In an order that filed and simultaneously settled charges of benchmark energy price manipulation, the Commodity Futures Trading Commission (CFTC) has required energy trader TOTSA to pay a $48m civil monetary penalty.

A CFTC statement detailed how the agency has ordered charges against energy company TOTSA for manipulating the market for EBOB-linked futures contracts — a legally binding promise to buy or sell something at a predetermined price for delivery at a specified time — in violation of the Commodity Exchange Act and CFTC regulations.

Energy trading companies including TOTSA blend and sell EBOB gasoline. Eurobob is an unfinished gasoline primarily used in European automobiles and is the most liquid European gasoline assessment and the market’s standard reference.

Futures contracts are linked to EBOB’s price trade on CFTC-regulated exchanges and are financially settled based on a benchmark price published by the price-reporting service Argus, a London business called (appropriately enough) the Argus EBOB Benchmark. The benchmark is based on brokered physical EBOB transactions that are reported to Argus. 

Influencing the market

The CFTC complaint notes that in March 2018, TOTSA attempted to manipulate this market for EBOB-linked futures by selling physical EBOB in the Argus- brokered market at prices below what buyers indicated they would pay.  

During this month, TOTSA sold more physical EBOB than it had sold in any other previous month with its sales constituting more than 60% of the volume transacted by all brokered market participants.

TOTSA’s transactions were reported to Argus, and incorporated into the Argus EBOB Benchmark, the CFTC said. In tandem with these sales of physical EBOB, TOTSA maintained a large short position in March-settled EBOB-linked futures which, because it was a short position, would increase in value if the reported price of EBOB declined.

“This case is a textbook example of policymakers with no industry experience second-guessing commercial business decisions in a bubble.”

CFTC commissioner Caroline Pham

The CFTC alleges that, in an attempt to benefit its EBOB-linked short futures position, TOTSA not only blended and sold large quantities of physical EBOB, but also attempted to sell physical EBOB at prices that were lower than what buyers indicated they were willing to pay.

On multiple occasions in March 2018, TOTSA traders maintained an offer to sell EBOB for a price that was lower than another market participant’s indicative bid. Essentially, TOTSA’s traders were willing to accept less revenue from the company’s sales of physical EBOB in an attempt to depress the reported price of EBOB, and increase TOTSA’s overall trading profits by boosting the value of the company’s EBOB-linked short position.

“This conduct constituted attempted market manipulation in violation of CFTC Regulation 180.1(a)(1),” the CFTC stated.

Ian McGinley, Director of the CFTC’s Division of Enforcement, said: “Benchmark manipulation is an age-old scheme firms have attempted in many markets.” He continued that this scheme “involved an attack on the market integrity of CFTC-regulated futures contracts on gasoline, and this settlement demonstrates such attacks will not be tolerated in any market.”

WhatsApp Messages and cooperation

The CFTC said TOTSA provided some cooperation during the agency’s investigation. For instance, TOTSA counsel assisted the Division by facilitating voluntary witness interviews with former and current TOTSA employees and voluntarily produced a large volume of communications and other internal TOTSA documents to the Division. In addition, TOTSA flagged for the CFTC certain documents that were potentially relevant to the investigation.

EBOB brokers had communicated in WhatsApp messages about market participants being interested in buying winter-grade EBOB and agreeing to trade with a counterparty at a specified price. But CFTC said these electronic communications were not produced in a timely manner after the Enforcement Division requested them, “nor adequately preserved” following the Division’s request, “with the result that other potentially relevant evidence was not available to the Division.”

Dissent

CFTC Commissioner Caroline Pham dissented against the settlement, saying the commission had relied on “flimsy evidence that is speculative and circumstantial” and that there is other evidence of a legitimate basis for TOTSA’s trading.

“This case is a textbook example of policymakers with no industry experience second-guessing commercial business decisions in a bubble,” Pham said.