CFTC Issues Order against Two Companies for Attempted Manipulation of Natural Gas Monthly Index Settlement Prices
Commentary by Bob Zwirb
The CFTC issued an order against two companies for their attempted manipulation of natural gas monthly index settlement prices during periods known as "bid-weeks."
According to the order, during bid-weeks in September 2011, October 2011, March 2012, and April 2012, the companies attempted to manipulate monthly index settlement prices of natural gas at four hubs. The companies' trading accounted for a substantial percentage of the total market by volume at the relevant hubs, even though the companies had no material customer business, assets or transportation at the hubs. Through this fixed-price trading, the companies attempted to affect the monthly index settlement prices favorably in order to benefit their related financial positions, including basis swap and index swap positions.
The order requires the companies to jointly pay a $3.6 million civil monetary penalty. It also imposes a two-year trading limitation from trading physical basis or physical fixed-price natural gas at hub locations when the companies also hold, prior to and during bid-week, any financial natural gas position the value of which is derived from natural gas bid-week index pricing.
Commentary
The CFTC's action -- which appears to be a sound enforcement action -- was brought under the CEA's prongs for traditional manipulation (CEA Sec. 9(a)(2) and CFTC Rule 180.2) and new fraud-based manipulation (CEA Sec. 6(c) and CFTC Rule 180.2). Moreover, based on the CFTC's description of the facts in the settlement Order, which focuses on attempts to manipulate a published index price in order to benefit respondent's related financial positions, it appears that the Division of Enforcement had a strong enough case to win under the traditional prong, which raises a question as to why it was necessary to also charge the respondents under the new prong.
That said, the new standard (and even the old standard as now interpreted by the CFTC) raises challenges for traders that hold related positions in two different markets - e.g., in natural gas futures and natural gas swaps. Such traders, therefore, should be mindful of several things concerning these standards.
First, they should be careful to avoid even the appearance of trading in a manner that has an impact on a related position. Thus, trading futures in a manner that appears to benefit a trader's swap position or vice versa can lead to charges of manipulation.
Second, although part of the case was prosecuted under the harder-to-prove traditional manipulation prong of the CEA, the CFTC alleged attempted manipulation, which is much easier to prove than manipulation and does not require proof that the attempt would affect market prices. CFTC v. Amaranth, 554 F. Supp. 2d 52, 533 (S.D.N.Y. 2008).
Third, even the traditional manipulation standard, post-Di Placido (In re Di Placido, CFTC Docket No. 01-23 (Nov. 5, 2008)), has been watered down somewhat by the CFTC's declaration that (i) artificial prices (a vital element of traditional manipulation) can be "conclusively presumed" from the nature of the respondent's conduct and (ii) expert economic analysis "may not be necessary."
Finally, under the new fraud-based manipulation standard authorized by Dodd-Frank, the CFTC has virtually unlimited discretion to treat any fraudulent practice as "manipulation" without having to prove many of the traditional elements of manipulation, such as specific intent and artificiality, as it was required to do in the past. Sheer size can lead to trouble, since selling large volumes in a short period of time may be viewed as a "manipulative device" under the fraud-based standard.