Gas markets under fire

Hannah Langworth explains the latest trading scandal

City regulator the Financial Services Authority (FSA) has announced that it has received information from a whistleblower concerning potential price fixing in the wholesale natural gas markets. This market, worth £300 billion annually, is where large quantities of gas are bought and sold by energy companies and commodities traders. In a statement, the FSA said: "We can confirm that we have received information in relation to the physical gas market. We take market misconduct seriously and will be analysing the material." The allegations have also been reported to Ofgem, the energy industry regulator.

Looking into futures

The allegations are understood to relate to the setting of benchmark prices for physical quantities of gas, which are of crucial importance because they determine the prices used in many wholesale gas contracts. These benchmark prices are set by third-party reporting agencies, who do so by collating price information they receive from a variety of market participants. It's thought that the whistleblower has claimed that some participants have not been submitting truthful information to reporting agencies, leading to artificial increases or decreases in the prices at which gas is bought and sold. The allegations are thought to relate particularly to movements in benchmark gas prices on 28 September this year. This date is particularly important in the gas markets because it marks the end of their financial year and can have a significant influence on prices over the following year.

Trading in physical quantities of gas is monitored by energy industry regulator Ofgem and any abuse of this market would be a matter for them. But the price of actual quantities of gas also has an impact on the price of gas futures, which are tradeable financial products used by energy companies and commodities traders to lock in the prices they'll pay for gas in the future or to speculate on future fluctuations in gas prices. The gas futures market, as a financial market, is regulated by the FSA, so if it's proven both that there has been manipulation of the physical market and that this manipulation led to the distortion of prices in the futures market, the FSA would be able to take action.

Paying the price

If the FSA's investigation, which is likely to take many months, confirms that the gas futures market has been distorted by price fixing activity, the regulator could impose a range of penalties on the individuals or institutions found responsible, including fines, bans on future market participation and public censure.

These allegations come in the wake of high-profile revelations of price fixing by traders of US wholesale electricity prices and of the LIBOR interest rate, and in a year which has also seen concern about price manipulation in a range of other commodities markets, including those in cotton and oil. In response the FSA is currently embarking on analysis of the way in which benchmark prices are set across a number of financial markets. The FSA's report following the LIBOR controversy states: "International work is already underway in some areas to investigate potential weaknesses in other international benchmarks and appraising the scope for strengthening the governance arrangements and regulation in some of these markets."