The regulatory investigation into alleged manipulation in the U.K. gas market, Europe’s biggest, may fail to undermine a price-setting system that relies on daily conversations between journalists and traders.
While forcing more buying and selling onto an exchange would improve transparency, scrapping reporters’ assessments of the private over-the-counter market would increase prices for end-users, according to Englewood, Colorado-based IHS Inc., a consultant whose clients include 70 of the U.K.’s 100 biggest publicly traded companies. Whatever the merits of the probe, regulators will have “great difficulty” finding evidence of manipulation, Eddie Proffitt, chairman of the natural gas group at the U.K.’s Major Energy Users’ Council, said Nov. 14.
Five months after the Libor-fixing scandal that led to a record fine for Barclays Plc, the U.K.’s $480 billion gas market has come under the spotlight after a journalist at the ICIS price agency reported deals he suspected were being done below “prevailing” levels. European gas trading increased 83 percent in the past five years as utilities sought to cut purchases from suppliers based on oil prices, according to Prospex Research Ltd., a London-based researcher.
“The European gas hubs are liquid markets, so it’s hard to report a price to a price-reporting agency other than where it’s trading,” Alex McDonald, chief executive officer of the London Energy Brokers’ Association, said Nov. 28 by e-mail. “Libor, by contrast, is a market that has not traded beyond the very short dates since the crisis.”
Every working day at 4:30 p.m. in London, a team of journalists at ICIS, a unit of Reed Elsevier Plc, call or e-mail about a dozen traders to collect prices of natural gas for delivery from one day to five years ahead. They gather data on completed deals as well as bids and offers, and then compare those with trades on Trayport Ltd.’s online platform, which aggregates prices from brokers including ICAP Plc and GFI Group Inc., and make their assessments. The prices are published daily and used to set contracts between buyers and sellers.
“Price-reporting agencies are generally efficient at regulating themselves, with reporters applying editorial judgment to decide what’s included,” Roderick Bruce, an analyst at IHS in London who’s tracked energy markets for seven years, said in a Nov. 16 e-mail. “Any other alternative, like forcing all trades onto an exchange or through a registry, would result in far higher costs for the industry and consumers.”
Traders and Journalists
The investigation was sparked after the ICIS journalist, Seth Freedman, a former broker at Insinger de Beaufort NV and Eden Financial Ltd., notified his managers of what he suspected was an attempt to manipulate assessments on Sept. 28. ICIS in turn reported the case last month to the Office of the Gas and Electricity Markets, saying there had been “a series of deals done below the prevailing market trend,” according to a Nov. 12 statement. Ofgem, as the regulator is known, said in a Nov. 13 statement it’s “looking into the issue.” The Financial Services Authority, or FSA, also said Nov. 12 it had received the information.
“Traders run roughshod over unsuspecting, under-trained journalists, leaning on them to influence the final prices in their favor,” Freedman, 32, who joined ICIS in January, said in a Nov. 16 phone interview. “Traders tried to influence me regularly.”
Reporters working for ICIS receive “extensive training” and are equipped to challenge any information they receive, Paul Abrahams, a Reed Elsevier spokesman at the company’s headquarters in London, said yesterday by e-mail.
On the day in question, Freedman said he spotted deals in the day-ahead market at 58 pence a therm while the prevailing price quoted by other traders was 58.50 pence. ICIS’s eventual assessment was 58.25 pence, according to its daily report obtained by Bloomberg News. Freedman said his manager set the price halfway between the two.
Journalists at McGraw Hill Inc.’s Platts, which began to publish oil prices in 1909, didn’t observe any irregular trading activities or attempts to manipulate the market that day, Kathleen Tanzy, a spokeswoman based in New York, said Nov. 14 by e-mail. Platts’s assessment was 59.1 pence. London-based Argus Media Ltd., the largest publisher of coal prices, discounted “unrepresentative trades” and put the price at 58.5 pence, it said Nov. 14 on its website.
“It’s always been pretty subjective,” Kevin Alger, head of gas trading at RWE Supply & Trading GmbH, a unit of Germany’s second-biggest utility, said Nov. 14 at a conference in Vienna. “You have someone calling up and asking for a price at a moment in time, but it’s moving all the time.”
Unlike gas-price assessments, most submissions made by banks to Libor, the London interbank offered rate that determines interest rates on about $300 trillion of financial products around the world, can’t be compared with real trades.
The FSA’s Managing Director Martin Wheatley on Sept. 28 proposed stripping the British Bankers’ Association of responsibility for Libor and adopting criminal penalties for rate rigging. The London-based BBA, which continues to manage the rate, proposed Nov. 8 cutting the number of rates it sets daily to 30 from 150 because many of them aren’t traded.
At least a dozen banks worldwide are being investigated over allegations they colluded to manipulate Libor. Barclays was fined 290 million pounds ($465 million) in June after admitting manipulation, prompting Chief Executive Officer Bob Diamond to resign. Royal Bank of Scotland Group Plc said Nov. 2 it expects to pay a fine in coming months to settle regulators’ probes into the affair.
More than half the world’s oil is priced using Platts’s Dated Brent crude assessment, according to the company. Its so-called trading window, an electronic system that captures deals, bids and offers, makes it more transparent than the gas market. Argus operates a similar bulletin board.
The International Energy Agency, OPEC and the International Organization of Securities Commissions said in an October 2011 report that “there is a risk that a price-reporting agency’s benchmark price can be manipulated by the submission of false prices or by over- or understating the volume transacted.”
ICIS’s methodology is “almost entirely subjective,” compared with Argus and Platts, which use a “combination of mechanistic analysis and judgment,” the report said.
ICIS is in talks with IOSCO on “how to maintain confidence in the oil market indices published,” Reed Elsevier’s Abrahams said.
Exchange trading is more transparent as prices are publicly available, including those on ICE Futures Europe, the region’s biggest energy exchange. Risk is also minimized as the exchange or a clearing company instead becomes the counterparty.
The gas market may not be ready to move completely to exchanges, according to Colin Lyle, chairman of the gas committee at the European Federation of Energy Traders.
Exchanges tend to charge fees for every transaction, while trades through a broker are typically cheaper or even free if counterparties deal directly with one another.
In a market where “counterparties are substantial companies well known to each other, the risks may well be better managed, and at lower cost, by trading bespoke, un-cleared, products” over the counter, Lyle said in a Nov. 22 e-mail.
About 34 percent of the gas on the U.K.’s National Balancing Point, a virtual trading hub, is bought and sold on exchanges, according to Patrick Heather, an independent consultant and a former head of gas trading at BG Group Plc. It’s 5.9 percent in the Netherlands, Europe’s second-biggest market, he said.
Even if all trading moved to exchanges, manipulation may still occur, according to Proffitt, whose group represents energy buyers including Trinity Mirror Plc, publisher of the Daily Mirror and the Sunday Mirror tabloids in Britain, and discount chain Aldi.
“Traders could use untraceable mobile phones to call each other and arrange to hit bids or offers, even on exchange-traded markets,” he said in a Nov. 14 telephone interview from London. Proffitt said he hasn’t seen any evidence of price fixing.
If the allegations of manipulation made by Freedman and ICIS are shown to be true, the U.K. government is prepared to legislate to clamp down on wholesale natural-gas trading, Energy Secretary Ed Davey said on Nov. 13 in Parliament.
“If we find we need more powers for the regulator, we will act,” he said.
U.K. natural gas for next-day delivery rose 0.5 percent to 67.3 pence a therm at 5:03 p.m. London time, according to broker data compiled by Bloomberg.