Oil trading will continue unabated amid a UK review on whether to criminalize manipulation of the world’s most-traded crude-futures contract, brokers and analysts involved in the industry said.
The UK Treasury started a review yesterday into whether it should extend legislation regulating the London Interbank Offered Rate to cover benchmarks such as ICE Futures Europe’s Brent contract, according to a statement. Use of Brent by hedgers and speculators will remain unaffected as the level of market participation already safeguards the oil marker against distortion, according to Saxo Bank A/S.
“I don’t think trading activity will be diminished as it seems a fairly innocuous proposal,” Christopher Bellew, a senior broker at Jefferies International Ltd. who’s been involved in the oil market for several decades, said by e-mail yesterday. “Who could possibly object to market manipulation being punished? Perhaps I am wrong, but I have not seen any evidence of market manipulation in Brent futures.”
The UK is toughening the rules after the rigging of Libor and related gauges resulted in $6.5 billion in fines for at least 10 companies. European Union antitrust authorities raided the offices of companies including BP Plc, Royal Dutch Shell Plc and Statoil ASA in May 2013 amid allegations of collusion and price manipulation in crude, refined products and biofuels markets.
“We support regulation that is carefully drafted so it is suitable to the nuances of each benchmark,” Finbarr Hutcheson, President of ICE Benchmark Administration, said in an e-mailed statement. “We need to ensure we don’t impair their usefulness in the process.”
Daily trading in Brent averaged 579,618 contracts this year compared with 588,836 in 2013, ICE data compiled by Bloomberg show. The price averaged $107.17 a barrel this year. It was at $97.03 today.
“Manipulating such a huge market is almost an impossible thing to do,” Ole Sloth Hansen, an analyst at Saxo in Oslo, said by e-mail. “I don’t see any impact on volumes as I would most certainly assume that most if not all trading isn’t with the intent of manipulating the market.”
The measures proposed by the UK focus on the trading of oil futures contracts rather than transactions in actual cargoes of crude, what’s known as the physical market.
Trades in the North Sea physical market are assessed by companies including Platts, which publishes the Dated Brent benchmark used to value more than half the world’s crude. The London offices of Platts, a unit of New York-based McGraw Hill Financial Inc., were also searched as part of the EU’s probe last May.
“We understand that the ICE Brent Futures contract is a focus of a U.K. consultation on financial benchmarks,” and Platts is “reviewing that proposal,” Kathleen Tanzy, a company spokeswoman, said in an e-mailed statement.
The impact of the current proposals will depend on whether the regulation is clearly defined, according to Michael Poulsen, an analyst at Global Risk Management Ltd. in Middelfart, Denmark.
“If there is no room for interpretation, then traders will know the exact lines of the playing field,” Poulsen said by e- mail. “If however there are fuzzy definitions, it could discourage trading activity as traders would likely play with a safety buffer, not to break any laws.”
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