Wednesday, December 26, 2012

Extending Principles for Price Reporting Agencies to All Assessments[†]

Allegations of price manipulation in UK wholesale natural gas prices by some major power companies and financial institutions could not have come at a worse time for price reporting agencies (PRAs). Less than a month after IOSCO’s publication of principles for oil price reporting agencies, a price reporter at energy‐ industry data provider ICIS went public with the charge that natural gas prices are regularly manipulated by physical and financial traders, and that prices assessed by price reporting agencies do not accurately reflect the underlying physical market. Furthermore, he argued that poorly trained price assessors often developed close relationships with traders, which led them to routinely engage in Libor‐style price fixing exercises. Immediately following these allegations, UK Financial Services Authority (FSA) and energy regulator Ofgem launched investigations into the claims.

Market participants have long claimed that selective reporting by traders and inconsistent methodologies used by price reporting agencies can distort reported prices. These concerns were the basis of a report published by IOSCO in early October, to which the IEA, OPEC and the IEF, responding to a request from the G20, provided input.* The report suggested that “ the ability to selectively report data on a voluntary basis creates an opportunity for manipulating the commodity market data that are submitted to PRAs” and “the need for assessors to use judgement under some methodologies creates an opportunity for the submitter of data to deliberately bias a PRA’s assessment in order to benefit the submitter’s derivatives positions.”