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48 Min Read

Honcho Talks Episode 5: Trading in Times of Crisis

I caught up with Deanna Reitman of DLA Piper, to see how companies can best prepare their compliance programs for times of crisis.  The article she wrote on this can be found here, highlights are below, and the the full podcast audio and transcription are at bottom.
Summary:
  1. People don't understand how much the government can and will look backward

    They may not be looking right now, bc busy looking at other things, but they do keep all of this data
    They look at how people behave in times of crisis (for example Enron and the California energy crisis)
    Have to be prepared and be vigilant right now
  1. Now is not the time to deviate from SOP's to the extent you had them
          Don't say "we used to buy a bunch of oil, and we now sell a bunch"
          If you're going to deviate, do it by process, in writing, involve your attorneys
          Traders want to take advantage of opportunity, and that's their job, but have to have meeting notes + documented strategy
  1. Make sure compliance program is in order
          Not a big deal to make sure manuals are up to date, have recent documentation
          Ok to re-distribute documentation and assure people that you are there if any questions arise
          Traders (and everyone) forget...that one little reminder could save them and you
                  
  1. Make sure the Risk Control group is running reports (VAR etc) on up to date data
          If used to run reports every 2 days, now might want to run daily
          If you are aware of what's going on you can get in front of potentially bad behavior

The full podcast and transcript with Deanna is below..

And her article on the same topic is here

 

Anish Parikh:

This week on Honcho Talks.

Deanna Reitman:

Well, I can tell you that the appearance of doing something wrong will bring with it the same level of scrutiny and reputational damage as actually doing something wrong.

Anish Parikh:

Welcome to the show everybody. Our guest today is Deanna Reitman. Deanna is Of Counsel with DLA Piper where she has over 20 years of experience working in commodity markets and more than eight years of senior management experience. She primarily advises energy commodity and marketing firms on structuring transactions and providing regulatory and commercial advice to her energy clients. Welcome Deanna. How are you today?

Deanna Reitman:

I'm good. I'm home working, and I'm home homeschooling.

Anish Parikh:

Well, that's impressive. You got a homeschooling going on and a podcast. And I know it's trying times for everybody, but one way or the other I appreciate taking the time.

Deanna Reitman:

Yeah, it's no problem.

Anish Parikh:

Everybody's managing through all right, the others in the firm and everything?

Deanna Reitman:

Everybody's doing really well. I think that we're all going to have to learn how to balance work, and if you have young kids, it's not as easy as just turning on the computer and letting them work. Younger kids, at least elementary school kids, need a little bit of guidance. So I think we're all going to have to figure out how to get work done, stop train of thought, get up, teach a little bit of English, or at least set them up on English or Math, whatever the heck the case may be, and then come back to your train of thought. That's going to be what everyone's going to have to adjust to, I think, from the legal perspective. Because we're home with our kids, and it's wonderful, but we're used to working, concentrating pretty hard on one thing for a very long time. So that's maybe the one thing that'll be adjustment. But other than that, fun, and he's sitting right across from me, and he has the hiccups.

Anish Parikh:

All right. Well, now we'll get some background color from that. And you bring up a good point; I've seen this a lot over the years. It's always hard to switch tasks whether you're working on one task of work to another, but it's even harder, it's exponentially harder to go from working to family mode. Those are such different states of minds that, for me anyway, it typically takes me 45 minutes to even be able to do that in a given day. And so now we're doing it all the time. Anyway-

Deanna Reitman:

We'll just have to get used to it.

Anish Parikh:

Yeah, yeah. That's right. We can all adjust, and everybody will be understanding. And so a lot of this is timely too because we're in the middle of COVID-19, and everybody's managing it. And our topic for today is trading in times of crisis. And I think a corollary to that is your communications in times of crisis. And you know, I've heard from yourself, I've heard from others, in the business who were in the front office who have spoken about crises as times of opportunity, times of uncertainty, and times of scrutiny. And let me just back up. I'd love to hear your thoughts on all this, Deanna, how you've seen it unfold over the years. And what do you think some of the key things are to look out for clients as we go through today?

Deanna Reitman:

Yeah. So I'm glad that you asked me, because it is a time of opportunity, but it is also a time of heightened scrutiny. I don't think that people realize how the government can look back on their marketing and trading activity. So we've seen this time and time again. I don't know if anyone remembers at the California energy crisis when the FERC looked into the traders' activities on the energy markets and the electricity markets, it was two years later that they actually brought the enforcement action. So the regulators do look at your activity, and they do scrutinize your trading and marketing activity during times of crisis. They may not be doing it right now because they are busy, and lots going on, as we just were talking about people adjusting to their jobs and how they're doing their jobs. But they will look, and like you just said, opportunity can bring scrutiny. And no one's saying that the regulators don't want money to be made, but what they don't want is people to take advantage of other people in these times of crisis. And so they are looking, and they will look.

So it maybe busy right now, but it doesn't mean that they're not going to come back and look. And so you have to be vigilant, and you have to be prepared as a marketing and trading company for these hindsight looking types of scrutiny that are going to come, whether it be a year or two years from now. So I would say that if I was going to give advice for trading in times of crisis, I would say a few things. One I would say now is not the time to deviate from your standard operating procedures of how you are trading. But now is not the time to bring on a new trading strategy, enter into a new market, unless of course you have a process and procedure in place where you can vet that change, and it's vetted with a large group, including your legal and your compliance department.

They all need to be involved, because two years from now no one's going to remember. I can't even remember what I did last night. You're not going to remember it two years from now. But if you have a group of people that vet these changes, because like we said, there could be opportunity here, and you write it down, and you have a note and a strategy, and then the traders then follow that strategy, even if it does deviate, I think you'll be in a better position, because then everyone can vet it and make sure that you're not actually taking advantage of a market crisis and or appearing as if you're taking advantage of a market crisis. So if you are going to deviate from standard operating procedures or standard trading strategy, that's how you would do it. Otherwise, my first piece of advice would be don't deviate. And you should probably tell your traders, "Don't deviate," unless you absolutely see an opportunity, and then make sure that they know the process to do that.

No changing your normal volumes by something can raise alarm. No changing the products you changes, things like that. But it can be done; it just has to be done with a process. The second thing I would say-

Anish Parikh:

So let me jump in-

Deanna Reitman:

Go ahead.

Anish Parikh:

... if I can Deanna and take it back a second. You said a minute ago crises have happened before; regulators expect markets to work normally during these crises, and as a consequence people will make and lose money. But I think there's an important thing that you pointed out which is that right now everybody's busy adjusting. And so as an example, I was talking to a customer earlier today who mentioned, because we're doing a data transfer project form, that said, "You know, I think, because everything that's going on in the world right now, it's going to be a couple to a few months in all likelihood before anybody would ever even think about asking us for this, but we want to be prepared."

And I think to your point, if I heard you right, that's right. Nobody's going to be looking at it this minute or in the next couple of months, because everybody's got their hands full. But the pattern has shown that give it, I don't know; six months, 12 months, 18 months, these things will come up, and these things in particular, these times get overly scrutinized. Is that kind of what I heard you say?

Deanna Reitman:

Yes, and that is what happens. So you just need to make sure that you are more diligent in your note taking, that you're involving the right people, maybe people you wouldn't have thought to involve before. Maybe before when you were changing your trading strategy and or you were deciding, like you had just said, what technology or data you're going to capture and or report; you've never had to involve your legal department. In times of crisis you would involve your legal department and things like that. Just make sure we have the right eyes with the right perspective, and everybody's perspective is different. And then make sure you write it all down, and you keep those notes, and you keep your outcome. Like you said, could be six months, 12 months, two years.

Anish Parikh:

Yeah. And so to your point there, markets are going to move, and it's everybody's job to move with them. But whatever you're doing that's different, if it's substantially different, really good idea to document it and make sure you've covered all your bases.

Deanna Reitman:

That's right. Exactly.

Anish Parikh:

Okay. And then you were going to go on to make another point before I interrupted you. What was that?

Deanna Reitman:

Oh yeah, no problem. I would say the second thing you really want to make sure you are doing right now is that you're making sure your compliance program is in order. So a lot of times if you were in the middle of a regulatory inquiry, or a litigation, or something along those lines, or prosecution, you wouldn't be making changes to your documentation; you would be afraid that that would draw attention to shortcomings and or be an infraction on its own, because you're changing your writing, your documentation.

But now is different. Your compliance program in times of crisis should be in order, and it's no big deal right now to make sure that your manuals are up to date and that you do have recent documentation of attestations to those manuals. I suggest in times of crisis that you look at your compliance programs, that you make sure you have manuals that cover all the trading activity, that you make sure it's relevant and fit for purpose, and that if you're trading in copper, your manual is not a complete manual about trading in oil. And you can do that right now, and make sure it's up to date. And if it is up to date, great; I suggest to you send it out again, get another attestation.

Anish Parikh:

Yeah, sorry that I cut you off there.

Deanna Reitman:

Yeah, no worries.

Anish Parikh:

So it sounds like one of the things that's going on, I think over the last week in particular, and spilling over into this week, hopefully by the end of this one everybody's set up, but with almost everybody move into a work from home, there's plenty of adjustment just in that. And I think everybody's trying to get their heads around it. And in some cases it may be extraordinarily busy, and in some cases it may be everybody's kind of waiting to move because infrastructure isn't even set up. And so I think what I'm hearing you say is, one way or the other, you can use this time of crisis to update, and you better use it to give yourself a new operating manual for what you're getting into.

Deanna Reitman:

Right. So people forget. I do this for a living, and I don't remember every aspect of every regulation and or every nuance, so in every interpretation of every regulation. So people forget. And I can imagine that a front office person may forget, and I can also imagine that a front office person, as you said, even a mid office person going through this transition when they're working from home. And we just said, my son's sitting across from me with the hiccups. You are going to forget every nuance of every rule.

So now is probably a good time to make sure your program's up to date, your manuals are up to date. And I even would suggest sending it out again with a little reminders saying, "Hey, please read the manual again." If you'd like to collect attestations that the person has read it, that's not a bad idea. I also would suggest that you let people know that you're available as a legal and compliance person for questions, because people may not know how to get ahold of you as they're working from home, and that that's not going to be an excuse. The market manipulation rules, yes, have some intent components to them, but some of them do not.

Some of the market manipulation rules or disruptive trade practice rules have simply reckless standards. You could just simply be found in an infraction when you just were reckless, and you didn't need to do anything. So I would make sure that the front office, mid office personnel know how to ahold of your legal and compliance department in times like this. I definitely suggest not being afraid to roll out bits and pieces of training, training about working from home, about how you are to enter your transactions, insta-trade capture system, even though you're working from home within a certain timeline, because that leads to what I would say would be the third thing you would have to make sure is running correctly when people are working from home and or trading in a time of crisis like right now.

And that is you need to make sure that your risk control group has the right trading data so that they are running there reports, whether it be VAR, market to market every day, everyday, and it's on data that is reflective of the true position of the company and the trader so that you are looking for and you can see any anomalies, any situations where someone made a ton of money, lost a ton of money in this position, so you can, again, raise those to your legal and compliance department, and or make sure you understand what's going on. Because bringing it full circle, two years from now, someone's going to ask you. So those would be the three main things I would say you should do and could do in a time of crisis to mitigate your regulatory scrutiny risks, I should say. Because anytime a regulator can audit and or bring a regulatory inquiry, it's just you want to be prepared to answer that regulatory inquiry and or that audit and feel prepared.

Anish Parikh:

So I think to summarize, one, don't deviate from SOPs to the extent that you have them, or if you do, you better document them clearly. Two is good time to update your manuals and make sure your program's in order, and send out reminders; let everybody know where you are, what the rules are, and how they can engage with you if they need. And then I think make sure you're running reports on up to date so that, especially now since things are more volatile, that you're more aware of what's going on and you can get in front of something before it snowballs out of control.

Deanna Reitman:

Yes. And people can do that in a regular workday. Usually risk control groups do that on a regular workday. And at a regular work day traders are sitting at a desk; they immediately probably enter their transactions into the trade capture system if it's not set automatically. When you're sitting at home, you may have an extra step to enter that transaction data, or you may forget because, like we just said, you're getting up and then try to teach a little bit of science class to your fifth grader. So things like that you want to make sure you remind your front office personnel that they are doing so that the risk control groups can run the reports on appropriate data.

Because if you're able to run a report on appropriate data and you see some major swing and or change in behavior, you can get in front of maybe some bad behaviors, or more likely than not, you can get yourself written notes, collaborative written notes with your legal compliance risk CEO that explains that deviation so that two years from now you have the story. Nobody wants to do anything wrong for the most part I've learned doing this for 18, 20 years. It's making sure that you have the notes, written story, so two years from now you're not fumbling around trying to remember what you did. Because you didn't do anything wrong; it just was an opportunity in the market, and everybody saw it, and everybody was okay.

Anish Parikh:

Two questions about that Deanna. Actually, I think it's really interesting here. So the first thing is what you said before, is that you said it's good to get an attestation that the training was received or that the reminder was received. That's the first thing. And the second thing is what you're pointing out here, is that it's not even about what you did, but it's about how you documented what happened or what the company did. And can you elaborate on that? Do you have generalized examples of where that went wrong for a company or just more insight into what makes you say those two things?

Deanna Reitman:

Well, I can tell you that the appearance of doing something wrong will bring with it the same level of scrutiny and reputational damage as actually doing something wrong in the end, because in the end having everybody in the market know that you're under some kind of investigation is horrible for your reputation. So if you're able to have the right documentation and or the right story to tell that your compliance programs are up to date, that everybody is trained, that you know this person, yes, made a lot of money; it seems like it was a large position, et cetera, but it was vetted, et cetera, et cetera, "Here's the reason why," you can stop, or maybe prevent, or maybe lessen some kind of reputational risk and or regulatory risk. So it's things like that that I've seen happen.

Because you can't stop somebody from coming in and asking me what's going on or what happened, but you can stop something from becoming into a full blown investigation and or something being referred to the department of justice and there being criminal action. And all of this stuff is public information. Every investigation becomes public.

Anish Parikh:

Yeah. How does that happen, the stopping, or the mitigating, or the lessening? How does that happen in practice?

Deanna Reitman:

Oh, okay. So as a company, you're able to mitigate or lessen any kind of regulatory fine by showing that you have a culture of compliance, that your program was in place, that you followed that program; say that did do something wrong, that you can show it was just this one bad actor, "It's not our company. It's not our policy." So whether it's CFTC or the FERC breaking in before them, and I've been in front of them on multiple occasions, you have the opportunity tell them what you've done as a company from a legal, regulatory, compliance perspective and even a risk management perspective, that you are able to present these things.

You have to have a story to present though, and then it could mitigate any fines and or maybe not have any fines be brought, but you have to have the story to tell. It has to be a real story. It can't be fake, either. It can't be, "Oh, well I have a video, I promise, and here it is." You really need to give some thought to it, because they will look.

Anish Parikh:

What you're saying is, it's interesting; the appearance of it matters, but it's based in reality. It's not a fairy tale. But what is your story? What were you guys doing? And to put it simply all of this essentially acts as an insurance policy, how effective-

Deanna Reitman:

Well, they have sentencing guidelines. So I guess I wasn't very clear that the regulators have sentencing guidelines. Or it's sentencing guidelines. That's not the right word. They have guidelines as to how and how much it can fine and or give someone or a company a regulatory fine, and you can reduce that amount based upon how you present your compliance program and your compliance culture. Is it embedded into your every day company marketing and trading activity? Does that make sense?

Anish Parikh:

Yeah. Is that set in stone? Not set in stone, but how much wiggle room, or however I want to ask you it, you just told me that-

Deanna Reitman:

No, wiggle room's right. No, you're totally right to say wiggle room, because they're just guidelines. That's why you never know. You never know.

Anish Parikh:

Yeah, I get-

Deanna Reitman:

But there is an industry standard. That's why it's so important to make sure that you are checking in with, there are lots of industry groups or that you can be involved with, but there are also lawyers like myself that know what the industry standard is. You've got to check it, because the regulators won't say, "You must have this. You must have that. You must have this. You must have that," if you're not necessarily a regulated entity but simply an end user, or a physical player, or something like that. But there are industry standards. You don't want to be below the industry standards. You want to have what's fit, what's right, what your third party colleagues in the market are doing in the regulatory compliance space.

Anish Parikh:

Yeah. And so the question I was really asking there, it's kind of a silly question in a way, but just humor me for a second. The question I'm saying is, so around these guidelines, how real is that mitigation? Have you seen it happen in practice so that that-

Deanna Reitman:

Oh yeah.

Anish Parikh:

... literally resulted in a lesser fine or lesser punishment?

Deanna Reitman:

Oh yeah. Oh yeah.

Anish Parikh:

Okay.

Deanna Reitman:

I've seen it, been involved. Yes, yes, yes. It works. I'm not going to-

Anish Parikh:

A little bit lees, a lot less, or a whole lot less? Let me say like that.

Deanna Reitman:

It depends upon your attitude too. If you go into a CFTC inquiry and you have a bad attitude, you are not going to get as much as someone who comes in probably with a cooperative attitude even though you have the same compliance program in place, for example. So they really are just guidelines. It just depends upon the facts of the situation. If you really did something wrong, when you really find a traitor who did something wrong, to self report that, but there's no real mandatory type method as to how you do that.

If you self report it and you show that you have a compliance program behind it, "It was just that one bad actor. We see this, and now we're going to train around it. We're going to put this in place and that and place to make sure it doesn't happen again," I'm sure you'll end up in a better place than you self report it and you say, "It was a bad actor, and we've done everything right, and we're not going to do anything else to fix it. And it was just that guy." You know what I mean? It depends. These are human beings you're dealing with on the other side of the table. They want to see that you take it seriously and that you don't want to harm the market.

Anish Parikh:

And so going back to that question I had about the attestation, it sounds like that's a part of the story basically. "Hey, I got the training. Hey, I acknowledged that I got it. I acknowledge that the company gave it to me." Is that what that is?

Deanna Reitman:

Well, sort of. It's more for the company that it is able to say, "It's very serious to us, and we do require our front office people," and sometimes mid office. A lot of companies require front and mid. I would even require back maybe, depends. I guess it has to be fit for the business to say, "We sent it out, and not only did we send it out, but we made sure that they wrote back that they attested to it and that they understood it." It's a little bit of a better story to tell than just, "I sent it out." Right?

Anish Parikh:

Right. And then, "I don't know what happened. I just sent it out."

Deanna Reitman:

So what I would say if I were a regulator on the other side was, "Okay, so you sent it out. How you know they read it?" It doesn't sound like you care very much if you just send it out. I don't know. You just try to create your story, and you try to create your program into something that would be telling your story that you really do care; you care about your traders and your business following the rules and that they don't do anything to harm the market. And you can see that your market counterparties are getting attestations. Most people get attestations not only once, but on an annual basis.

Anish Parikh:

And so the simplest way to say it is if the company or an individual gets into a scrape, generally, like you said, most people are trying to do the right thing, trying to do good, and just trying to do business, and basically the other side wants to hear, "Great. Show me that that's true. Show me how that's true. Show me how you're a good company doing business and not a bad actor doing something bad."

Deanna Reitman:

Yeah. And I think that that is mostly okay. For the most part, like I said, been doing 18, 20 years now, rarely see someone doing something wrong because they're bad. Most of the time that they've done something wrong, it was not intentional; it was the misunderstanding. But again, sometimes that doesn't matter, because you have that requisite standard and some of these market rules, and you could still be found guilty, but it's still better to tell the story to show that you really care about following the rules and that you're going to operate in a fashion, in compliance with the rules. And that's having a good program in place.

Anish Parikh:

That's really something, what you're telling me, that you've been in business for, you said 18, 20 years, and the overwhelming majority of things you work on or people that didn't do wrong but got themselves into an inquiry or a situation where they need to call you anyway. And that's generally what happens. One more question for you, Deanna, before I let you go here. I think it's been really helpful for our audience, somebody said to me that, they were commenting about the crisis, and they were like, "Well you know, a crisis like this is wide-scale, effecting everybody, but I think when you go through a serious inquiry, it's almost like your company's going under a mini crisis like the one everybody's going through with coronavirus." Any truth to that?

Deanna Reitman:

It depends. It depends upon what it is. Audits can be routine. Again, it could feel like scrutiny, but audits are just routine. It could be that the inquiry really did find that you are engaged in some behavior that was an infraction. I don't know if that's true. I'm sure, and I know that it is stressful, Because I've been through it all, an audit, regulatory inquiry, self-reports, more than one time. It's very stressful when you go through it. Do you consider it your only mini crisis? Yes, if you care about your company, and I care about my clients. Yeah, it seems like a mini crisis, but a lot of the stuff is routine. Audits are routine; reporting is routine; questions from exchanges can be routine, especially when you're doing things that are highly regulated like block transactions or cross transactions, EFPs. Sometimes you get questions about those things.

Anish Parikh:

Yeah, it's like going to the dentist.

Deanna Reitman:

I'm sure it's all. Yeah, yeah. Personal for them.

Anish Parikh:

Can be routine or it can be more painful. Hey Deanna, thanks a bunch for taking the time and miss your day to share with us and with our audience about how they should be thinking about things during this crisis. And I think you wrote a paper about this or an article. Do I have that right?

Deanna Reitman:

I did. It was just published today. I can send you the link-

Anish Parikh:

Oh, where should people-

Deanna Reitman:

... but it's on marketing during-

Anish Parikh:

Go ahead.

Deanna Reitman:

Yeah, it's on the DLA Piper platform. I will make sure that it is uploaded to my bio on DLA Piper. So if you go to dlapiper.com, look for me. I'll make sure that the link is there in case people want to read it.

Anish Parikh:

Cool. And when we post this, I'll put a link in our transcription so that everybody can click to there as well.

Deanna Reitman:

Perfect. I'll send it.

Anish Parikh:

All right. Thanks again, Deanna.

Deanna Reitman:

All right, thank you.

Anish Parikh:

Enjoy your rest of your day, and stay safe out there.

Deanna Reitman:

All right. You too.

Anish Parikh:

All right, take care.

Deanna Reitman:

All right. Bye.