U.K. Gas Market Manipulation Claims Highlight Need For Trading Controls Within Firms
Concerns over the alleged manipulation of wholesale gas markets in the U.K. could bring with it more onerous regulation in future to energy markets—as firms generally are being urged to have the correct internal controls in place to monitor and investigate any suspicious trading activity.
Earlier this month, a whistleblower made claims to the Financial Services Authority, the U.K. regulator, that U.K. traders had manipulated wholesale prices on Europe’s biggest gas market. The alleged manipulation of the U.K.’s day-ahead gas contract, which is regarded as a benchmark across Europe, could now have serious implications for how these markets operate in the future.
“I am extremely concerned about these allegations and will be keeping in close touch with the regulators while they get to the bottom of this,” said Ed Davey, the U.K. energy secretary, earlier this month.
The U.S. Western Energy Crisis in the early part of the last decade, in which wholesale prices spiked 800% and parts of California suffered blackouts due to a shortage of electricity, was caused in part by market manipulation. Guilty firms involved in the crisis were eventually forced to pay multi-million dollar fines and some even went out of business.
“History looks destined to repeat itself,” Glenn Kinser, head of energy trading compliance, SME, at Nice Actimize, a provider of financial crime, risk and compliance software, told Markets Media.
“The U.K. gas market could now be going through what the U.S. gas and power market went through in regards to false reporting and attempted manipulation of price reporting agency indexes. The U.K. gas markets may now likely go through similar reforms as seen in the U.S. to assure market transparency and valid price indexes.”
Kinser added: “There are correlated instruments that could be impacted or this may be part of a much bigger problem.”
Firms are being urged to have the correct procedures in place to prevent any monetary or reputational losses brought about by suspicious trading activities.
“Firms can put in place systematic ways of monitoring what they report to PRAs [price reporting agencies], for example, comparing what they report versus the overall market,” said Kinser. “This gives organizations the chance to see if there are outliers and investigate their legitimacy.
“Other things that can be done from a systems or technological standpoint is to record and monitor business communication whether that be by email, voice or SMS. You are able to monitor that business communication for the same type of thing.
“If someone is reporting something that doesn’t make sense when comparing the transactions to the broader market, the control group within a firm, whether that be the compliance or risk management, can discuss the situation with the front office and ask them what was the purpose of the transaction executed.”
However, the manipulation allegations made by the whistleblower to the FSA may, in the end, remain just that.
“The revelations are a hot button issue for regulators and politicians, especially in the wake of the recent manipulation of Libor,” said Michael Hewson, senior market analyst at CMC Markets, a provider of financial spread betting in the U.K..
“While the prospect of an enquiry into energy price fixing might seem appealing to a lot of people, proving that price fixing happens won’t be as easy as it was for Libor. Unlike Libor, energy prices are an actively traded market with supply and demand dictating price movements, while companies also look to hedge against rising and falling prices, which means that we are unlikely to find conclusive proof of price fixing in the absence of a ‘smoking gun’.”
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The analysis is based on transactions publicly reported by 30 European APAs and venues.
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