This week, the Federal Trade Commission opened a formal investigation into the alleged manipulation of oil prices. The FTC’s investigation was prompted by a similar investigation by European regulators into the alleged manipulation of Platts’ oil benchmark. These investigations highlight the growing scrutiny both US and international regulators are placing on trading activities in the energy markets. Hedge funds and others in the financial services industry increasingly are trading in global energy markets. These trading activities form the basis of certain commodity price benchmarks, such as Platts’ oil benchmark. Given the importance of the oil benchmark in setting global price indexes, other US federal regulators, such as the Commodity Futures Trading Commission, are paying close attention to activities that potentially impact oil prices and related futures, swaps, and other derivatives.
On June 25, 2013, Bloomberg published articles reporting that the FTC has opened a formal investigation into the derivation of prices for crude oil and other petroleum products. Bloomberg reports that the FTC’s investigation mirrors a similar investigation conducted by European Union regulators and that FTC investigators are reviewing the progress made by their EU counterparts.
The FTC’s petroleum market manipulation rule prohibits manipulative and deceptive conduct in the wholesale petroleum markets. Specifically, it prohibits fraudulent or deceptive conduct in connection with wholesale transactions of crude oil, gasoline, or petroleum distillates. Such prohibition includes making false or misleading statements of material facts. The rule also prohibits the intentional failure to state a material fact when such omission makes a statement misleading or distorts market conditions for petroleum products. The FTC’s petroleum market manipulation rule is similar to those of other federal agencies, such as the Federal Energy Regulatory Commission, Commodity Futures Trading Commission, and Securities Exchange Commission. Given that its rule took effect as recently as November 2009, the FTC likely will look to other federal agencies’ implementation of their market manipulation rules for guidance in conducting the current investigation into oil prices.
On June 18, 2013, the Wall Street Journal published a story about the EU’s investigation of the alleged manipulation of Platts’ oil benchmark. This story initially developed last May when the EU conducted unannounced inspections of several oil companies and Platts in an effort to uncover evidence of such manipulation.
Similar to prior price-reporting cases, such as those involving natural gas in the mid-2000s, allegations are surfacing that oil traders manipulate Platts’ daily oil benchmark. Platts derives its benchmark from voluntary submissions of price information from traders. In deriving its oil benchmark, Platts focuses on trades occurring during the last thirty to forty-five minutes of the trading day (trading window). While Platts believes that its oil benchmark accurately represents the spot price of oil at market close, international regulators are taking a closer look. Currently, Platts “has more than 80% of the market for spot [oil] prices and is the standard upon which much of the world relies.”
One reported strategy used by traders involves selling at a discounted price, reporting such discounted price to Platts to drive down the benchmark price, and subsequently buying at the reduced benchmark price. Traders view such strategy as legal because it does not involve collusion or reporting false information. As the WSJ reports, the benchmark price does not always reflect actual market prices because deals occur privately on the spot market. Further, the benchmarking process is susceptible to abuse due to the trading window’s brief duration, the small volumes eligible for trading, and the occurrence of offsetting deals.