electronic or mechanical, without the express prior written permission of both Actimize, Inc. and Fulbright &
Jaworski L.L.P. For more information, contact Actimize at actimize.info@actimize.com or Fulbright & Jaworski
at energy@fulbright.com
Executive Summary
n mid 2010, NICE Actimize and Fulbright & Jaworski L.L.P. commissioned a
I study of senior executives and compliance personnel in the energy trading

sector. The purpose of the study, conducted by an independent research firm,
was to capture the state of compliance within the energy trading industry, and to
gauge the industry’s overall readiness to deal with increasingly stringent
regulations and greater government enforcement capabilities.
More than 140 industry participants responded to the questionnaire. Of those,

more than one in six self-identified as senior management, with 80 percent
holding positions on the front lines of compliance, including: trading, risk
management, legal, and senior management.
The study was designed to collect data concerning a number of core energy
trading compliance issues, including: (i) how respondents perceive the
knowledge sets, skill sets, challenges, and motivations for–and barriers to–
addressing compliance concerns at their respective organizations; (ii) how
respondents view those same issues for the industry as a whole; and (iii) how
respondents see the knowledge sets, skill sets, and resources of the regulators
evolving.
While the research was in process, the Dodd-Frank Wall Street Reform and
Consumer Protection Act became law. As the industry looks toward 2011, the
resulting regulatory changes brought about by the Dodd-Frank Act will affect
every aspect of the energy trading industry as the Commodity Futures Trading
Commission (CFTC), the Securities and Exchange Commission (SEC), and the
Federal Energy Regulatory Commission (FERC), among others, implement new
rules and regulations for industry compliance.
The research results illustrate that compliance prior to the Dodd-Frank Act
required a sophisticated knowledge of multiple complex regulations and the
dedication of substantial resources within a well designed compliance program.
Passage of this new legislation now adds an additional layer of challenge for
those in the industry.
The research portrays an energy trading industry that is: (i) in an early stage
compliance program adoption process; (ii) fragmented in its approach; (iii)
unclear as to best practices; (iv) still facing decisions as to when to make major
investments in training, systems or resources; and (v) coming to terms with the fact
that corporate culture must be reshaped for compliance to be achieved. While
the study identified areas where industry responses were remarkably consistent,
especially as to the near- and mid-term regulatory landscape, the study identified
other areas where responses displayed significant divergence -- such as what is
being done to develop compliance infrastructure to adapt to the emerging
regulatory landscape.
An independent study initiated by NICE Actimize and Fulbright & Jaworski L.L.P. September 2010
2
Increasing Need for Compliance Solutions
he need for proactive compliance programs, including formal training, the distribution of compliance documents, and real-
T time surveillance, is increasing.
Research results indicate that many in the energy trading industry recognize that regulators are increasing their enforcement
activity, resources, and infrastructure. Approximately 80 percent of respondents believe regulatory audit and enforcement
actions against energy trading firms will increase. In addition, almost 40 percent of respondents believe regulators already
have the capability to examine energy trading activity, while others believe regulators will ramp up surveillance capabilities in
the near future. These results suggest that regulators will be better, and faster, at discovering suspected illegal behavior in the
energy markets, and that queries to companies may increase. Accordingly, improved compliance programs and infrastructure,
including the use of automated surveillance, is seen as a significant industry need.
Market participants that stand still and only use data mining or other techniques to audit past performance may miss the mark
set by the practices of industry leaders and regulators' expectations. Companies that only employ data mining to discover
suspect activity may need to play catch up when approached by regulators, which could impact how they are treated by
regulators when transgressions occur.
Risk vs. Compliance Oversight

here is significant divergence within the energy sector on where energy trading compliance is managed. There is also
T divergence on the quality of information distributed to enable compliance with energy market trading regulations.
Approximately 30 percent of respondents indicated that energy market compliance was managed by the organization’s risk
management group, approximately 23 percent indicated that compliance was managed by the legal department, while other
respondents indicated that compliance was managed by either an independent compliance group (18 percent) or a business
unit (12 percent). In addition, almost 30 percent of respondents indicated that their organization did not have a centralized
compliance function or that they did not know whether a centralized compliance function existed. Approximately 1 in 5
respondents also reported that their organization did not adequately disseminate the information needed to achieve
compliance. These study results suggest that creating a single structure for management and analysis of data for compliance
purposes is something of value that the industry has not fully addressed.
The research indicates that the energy sector has not yet adopted a generally accepted “best practice” rubric for energy
trading compliance. In many ways, the research suggests that the energy industry views compliance as it did risk management
in the mid-90s — industry participants are unclear how to value the compliance investment and how to best implement
comprehensive compliance programs, but they are fairly sure action is needed.
The research participants demonstrate an understanding of the consequences for adopting inadequate energy trading
compliance measures. More than 60 percent of respondents believe civil or criminal fines are one of the three greatest risks
to energy trading firms and executives if they fail to establish an effective compliance program, while more than 50 percent of
respondents also believe reputational risks are among the top three hazards for compliance inadequacies. These results
indicate that many energy market participants recognize that the failure to be proactive with regard to compliance can lead
to substantial financial losses and sullied corporate–or personal–reputations.
3
Acknowledgement of Rules and Compliance Readiness

here is evidence of an apparent gap between how respondents perceive their own compliance capabilities versus those
T of the industry as a whole. Many respondents seem to believe their own organizations are in a better position to comply
with energy market trading regulations than others in the industry. For some, this confidence may be misplaced.
More than 60 percent of respondents believe their organization has a good or excellent understanding of compliance rules.
However, less than 13 percent of respondents rate the energy trading industry’s readiness to comply with new energy trading
regulations as good or excellent. In addition, more than 40 percent of respondents report utilizing a manual compliance
reporting system, and just over one third of respondents report utilizing a system to automatically examine for suspicious activity
on a daily basis. Approximately 10 percent of respondents indicate that their firms never audit the effectiveness of their
compliance functions, while only approximately 27 percent of respondents report conducting quarterly or monthly compliance
program evaluations. As for resources, more than 25 percent of respondents believe their organizations are not devoting
sufficient staff and resources to compliance.
The study results indicate that while the majority of energy trading companies may have a basic knowledge of the applicable
rules and regulations, many companies may not systematically review their trading activities for compliance with those rules,
and some not devote adequate resources to compliance. The results also suggest that while there is a clear need to keep up
with changing energy market rules, it is also critical for energy trading firms to focus on strong compliance program
development, implementation, and maintenance.
Regulators’ Reach Across All Markets

espondents indicated they are as concerned about physical and Over-the-Counter (OTC) market compliance as they
R are about futures market compliance. Approximately 83 percent of respondents indicated that OTC transactions and/or
physical transactions are as much or more of a compliance concern than exchange transactions. This result suggests a
shift in energy market compliance from a primary focus on regulated exchange trading to a broader focus on all transaction
types. Energy market participants are now also dealing with a range of regulatory agencies, often with overlapping
jurisdiction.
The concern of industry respondents regarding OTC and physical transactions suggests that formal compliance policies and
systems are likely to become of greater importance for all energy market participants, especially in light of the new
requirements imposed by the passage of the Dodd-Frank Act and the consideration of potential new financial regulations
across the globe.
4
Regulatory Pressure Will Increase
ot one industry participant indicated that regulatory pressures for compliance would diminish in the future, and all
N applicable responses indicated that regulators would strengthen their ability to detect suspicious behavior. Further, no
respondent expected investment by regulators in systems or staff to decrease. However, approximately 80 percent of
respondents indicated that they expected the number of audits and enforcement actions taken against energy trading firms to
increase. These results point to a regulatory structure that is in flux and one that may become increasingly burdensome for
energy market participants.
Respondent Profile and Research Background
ICE Actimize, a leading provider of technology solutions for brokerage compliance, anti-money laundering and fraud
N prevention, and Fulbright & Jaworski, L.L.P, a premier law firm with a diversified practice serving the needs of the global
energy industry, sponsored this research study. Infosurv, an independent research firm, conducted the project in the
second quarter of 2010.
The research participants included 142 executives and employees of energy trading industry stakeholder enterprises from
across the globe. The study was completed online via a questionnaire that consisted of more than 34 questions.1
Of the 142 energy industry participants, nearly four out of five serve in commercial (trading/origination), oversight (risk or
compliance), or executive roles. The demographics indicate that the majority of respondents are on the front line of trading
operations and compliance, or are key decision makers for compliance issues.
The respondents represent trading firms globally, with a majority having trading interests in North American markets.
Participants also represent firms with business interests spread across all developed continents and regions, particularly in the
United Kingdom, Western Europe, and Asia. The regional activity and portfolio asset size of the firms are broadly
representative of the overall energy trading market.
1 Additionally, three regulators completed a parallel questionnaire consisting of 18 questions. Due to the limited number of responses, those
results have not been included in this report.
5
Increasing Need for Compliance
Which markets cause the greatest compliance concern for you and your organization?
(Respondents could only choose a single response)
Physical transactions 24.6%
Exchange transactions 9.2%
Over-the-counter transactions 23.2%
All of the above, equally 35.2%
Don't know 7.7%

0 5 10 15 20 25 30 35 40
83 percent of respondents indicate that swaps and physical transactions are as much or more of a compliance issue than
exchange traded instruments. Products and programs that deal solely with exchange futures fail to address a major gap
in energy trading compliance.
Do you believe your current organization's control systems will be able to manage compliance
reporting adequately on a daily and potentially intra-day basis?
27.7% Yes
46.7%
No
25.5% Don’t know
Fewer than half of the respondents believe their systems are capable of managing compliance on a daily and
intra-day basis.
Many regulators run analysis in 10-minute delays, which could result in regulators uncovering a potential problem prior to
the firm knowing about it. Slow monitoring and reporting increase the risk and size of fines, as well as the possibility of
being excluded from trading in certain markets.
Energy trading firms must establish strong compliance training and policies that empower and encourage officers, and keep
employees within regulatory boundaries. Firms should also implement systems that can expeditiously identify suspicious
behavior related to trading.
6
What is your estimate of the number of compliance employees within your organization?
(Respondents were limited to brief text responses)
13.2%
15
10.3%
12
8.8%
7.4%
7.4%
7.4%
5.9%
5.9%
5.1%
4.4%
4.4%
3.7%
6
2.9%
2.9%
2.2%
2.2%
2.2%
2.2%
1.5%
3
0
0 1 2 3 4 5 6 7 8 10 12 15 20 25 30 40 50 100+ Other
Responses
More than 50 percent of respondents work for trading firms with six employees or less who oversee and manage
compliance. If firms with the fewest number of compliance employees are also trading on the smallest annual wholesale
energy transaction portfolio, the 50+ percent of firms with six or less compliance employees may have books of up to
$999.9 million. Firms in these situations must weigh whether having a compliance staff of this size can keep up with the
changing face of regulation on multiple fronts, as well as the overselling of all trading activity.
The fact that more than one-fifth of the respondents report that their firms have less than fully acceptable dissemination of
information necessary to achieve compliance may also support a conclusion that existing compliance staffs are
overburdened. It may be appropriate to outsource one-time, infrequent, or highly specialized compliance related tasks.
7
Risk vs. Compliance Oversight
How often does your organization audit the effectiveness of its compliance program?
Weekly 0.8%
Monthly 7.8%
Quarterly 19.4%
Annually 32.6%
Never 10.1%
Don't know 24.8%
Other 4.7%
0 5 10 15 20 25 30 35
10 percent of those responding indicate that their firms never evaluate their compliance program, and nearly a third of
the remaining respondents indicate that their compliance programs are evaluated only once per year.
Responses indicate that a significant number of energy trading firms may be unable to discover issues in time to self-
report quickly enough to receive leniency from regulators.
Regulators tend to discount the self-reporting that occurs on the eve of a required disclosure that would likely give rise to
the discovery of the violation, or one that comes after undue delay. Thus, examining compliance in connection with
other annual reporting functions may do little to convince a regulator to treat a self-report as a mitigating factor in the
wake of a compliance violation.
It appears that many firms are taking large risks with respect to racking up substantial multi-day, multiple-instance
violations that are subject to penalties on a per day/per instance basis.
8
What communication formats does your firm currently monitor for compliance purposes?
(Respondents were allowed to choose multiple responses)
Company telephone 54.3%
Personal and company cell phone 15.5%
Electronic mail 65.9%
Instant messages 40.3%
Texting 7.8%
Don't know 22.5%
Other 5.4%
0 10 20 30 40 50 60 70 80
Responses suggest there are gaps in the defenses. While two-thirds of respondents indicate that their organizations monitor
e-mail, fewer than one in 10 monitors texting. About 40 percent monitor instant messaging, which means that up to 60
percent may not.
According to one industry expert, up to 60 percent of trading in the physical power markets is done via instant messaging.
Nearly one quarter of respondents did not know what forms of communication were monitored at their firms.
In your organization, to whom does the compliance function report?

CEO 20.2%
General Counsel 25.6%
Compliance Committee 10.9%
Board of Directors 9.3%
Don't know 17.1%
Other 17.1%
0 5 10 15 20 25 30
9
Who manages your energy market compliance?

Risk management 29.9%
Legal 23.4%
Independent compliance group 18.2%

Business Unit 12.4%
Don't know 3.6%
Other 12.4%
0 5 10 15 20 25 30
While the industry has not seized upon a single approach for delegating responsibility for oversight and managing
compliance, the factors that must be taken into account in determining how the compliance function should be structured are
common to all stakeholders. For example, if the organization does not have in-house counsel, does relying on the same
outside counsel that assists that organization with the terms of its deals (1) make sense because the outside lawyers have
the best understanding of the organization’s business, or (2) create a thorny conflict of interest, whereby the outside counsel
is encouraged to take compliance risks in order to avoid impediments to generating more deals and more business for itself?
If the organization has in-house counsel that is also responsible for compliance, similar concerns are raised with the further
difficulty that in-house General Counsel that are called upon to judge their own actions may be in a position to kill any
unbiased self-examination. Even where in-house counsel is not ostensibly responsible for managing compliance, the General
Counsel may be so involved with management of the business that it is difficult for the organization to evaluate compliance
issues realistically.
Placing the risk management group in charge of compliance can have the advantage of allowing compliance managers
access to a broad range of real-time data that can otherwise be difficult to obtain even within a single organization.
However, it also requires that the group be able to put a different perspective on compliance than the other risks that such
groups are traditionally called upon to analyze.
Traditional risk management involves balancing the economic pros and cons of different but equally permissible choices that
can largely be reduced to dollars and cents, where hedges can be used to balance risk and reserves can be created to
ensure against irreducible downside risk. In contrast, compliance generally involves choosing between an acceptable, but
economically less appealing behavior, and impermissible behaviors that tantalize with higher short-term returns, where the
downsides cannot be hedged or accounted for with reserves. Thus, the management of these two functions requires very
different skill sets.
Finally, placing compliance in its own group creates issues with respect to information access and authority. Can an
organization that gives free access or pushes all relevant information to a compliance group, and imbues that group with
authority to investigate suspicious activity, veto actions, and impose internal disciplinary sanctions, be counted on to make
realistic choices and avoid undue interference while conducting business on a day-to-day basis? Any efforts to place limits
on information available to, or circumscribe the scope of, the authority of a separate compliance may render it impotent,
either in practice or simply in the eyes of governmental authorities charged with determining whether the organization’s
compliance efforts were sufficient to warrant leniency when a transgression occurs. These issues demand attention from the
top with appropriate counseling.
10
Do you believe your organization's current compliance and control systems will be able to handle
requirements imposed by any new energy market position limits rules and regulations?
26.3% Yes
62.8% No
10.9%
Don’t know
How frequently does your organization’s oversight system automatically examine for
suspicious activity?
Intra-day 3.4%
Daily 39.0%
Weekly 1.7%
Monthly 2.5%
Quarterly 5.9%
Don't know 39.0%
Other 8.5%
0 5 10 15 20 25 30 35 40
The new position limit monitoring obligations as clarified in the CFTC Division of Market Oversight Advisory published in May
2010 requires firms to monitor positions on a daily basis, as well as on an intraday basis in some circumstances. This applies
to both Federal limits as set forth in regulation 150.2 as well as limits set by exchanges. “In other words, a trader whose
position exceeds the applicable speculative position limit at any time during the day is in violation of the Commodity Exchange
Act and CFTC regulations, even if the position is subsequently reduced to a level within the applicable limit by the close of
the market for that day”2.
Nearly two-thirds of respondents felt that their internal compliance and control systems were capable of meeting new position
limit requirements; yet only three percent indicated that their oversight systems are capable of intraday monitoring, and just
over 40 percent indicated their firm is monitoring on a daily basis.
This data seems to indicate a disconnect between how the industry views their monitoring capabilities and the requirements
of such monitoring by current and proposed regulations. The fact that just over 40 percent of respondents indicated their firms
are monitoring on a daily basis may be indicative of the learning curve and investment in monitoring capabilities that energy
trading firms must now face.
2 Advisory Regarding Compliance with Speculative Position Limits. U.S. Commodity Futures Trading Commission, Division of Market
Oversight. May 7, 2010
http://www.cftc.gov/ucm/groups/public/@industryoversight/documents/file/specpositionlimitsadvisory0510.pdf
11
Does your firm have one centralized person or group responsible for compliance?
7.4%
Yes
22.1%
No
70.6%
Don’t know
70 percent of respondents indicated that they have a centralized compliance function. A centralized compliance function
provides a holistic view of compliance and regulatory issues across the enterprise and provides clear lines of responsibility
and accountability as the compliance program matures. This is an important step in the evolution of compliance within the
trading industry, and is the foundation upon which many other tenets of an effective system of supervision can be built.
How effective is your organization at internally disseminating the information needed to comply with
energy market trading rules and regulations?
Poor 7.8%
Somewhat acceptable 13.2%
Acceptable 30.2%
Good 33.3%
Excellent 10.1%
Don't know 5.4%

0 5 10 15 20 25 30 35
About 1 in 5 respondents report that their organization is not adequately disseminating the information needed to achieve
compliance.
To achieve an adequate distribution of compliance related information, firms may need to consider hiring additional
compliance staff, outsourcing compliance related tasks, or investing in technology that will enable them to efficiently
disseminate, track, and audit information more effectively.
12
What generation of technology is your organization using to monitor for energy trading compliance?
Manual 43.4%
First Generation 41.1%

Second Generation 34.9%
Third Generation 8.5%

0 10 20 30 40 50
Manual - reviewing paper logs or conducting spreadsheet analysis

First Generation - running IT managed queries against databases, manually looking over
results for suspicious behavior
Second Generation - tools in place to automate queries and deliver reports in electronic
format via email or portal, reports still reviewed manually
Third Generation - single platform and workflow tools automatically execute analytics and
data mining to detect defined and unknown patterns across many databases and applications
A majority of the respondents indicated that they are currently utilizing some form of manual monitoring for energy trading
compliance. This further highlights the disconnect between the industry’s investment in compliance infrastructure and their
current and future monitoring obligations. In a manual environment, it is nearly impossible to detect issues like market
manipulation, violations of position limits, and other issues mandated by regulators.
Automated compliance systems bring efficiencies to the monitoring process and enable analysts to move from spending their
time mining data for potential violations to spending more of their time proactively responding to exceptions.
The efficiencies and cost reduction afforded by automated monitoring systems and processes will become more compelling
to the industry as they seek to mitigate increasing regulatory, reputational, and litigation risks that are so prevalent in the
current environment.
Do you believe your organization is devoting sufficient staff and resources to compliance?
19.5%
Yes
55.1% No
25.4%
Don’t know
13
What do you perceive as the top three challenges to deploying energy trading compliance solutions?
Cost / expense 56.8%

Availability of tools 28.0%
Conflicting / overlapping regulatory requirements 29.7%
Lack of understanding of regulatory requirements 27.1%
Data availability / access 24.6%

General resource priorities 40.7%
Lack of expertise 27.1%
Lack of senior executive commitment 10.2%
Changing compliance rules 40.7%
None 3.4%
Other 5.1%
0 10 20 30 40 50 60
The top three challenges cited by respondents are cost, resource priority, and changing compliance
rules. At the current pace of regulatory promulgation and enforcement, firms that do not begin to
invest in flexible, efficient, and resource friendly technology may begin to feel the effects of a larger,
more focused regulatory presence which has been investing heavily in both technology and human
capital. These challenges may indicate a need for the industry to devote sufficient resources to
establish an effective and credible compliance program.
14
When is the trading and risk staff required to complete compliance training?
Prior to assuming duties 27.1%
Monthly 1.7%
Quarterly 8.5%
Annually 46.6%
As needed 30.5%
Voluntary training only 2.5%
Don't know 13.6%
Other 3.4%
0 10 20 30 40 50
A substantial portion of the industry appears to be devoting inadequate resources to training. Slightly more than one in four
respondents work for firms that provided compliance training prior to them assuming their duties. Less than one-third receives
training on an as needed basis.
Energy trading company employees should be trained prior to assuming duties, even if they have been recruited from another
energy trading company and received training there.
Supplemental compliance training should be provided as needed, including when new requirements are imposed or a new
understanding of existing requirements arises. In addition, periodic refresher courses (e.g., annual refresher training) should
be completed on a regular basis.
15
What do you believe are the greatest risks to executives or firms if they fail to establish an effective
compliance program?
(Respondents were allowed to choose up to three responses)
Monetary 40.7%
Seizure of assets 6.8%

Restricted trading activity 27.1%
Civil or criminal fines 61.9%
Operational disruption 29.7%

Effect on morale or productivity 8.5%
Personal liability/incarceration 26.3%
Reputational 54.2%
Don't know 2.5%
Other 1.7%
0 10 20 30 40 50 60 70 80
Almost two-thirds of respondents believe criminal and civil liabilities to senior executives are one of the top three risks of a
compliance failure.
Nearly one-half of respondents do not believe that the reputation of the firm or its executives was a key risk, and more than
one-half do not identify monetary loss as a key risk. Nearly three-quarters do not find personal liability or incarceration a
key risk.
Many in the industry may not understand that they could be held personally responsible in a corporate
compliance failure.
16
Acknowledgement of Rules/Compliance Readiness
How strong is your organization's understanding of all the energy market trading rules and regulations
it must comply with?
Poor 2.8%
Acceptable 20.4%
Good 32.4%
Excellent 28.9%
Don't know 5.6%

0 5 10 15 20 25 30 35
Four-fifths of the respondents report that their organizations have at least an acceptable understanding of the rules that apply to them.
However, more than one in 10 rate their organization's knowledge as less than acceptable, and more than one in 20 do not know.
Enforcement agencies can expect to be busy. Disruptions will occur in the rest of the industry where more than ten percent of
respondents indicate that their organizations do not know the trading rules and regulations.
According to the Federal Energy Regulatory Commission’s Strategic Plan for 2009-2014, FERC expects to find, through audits and
investigations performed in 2010, that just 10 percent of company compliance programs demonstrate a culture of compliance, and that
just 10 percent of investigations that lead to penalties will involve companies with compliance programs that merit granting leniency. FERC
expects both of these percentages to improve by a factor of 2.5x by 2011, and increase to 70 percent by fiscal year 2014.3
Clearly, energy trading enterprises that do not take steps soon to develop compliance programs that include a culture of
compliance and proactive monitoring of their own compliance could expect very little leniency in the future should a lapse in
their compliance be discovered.
In U.S. dollars, what is your estimate of the industry-wide total energy market fines and penalties
over the last three years?
Less than $50 million 17.6%
$50-$99.9 million 12.7%
$100-$499 million 26.1%

$500-$999 million 10.6%
Over $1 billion 9.9%

Don't know 23.2%
0 5 10 15 20 25 30
Almost three-quarters of the respondents lack a strong understanding of the value of fines and penalties assessed on the industry within the last
three years. More than 40 percent of respondents either grossly underestimated the level of fines and penalties levied, or simply didn’t know.
Can organizations develop reasonable compliance budgets without fully grasping the stakes? For example, total energy
market fines and civil penalties, including settlements, imposed by FERC over the last three years exceeded $119 million. During
a longer period, from December 2001 through September 2009, the total civil penalties imposed by the CFTC in energy market
enforcement actions exceeded $450 million.
17
What is the chance that a large (over $100 million USD) energy trading fine will be levied against a
market participant by a regulator in the next 12 months?
Very likely 8.5%

Likely 23.2%
Neither likely nor unlikely 14.1%
Unlikely 28.2%
Very unlikely 7.7%
Don't know 18.3%

0 5 10 15 20 25 30
Opinions are polarized when it comes to predicting another large energy trading fine. Over 30 percent think it likely or very likely.
Yet another 30 percent think it unlikely or very unlikely. Only about 14 percent think it could go either way.
The reality is that with the passage of the Energy Policy Act of 2005, the magnitude of the penalties FERC is authorized to impose increased
by a factor of 100 and now stands at $1,000,000 per day, per violation. Assuming one lapse could lead to several violations, a non-compliant
practice that spans just one month before being discovered and corrected could lead to a $100,000,000 penalty. Given the implications of
penalties of this magnitude, FERC is examining its practices and considering implementing Penalty Guidelines.
The Penalty Guidelines put forth by FERC in March 2010 evidence a desire to be fair in imposing penalties, but not a reluctance
to impose $100 million plus penalties. Base penalties go up to $72,500,000 and are subject to a multiplier of up to a factor
of 4x (depending on culpability). Thus, even a base penalty of only about one-third of the maximum base penalty can lead to
an assessment on the order of $100 million. These amounts are over and above any disgorgement of profits that might be
required by FERC or restitution of losses that might be sought through separate actions by third parties.
Do you believe there is personal legal exposure to senior executives in your firm for actions of
individual traders?
19.0% 19.0% Yes - as a matter of course

Yes - only under extraordinary circumstances
28.2% 33.8% No
Don't know
More than 50 percent of respondents indicate that they believe senior executives at energy trading firms could face direct
personal legal exposure due to compliance failures.
More than 28 percent of respondents believe that senior executives do not face personal legal exposure for the actions of
individual traders. However, senior executives have been pursued in energy market enforcement actions. For example, on
March 8, 2010, the CFTC entered into a consent order settling charges against Robert Moore, former executive managing
director for the Bank of Montreal’s Commodity Derivatives Group, who was the supervisor of a natural gas trader. Moore
was charged with controlling person liability for the traders’ violations relating to the mis-marking and misvaluing of certain
natural gas options, and a civil penalty of $150,000 was imposed as part of the settlement.
18
Regulators Reach Across All Markets
Select the top three criteria you believe regulators evaluate when determining the magnitude of a
compliance failure and subsequent fines or penalties?
Number of employees at the non-compliant organization 2.8%

Annual revenues of the non-compliant organization 11.3%
Profitability of the non-compliant organization 11.3%
Number of years the non-compliant organization has done business in the markets related to 6.3%
the violation
Whether the violation involved fraud, manipulation or anti-competitive conduct 75.4%
Whether misrepresentations and false statements to regulators were involved 62.0%
Whether there was a violation of the basic tenets of fairness or moral turpitude was involved 8.5%
The magnitude of the loss suffered by third-parties as a result of the violation 35.2%
Senior management of the non-compliant organization was involved in the violation 24.6%
Prior violations committed by the non-compliant organization that occurred more than five 12.7%
years in the past
The violator had in existence an otherwise effective compliance and ethics program at the time 19.7%
of the violation
The non-compliant organization has a document retention policy that resulted in the 7.0%
destruction of relevant documents prior to the discovery of the non-compliant activity
The non-compliant organization self-reported the violation to the applicable regulatory agency 23.2%
Close to one in five respondents believes that one of the top three considerations in the severity of a compliance sanction
by a regulator will reflect the quality of the corporate compliance surveillance in place. Nearly one in four believes that
one of the top three considerations in the severity of a compliance sanction by a regulator will be whether the company
self-reported the violation.
Due to the fact that 80 percent of respondents believe that regulatory audit and enforcement actions will increase, the
existence and use of surveillance is seen as a necessity as regulators increase scrutiny in the coming years.
A small but significant number of respondents identify several factors among the top three criteria that are not included in
pending FERC Penalty Guidelines. While FERC has chosen to evaluate public comments and possibly fine-tune the Penalty
Guidelines before implementing them, these rules best illustrate FERC’s current position regarding penalties.
Clearly, there exists a “less than universal” understanding of the factors that influence FERC’s determination of penalties. In
order to devise cost-effective compliance programs and encourage management, and employees, to avoid unnecessary
behaviors that could compound the seriousness of violations, energy trading firms need to develop a better understanding
of the mechanics of compliance enforcement.
19
Regulatory Pressure Will Increase
Do you believe it is likely that regulators will implement capabilities to directly examine your
company's activities?
Yes - they already have this capability 39.4%

Yes - within two years 16.9%
Yes - within five years 12.7%
Yes - more than five years from now 1.4%
No 14.8%
Don't know 14.8%

0 5 10 15 20 25 30 35 40
More than 50 percent of respondents indicate regulators have, or soon will have, the ability to directly monitor energy
trading compliance. Of that group, more than 80 percent believe that regulators might already have this ability. Delaying
until regulators can find the violation is no longer a prudent option.
FERC has a dedicated Office of Enforcement (OoE), charged with the timely identification and remediation of market
problems, ensuring compliance with Commission rules and regulations, and detecting and crafting remedies to address
market manipulation and other noncompliance issues. Three divisions within the OoE are devoted to compliance-related
functions, including the Division of Energy Market Oversight (DEMO), the Division of Audits, and the Division of
Investigations.
DEMO oversees the US natural gas and electric power markets and related energy and financial markets. DEMO
conducts daily oversight of these markets and reports its findings and recommendations to the Commission. DEMO
maintains proprietary databases culling trading and other market information from energy exchanges, private data
aggregators and venders, and other government entities.
The OoE also staffs an Enforcement Hotline, which accepts tips from trading company employees, trading partners, and
others with respect to failures to comply with matters subject to FERC’s jurisdiction.
20
Which regulators could potentially bring enforcement actions against your organization?
CFTC 58.5%
FERC 64.1%
FTC 20.4%
SEC 37.3%
ISO/RTO 28.9%
DOJ 26.8%
FSA 12.7%
Don't know 14.8%
Other 16.9%
0 10 20 30 40 50 60 70 80
Industry oversight emanates from multiple sources. Respondents expressing opinions about any enforcement that
government agencies could bring against them identified three agencies with such authority. This also suggests that
firms, to varying degrees, have both physical and financial oversight.
FERC was the number one agency named, with 64 percent of respondents identifying it as a potential source of
enforcement actions, closely followed by CFTC, at 58 percent. More than a quarter of the respondents identified
criminal actions by DOJ as a possibility.
The US markets are not the only regions for which respondents expressed concern, as one-eighth of those surveyed
have overseas exposure. Firms need to ensure their employees are well versed in all possible regulatory actions.
21
Do you believe the number of audits and enforcement actions taken against energy trading firms can
be expected to:
Increase 79.6%
Remain the same 13.4%
Decrease 0.0%
Don't know 7.0%

0 10 20 30 40 50 60 70 80
Almost four-fifths of respondents expect the number of audit and enforcement actions to increase over time.
Based on the responses to this question, many industry stakeholders may be surprised to learn the number of investigations
and audits conducted by FERC in fiscal year 2009 were dramatically lower than 2008. According to FERC’s 2009
Report on Enforcement (issued December 17, 2009 in Docket No. AD07-13-002), FERC opened just 10 investigations in
2009 versus 42 investigations in 2008, and conducted 33 audits in 2009 versus 60 in 2008.
The reduction in investigations and audits is certainly not due to budget cuts and staffing reductions. Enforcement funds
and staffing are on the rise. Instead, the reduction in numbers appears to be the result of FERC digging deeper and taking
on more complicated issues than in the past.
A higher percentage of enforcement activities aimed at exposing more serious violations behind complex fact patterns,
and the resulting possibility of more substantial penalties than in the past can be expected. Further, as FERC becomes
more familiar with this style of compliance enforcement, a likely return to double-digit percentage increases is possible in
audits and enforcement actions, leading to a new plateau that raises the bar for the industry.
What do you think is the maximum energy trading compliance fine your company could face?
Less than $5 million 29.6%
$5-$9.9 million 2.8%

$10-$24.9 million 4.9%
$25-$49.9 million 4.2%
$50-$99.9 million 3.5%
$100-$149.9 million 4.2%
$150-$200 million 0.0%
Over $200 million 12.7%

Don't know 38.0%
0 5 10 15 20 25 30 35 40
38 percent of respondents admit that they do not know what their own organization's exposure for non-compliance could
potentially cost their companies. This demonstrates the need for compliance training.
How can employee decisions reflect the best interests of their organizations if they don't understand what is at stake?
Without this basic knowledge, will they have sufficient interest in training and keeping current with changing rules?
22
How would you rate the energy trading industry's readiness to comply with new energy trading rules
and regulations?
Poor 7.6%
Acceptable 27.1%
Good 11.0%
Excellent 2.5%
Don't know 10.2%
0 10 20 30 40 50
Nearly one-half of respondents indicate that the energy trading industry has a less than acceptable ability to comply with
new energy trading regulations. The increasing rate of change will create even greater stress on internal compliance
resources within companies.
If new energy market position limits rules and regulations are imposed by the CFTC, what will the
impact be on your organization?
No impact 7.7%
Minimal 24.8%
Moderate 37.6%
Significant 12.0%
Very significant 4.3%
Don't know 13.7%
0 5 10 15 20 25 30 35 40
70 percent of respondents expect new CFTC position limits will not have a ‘significant’ impact on their organization.
Early in 2010, the CFTC commenced a rulemaking proceeding to impose position limits in four exchange-traded energy
futures contracts, which has now been withdrawn in lieu of a rulemaking to impose position limits as required under the
Dodd-Frank Act. The Dodd-Frank Act significantly expands the scope of new position limits beyond those previously
proposed by the CFTC. The Dodd-Frank Act requires the CFTC to establish regulations imposing position limits for contracts
based on the same underlying commodity across various markets, including exchanges, swap execution facilities, certain
foreign boards of trade, and swaps that perform a “significant price discovery function.”
Though the details of these new rules have not yet been developed and finalized, the complex set of aggregate limits
required by Dodd-Frank will likely have a more significant impact on energy market participants than the limits initially
proposed by the CFTC.
23
What market impacts may occur if proposed financial regulatory reforms become law?
Reduction in available credit 51.3%
Reduction in market liquidity 65.0%
Reduction in structured transactions 43.6%

Reduction in counterparties 55.6%
Increase in transaction costs 66.7%

Movement of trading activity to overseas market centers 36.8%
Increased transparency 27.4%
Reduction of systematic risk 17.1%
None 0.9%
Don't know 12.0%
Other 4.3%
0 10 20 30 40 50 60 70 80
To the research participants, negatives seem to greatly outweigh positives. About two-thirds predict increased transaction
costs and a reduction in market liquidity. About half foresee a reduction in available credit and counterparties. More than
one-third expect to see reduced structured transactions and movement of trading oversees.
In contrast, only about a quarter of the respondents expect the changes to result in increased transparency, and fewer than
one-fifth believe the changes will result in a systematic reduction in risk.
24
Demographics/Respondent Profile/Research Background
In what type/part of an organization do you work?

Oil 17.6%
Natural Gas 44.4%
Power 40.8%
Natural Gas Liquids 7.0%
Investment Bank 4.2%
Regulator 0.0%
Other 23.2%
0 10 20 30 40 50
Research participants represent a range of energy industry organizations, including investment banks (4.2%), but the largest
participation came from entities operating in the natural gas (44.4%) and power (40.8%) sectors.
Within the “Other” category (23.2%), participation came from a range of entities, including broker/dealers, hedge funds,
and consulting firms.
Select the category that best describes your organization/role.

Producer 13.4%
Marketer 24.6%
Fund 2.8%
Utility 28.9%
Consumer 4.2%
Midstream 2.1%
Retail 1.4%
Other 22.5%
0 5 10 15 20 25 30
Respondents include a range of energy market participants, from producers (13.4%) and funds (2.8%), to utilities (28.9%)
and marketers (24.6%).
Others (22.5%) describe themselves in a variety of roles, indicating some knowledge of the trading area.
25
How large is your organization's annual wholesale energy transaction portfolio (in U.S. dollar value)?
Below $50 million 23.7%

$50 million to $149.9 million 13.2%
$1 billion to $2.9 billion 15.8%
$3 billion to $9.9 billion 12.3%
$10 billion and above 11.4%
0 5 10 15 20 25
Respondents represent organizations with energy transaction portfolios of varying sizes. While almost one in four
respondents represent organizations with modest annual wholesale energy transaction portfolios of less than $50 million,
more than one in 10 represented organizations with large transaction portfolios greater than $10 billion.
Which of the following best describes your work area?

Executive Management 14.9%

Internal Audit 0.9%
IT/Information systems 3.5%
Compliance 14.9%
Risk Management 20.2%
Legal 8.8%
Trading 21.1%
Origination/Marketing 7.0%
Production/Assets 0.0%
Other 8.8%
0 5 10 15 20 25
More than 56 percent of respondents identify themselves as working in trading, risk management, or compliance, with
trading accounting for the largest representation at 21.1 percent.
Nearly 15 percent of respondents identify themselves as working in senior management.
26
In what region do you as an individual participate in your company's activities?
North America 93.9%

South America 4.4%
United Kingdom 7.0%
Western Europe 6.1%
Eastern Europe 1.8%
Middle East 1.8%
Asia/Pacific 7.9%
Africa 1.8%
Australia 3.5%
Other 3.5%
0 20 40 60 80 100
The vast majority of respondents (93.9%) indicate participation in activities within their organization’s North American
operations.
Participants also indicate involvement in activities across the globe, particularly in the United Kingdom, Western Europe,
and Asia.
27
About NICE Actimize About Fulbright & Jaworski L.L.P.
NICE Actimize is the world's largest and broadest Fulbright & Jaworski, in business since 1919, is recognized
provider of a single financial crime, risk and compliance as one of the leading oil & gas law firms in the United States
platform for the financial services industry. NICE Actimize by Chambers USA 2010 and this is due in part to the fact
empowers its clients to prevent financial crime, mitigate that six of our energy regulatory lawyers were recognized
risk, reduce operational costs, minimize losses and individually by Chambers. Our energy regulatory group is
improve compliance. The company provides real-time composed of highly experienced lawyers who provide a full
and cross-channel fraud prevention, anti-money range of services in energy regulatory matters, including
laundering, enterprise investigations, risk management natural gas regulation, crude oil and petroleum product
and trading surveillance solutions; built upon the regulation and electric power regulation. This team includes
Actimize Core Platform which has been enhanced by the seasoned lawyers formerly with the CFTC, the FERC, the U.S.
company's acquisitions of Syfact and Fortent Department of the Interior, and the U.S. Department of
(Searchspace) analytics and technology. With offices Justice as well as a former general counsel of a major energy
across North America, Europe, Asia and the Middle company. We have a broad regulatory practice geared to
East, NICE Actimize serves the majority of the world’s helping our energy clients cope with the complex and
largest financial institutions including all of the top 10 changing regulatory schemes affecting their business
global banks. www.actimize.com operations, including the trading of energy commodities.
www.fulbright.com
For more information about how NICE Actimize has
helped energy firms address compliance requirements For more information about how we can help your
and how we can help your organization build an organization build an effective energy compliance program,
effective energy compliance program, contact Actimize please contact Erik Swenson (eswenson@fulbright.com or
at 212-643-4600 or actimize.info@actimize.com 202-662-4555) or Michael Loesch (mloesch@fulbright.com
or 202-662-4552).

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Actimize Energy Trading Compliance Research 2010

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Energy Trading Compliance

I study of senior executives and compliance personnel in the energy trading

More than 140 industry participants responded to the questionnaire. Of those,

T time surveillance, is increasing.

Risk vs. Compliance Oversight

Acknowledgement of Rules and Compliance Readiness

Regulators’ Reach Across All Markets

Respondent Profile and Research Background

Increasing Need for Compliance

Physical transactions 24.6%

Exchange transactions 9.2%

Over-the-counter transactions 23.2%

All of the above, equally 35.2%

Don't know 7.7%

Risk vs. Compliance Oversight

Don't know 24.8%

Company telephone 54.3%

Personal and company cell phone 15.5%

Electronic mail 65.9%

Instant messages 40.3%

Don't know 22.5%

In your organization, to whom does the compliance function report?

General Counsel 25.6%

Compliance Committee 10.9%

Board of Directors 9.3%

Don't know 17.1%

Who manages your energy market compliance?

Risk management 29.9%

Independent compliance group 18.2%

Don't know 3.6%

Don't know 39.0%

Somewhat acceptable 13.2%

Don't know 5.4%

First Generation 41.1%

Third Generation 8.5%

Manual - reviewing paper logs or conducting spreadsheet analysis

Cost / expense 56.8%

Data availability / access 24.6%

Lack of expertise 27.1%

Lack of senior executive commitment 10.2%

Changing compliance rules 40.7%

Prior to assuming duties 27.1%

Voluntary training only 2.5%

Don't know 13.6%

Seizure of assets 6.8%

Operational disruption 29.7%

Don't know 2.5%

Don't know 5.6%

Less than $50 million 17.6%

$50-$99.9 million 12.7%

$100-$499 million 26.1%

Over $1 billion 9.9%

Very likely 8.5%

Neither likely nor unlikely 14.1%

Very unlikely 7.7%

Don't know 18.3%

19.0% 19.0% Yes - as a matter of course

Number of employees at the non-compliant organization 2.8%

Regulatory Pressure Will Increase

Yes - they already have this capability 39.4%

Don't know 14.8%

Don't know 7.0%

Less than $5 million 29.6%