What is the issue?
Recent events have suggested that commodities markets in the metals and mining sector may have attracted the attention of regulators currently engaged in investigations into possible manipulation of Libor1 and oil and gas prices.2
In a major development, two price reporting agencies active on the metals markets have announced that they are to engage third party auditors. Commodity Research Ltd (CRU) has announced an audit of its steel pricing assessments, which will include on-site inspections of a sample of steel companies that provide it with pricing data, and Metal Bulletin Ltd, owned by Euromoney Institutional Investor Plc, is expected to conduct an audit into its iron ore and US ferrous scrap indexes.3 The price reporting agency Platts has also confirmed that some companies have withdrawn from or have scaled back their involvement in its price assessments.
A common feature of pricing assessments in these industries is their foundation (at least in part) in voluntarily-provided information that is processed through opaque methodologies, often with an element of human judgment — characteristics regulators are viewing as inherently at risk of manipulation.
Relevance to the metals and mining sector
It is unclear precisely how the regulatory authorities will approach any investigation into pricing assessments used in commodities trading, given the significant differences in how commodity markets operate. However, regulators are likely to seek considerable information from market participants, for example: on how pricing information is provided to price report agencies; the precise role of price reporting agencies and their business models; and any structural or other links between pricing reporting agencies and market participants and among market participants themselves. Based on the experience of Libor and the investigations into oil and gas pricing, which have involved detailed inquiries and wide-reaching consequences, the recent developments are likely of interest to a range of metals industry participants including:
- Companies that supply information on their trading activities to price reporting agencies
- Agencies and other intermediaries that collect information from market participants and publish pricing assessments
- Customers and end users of commodities
- Commodities traders
While the ‘bandwagon’ effect is powerful, it remains to be seen whether the metals sector can attract as much political interest as the securities and oil and gas markets and thus spark multiple investigations around the world into the sector.4 The question is also open as to whether commodities are appropriate subjects for regulation, in a similar manner to the securities markets, and if so which commodities (if not all) should be regulated, how, and by whom.
If regulators undertake any investigations into pricing assessments in the metals sector, they may consider imposing remedies comparable to the penalties on organizations and individuals engaged in the manipulation of Libor. The experience from previous investigations suggests that the following liability may arise:
- Civil liability, e.g., damages5
- Criminal liability, including under anti-bribery legislation, which can result in imprisonment and unlimited fines6
- Civil market manipulation liability, e.g., under the UK’s Financial Services and Markets Act (FSMA) 2000, although these offenses require a ‘prescribed market’ and it remains unclear whether that condition would be found to exist in the context of information provided to price reporting agencies
- Antitrust liability, as authorities can use anti-competitive offenses to punish the sharing of information even in the absence of an organized cartel7
How to respond
In the light of the audits planned by CRU and Metal Bulletin Ltd, participants in the metals and mining sector may consider conducting a review of their own procedures for providing information to price reporting agencies, and auditing compliance with record-keeping procedures. A review of any standard form supply and offtake agreements may also prove helpful, in order to determine whether the agreement language adequately covers any issues that may arise from existing or future regulatory action. The impact of any investigation on contracts between unrelated third parties that refer for price determinations to potentially inaccurate pricing indexes is as yet an open question, but any commercial solution is likely to turn on the contractual language.