The FSA
Testing its Range:
Anti-market misconduct systems and controls in the commodities market.
ByRichardBurger
INTHELASTFEWYEARStheFinancialServicesAuthority(FSA)has cargo ships to go and up down the
significantlysteppedupitseffortsinthefightagainstmarketmis- Thames as commodity traders head
conduct(thetermmarketmisconductisusedtodescribethecrimi- acrossLondonBridgeduringthemorn-
nal offences of insider-dealing and misleading statements to the ingrushhour.
market,the‘civiloffence’ofmarketabuseandtheFSAPrincipleof TheCodedoesnotgiveaworkingdef-
marketconduct).Historicallytheregulator’sfocushasbeenonmis- initionofdistortionbutmarketmanip-
conductinthesecuritiesmarkets,ratherthanthecommoditiessec- ulation is described in a recent joint
tor. This is unsurprising when there seems to be little evidence of consultation paper prepared by the
marketabuseinthesector. Committee of European Securities
In July 2008 Alexander Justham, the FSA’s Director of Markets, Regulators (CESR) and the Committee
appearedbeforetheCommonsTreasurySelectCommitteesession of European Banking Supervisors
ontheregulationofoilmarkets.Inresponsetoquestioningabout (CEBS) providing technical advice to
the robustness of the current regulatory regime to deter potential the European Commission on the
marketabuse,MrJusthamcommentedthatdespitetheFSAlaunch- review of commodities business. The
ing“…anumberofinvestigationsinrecentyears…thereisnothuge paperdescribeshowthemarketcanbe
evidence of market abuse.” However the Committee was not con- corneredandsqueezed.“When‘corner-
vinced,withonememberremarkingthatinlightofthelackoftrans- ing’amarket,amanipulatorbuildsup
parencyandinformationabouttheglobaloilmarket,“Howdoyou large positions in the underlying cash
[theFSA]knowthereisnomarketmanipulation?” market for the commodity in order to
createanartificialshortage.Thisisusu-
...the UK commodities sector should not be surprised
allydoneinconjunctionwithlongposi-
by greater attention from the FSA
tionsinthefuturesmarket.Themanip-
ulator then demands delivery of the
commodity (squeezes the market).
In contrast, the US regulator, the Commodity Futures Trading Since he simultaneously withholds his
Commission(CFTC),hasundertakenanumberofinitiatives,particu- stock of supply, the sellers of the
larlyintheenergysector.InAugust2007theCFTCannouncedthat futures will find it difficult to acquire
Marathon Petroleum Company had agreed to pay a US$1 million enoughofthecommoditytofulfiltheir
penaltytosettlechargesofattemptedmanipulationinthecrudeoil contracts. The manipulator can then
market. With greater CFTC interest in the trading of US crude oil usehismarketpoweronthecommodi-
future contracts on ICE Europe and concerns raised by a Treasury tymarkettochargehighpricesforhis
Select Committee, the UK commodities sector should not be sur- stockofthecommodity.”
prisedbygreaterattentionfromtheFSA.
FSAThematicReview
MarketAbuse Despitethelackofevidenceofmarket
Thereareseveraltypesofmarketabusebut,inthecontextofphys- misconduct, the FSA has recently
icalcommoditiestrading,misleadingbehaviouranddistortionisthe focusseditsattentionontheanti-mar-
mostrelevantone.TheFSAconsidersthatbehaviourwhichgivesor ket abuse systems and controls
is likely to give a regular user of the market a false or misleading employed by commodities firms. In
impressionastothesupplyof,demandfor,orpriceorvalueof,an June 2008, the FSA reported on the
investment,ismarketabuse. anti-marketabusesystemsandcontrols
TheFSA’sCodeofMarketConductgivesexamplesofsuchabusive of a small number of commodities
behaviour:forexample,themovementofphysicalcommoditystocks firms.TheFSAnotedthattheissueof
orthemovementofanemptycargoship,whichmightcreateafalse effective prevention and detection of
ormisleadingimpressionastothesupplyof,orpriceof,acommod- marketmisconductisanareaofdebate
ityorthedeliverableintoacommodityfuturescontract.Howeverit withinthecommoditiesindustryandis
isdifficulttoimagineaGordonGekkowannabearrangingforempty keen to discuss this issue with a wider
COMMODITIES NOW SEPTEMBER 2008 81
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