UK regulators are investigating an alleged attempt to manipulate the country’s physical wholesale natural gas market, the latest sign of watchdogs stepping up their vigilance of electricity and natural gas trading.
The UK Financial Services Authority and the Office of the Gas and Electricity Markets (Ofgem) are investigating unusual price activity in late September in the National Balancing Point (NBP), a so-called virtual hub that serves as the main pricing point for UK natural gas, according to people familiar with the probe.
NBP is the most active gas market in Europe, attracting billions of dollars of physical and financial transactions from utilities, hedge funds and banks.
Edward Davey, UK energy secretary, said in a statement he was “extremely concerned” about the allegations of manipulation. “[We] will be keeping in close touch with the regulators while they get to the bottom of this,” he said.
The investigation comes only days after US regulators said they were seeking a record fine of $435m against Barclays for allegedly manipulating the electricity market in California between 2006 and 2008.
The UK regulators are looking at whether a trader or group of traders submitted quotes below the prevailing market price in order to force physical prices at NBP to fall and, subsequently, profit from bearish positions in the derivatives market. Besides its role in the physical market, the NBP hub is also the pricing point for UK natural gas futures traded on the London-based ICE Futures exchange.
ICIS, a price reporting agency that compiles quotes in the physical UK gas market, alerted regulators last month of “some unusual trading activity on the British wholesale gas market on 28 September 2012”, the company said in a statement. The alert, and the investigation, is rare, industry executives said.
“The cause of the trading pattern, which involved a series of deals done below the prevailing market trend, has not yet been established,” it said.
Ofgem, which oversees the physical market, confirmed it had “received information relating to trading in the gas market” and said it was “looking” into the issue. The FSA, which regulates the financial gas market, confirmed it was also investigating.
The price of NPB natural gas for delivery the following day, the main benchmark, fell on Sep 28 to 58.6p per therm, down 1.7 per cent on the day. Regulators are probing whether the “anomalous” quote submission pushed NBP prices below the real market level, according to people familiar with the investigation.
The probe suggests that UK and US regulators are paying extra attention to the link between the physical and derivatives commodities markets after several cases in the US in which traders manipulated the physical market to profit in derivatives.
The case will highlight the role of price reporting agencies only two months after global financial watchdogs backtracked on proposals for greater regulation of the physical energy market. The International Organisation of Securities Commissions, an umbrella group of financial regulators, pushed in favour of strong regulation this year on how commodities benchmarks, including the NBP natural gas, are compiled. But the group backed away from its first proposals at the last minute, instead proposing to largely retain the status quo.