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Government Turns Up the Heat on the Oil Markets

Mustafa Ostrander

24 April 2012
This week saw a couple of major developments concerning the oil markets.  On Tuesday, President Obama announced his intention to seek additional resources and legal authority for federal authorities to limit speculation and curb manipulation in the crude and refined products markets.  Separately, on Thursday, the Southern District of New York issued an order approving a $14 million settlement between the Commodity Futures Trading Commission and a group of Netherlands-based companies for manipulation of the US oil markets. 
Government Turns Up the Heat on the Oil Markets

White House Takes a Stand Against "Excessive Speculation" and Manipulation in the Oil Markets

In response to complaints about high gasoline prices and presumably in anticipation of the upcoming general election, President Obama announced the following steps to beef-up federal market surveillance and enforcement authorities:

  • More Personnel: The President asked Congress to increase the CFTC’s funding to provide for a six-fold increase in surveillance and enforcement staff.
  • New Technology: The President called for additional funding to pay for technology upgrades to modernize the CFTC’s monitoring capabilities.
  • Higher Penalties: The President called for congressional action to provide a ten-fold increase in civil and criminal penalty authority.  This would result in an increase in fines from the current cap of $1 million (or three times the gain to the wrongdoer, whichever is higher) to $10 million per violation.  The President also asked for congressional action to allow for higher penalties for ongoing violations.
  • Increased Margin Requirements:  The President called on Congress to grant the CFTC new authority to require exchanges to impose higher margin requirements, in order to curb so-called “excessive” speculation.
  • Data Sharing:  The President announced a new data sharing agreement giving the White House Council of Economic Advisors access to the CFTC’s oil markets data on a disaggregated basis.  The White House hopes that access to this data will enable it to analyze oil markets data to identify market trends.

The President’s initiatives have been seen by many as a political move to address concerns about persistently high gasoline prices, a topic which will likely emerge as a pivotal issue in the coming general election.  Political opponents, including House Speaker John Boehner, have suggested that federal agencies have all the authority they need to investigate and sanction manipulation in the oil markets.  Indeed, the CFTC and the Federal Trade Commission currently each have statutory authority to impose million dollar penalties for fraud and manipulation they find in the financial and physical markets for crude and refined petroleum products.  Moreover, pursuant to its new authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC promulgated a final rule that would limit the size of market participants’ positions in the futures contracts for crude oil and various refined products.  The position limits rule, however, has yet to take effect and is currently on appeal.   

Speaking of Increased Enforcement . . .      

On Thursday, the US District Court for the Southern District of New York entered an order approving a settlement between the CFTC and Optiver Holding BV, including two of its affiliates (Optiver US, LLC and Optiver VOF) and certain individual employees, for allegedly manipulative conduct in the futures markets for crude oil, heating oil, and gasoline.  The settlement calls for the companies and individuals to pay civil monetary penalties totaling $13,000,000 and to make a disgorgement payment of $1,000,000. 

The settlement follows a July 24, 2008 complaint, which the CFTC filed against the Optiver entities and certain individual employees for alleged manipulation and attempted manipulation of the New York Mercantile Exchange futures contracts for Light Sweet Crude Oil, New York Harbor Heating Oil, and New York Harbor Gasoline.  The CFTC also charged the defendants with making false statements to NYMEX in response the exchange’s inquiry into related trading.  According to the CFTC, the defendants conducted a scheme known as “marking [or, banging] the close” to benefit certain contemporaneously held Trading at Settlement (TAS) contracts, which were priced against the daily closing price of the crude, heating oil, and gasoline futures contracts.  “Marking the close” refers to the practice of establishing a large long or short position ahead of the daily closing period, and then entering into a series of rapid offsetting trades in the closing period to influence the closing price.               

According to the CFTC’s initial complaint, the defendants engaged in nineteen instances of attempted manipulation (with five resulting in artificial prices) over eleven days in March 2007.  The CFTC alleged that on five occasions the defendants’ conduct resulted in artificially higher or lower prices, and that the manipulative scheme resulted in $1,000,000 in unjust profits.

The Optiver companies and individuals agreed to additional non-monetary sanctions.  For example, Optiver US, LLP agreed to undertake certain prospective compliance obligations, and to comply with a 2 year ban from trading during--and three minutes before--the closing period for the relevant crude, heating oil, and gasoline contracts.  Also, the named individuals agreed to substantial trading limitations ranging from two to eight years in duration.  According to the order approving the settlement, the defendants neither admit nor deny the CFTC’s allegations.

Mustafa Ostrander

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