November 13, 2012 4:48 pm

Gas claims fuel global benchmarks probe

Allegations that traders manipulated prices of UK natural gas to make money on derivatives will fuel the global probe of market benchmarks that began with the Libor scandal.

After Barclays was fined £290m for trying to fix the London interbank offered rate, the International Organisation of Securities Commissions (Iosco) promised a global review of benchmarks that could be similarly vulnerable to misconduct.

Led by Martin Wheatley of the UK Financial Services Authority and Gary Gensler, who chairs the US Commodity Futures Trading Commission, the review is examining the price-setting process for everything from interbank lending and interest rate swaps to oil and gold.

It is focusing on benchmarks that rely on estimates or quotes gathered from market participants either by a daily poll of designated participants or by price-reporting agencies.

Mr Wheatley, who conducted a review of Libor for the UK government, has said his work could point the way for similar probes elsewhere, and Mr Gensler has been adamant that price benchmarks should be tied to actual transactions rather than quotes or estimates.

Iosco is expected in March to report on best practices for rating setting and a list of critical benchmarks around the world that regulators should examine to make sure they live up to expected standards.

The latest allegations, that traders proffered below market quotes to push down the price of natural gas on the National Balancing Point, all but ensure that energy benchmarks will be central, along with interbank lending, to the Iosco review.

The allegations could also raise questions about whether benchmarks based at least in part on transactions may also be vulnerable to manipulation through deals done at prices that do not reflect prevailing rates.

Richard Reid, research director at the International Centre for Financial Regulation, said regulators would be “under greater pressure” to demonstrate that the approach they had outlined for dealing with Libor would be sufficient to restore confidence in benchmark interest rates.

The European Commission is also looking at the issue with an eye to regulating benchmarks across the 27-nation bloc.

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