Commodities Brokers Put Forward Industry-Led Benchmark Solution

Terry Flanagan

An industry-led solution to providing a more open and transparent method of calculating certain benchmarks has been put forward by a group of commodities brokers, as the Libor crisis threatens to engulf yet more organizations.

Europe’s leading inter-dealer brokers—Icap, Marex Spectron and Tullett Prebon—have launched a set of new natural gas benchmarks that will be calculated using actual transactions.

The process of setting benchmarks, which underpin the pricing of a vast array of financial instruments, has come under the spotlight in recent months after the Libor scandal first broke in June last year. Calls have grown for changes to the rate-setting system of Libor and other industry-led benchmarks, some of which, like Libor, are formulated merely by assessments from industry experts.

The Financial Services Authority (FSA), the U.K. watchdog, is also currently investigating alleged manipulation of the domestic wholesale gas market after a whistleblower made claims in November that traders had manipulated wholesale prices on Europe’s biggest gas market.

The new solution put forward by Icap, Marex Spectron and Tullett Prebon for the natural gas markets—to be called the Tankard indices—will focus on trades that are physically-settled natural gas forwards and executed between utilities, natural gas producers, hedge funds, banks and trading houses.

The Tankard indices initially cover the four leading traded natural gas hubs in Europe—the U.K. National Balancing Point, Dutch Title Transfer Facility, German NetConnect Germany and Gaspool.

The current methodology used by price reporting agencies to set index prices for the OTC gas markets in Europe relies on information voluntarily provided to them by gas companies.

“Providing robust and transparent indices based on actual trades will go a long way towards increasing the level of transparency in the European natural gas market,” said Richard Frape, director of market services at Marex Spectron.

“This collaboration between the three largest brokers in the OTC market for European natural gas is likely to provide a sound foundation for related physical activity.”

Regulators have so far struggled to impose meaningful changes to the way benchmarks are worked out due to an apparent lack of enforcement powers held by watchdogs across the globe.

Many investors are calling for increased regulatory powers to restore credibility and integrity to the benchmarking process and it seems that regulators are finally now formulating some sort of cross-border response through Iosco, the umbrella group of global securities regulators, while others such as the U.K.—where the Libor scandal first broke—are also seriously tackling the issue.

“‘My word is my bond’, is the motto on which the City was built—and we must rebuild that bastion of confidence here in Britain [following Libor],” said Greg Clark, the City minister, in a speech earlier this week in London.
Regarding Libor, the fallout continues as the Royal Bank of Scotland this week became the third bank—after Barclays and UBS—to be fined over manipulating the Libor rate-setting process with the FSA revealing that this would not be the last of the fines.

“The extent and nature of the misconduct relating to Libor has cast a shadow on the reputation of this industry and we expect firms to take steps to ensure that this can never happen again,” said Tracey McDermott, director of enforcement and financial crime at the FSA.

“This is the third penalty we have imposed in relation to Libor-related misconduct. The size and scale of our continuing investigations remains significant.”

The FSA says it is continuing to pursue a number of other significant cross-border investigations in relation to Libor and other benchmark rates.

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