Barclays, Energy Regulators Versus Market Riggers

By: Andrew_McKillop

WORLDWIDE PROBLEM
Hailed as Croatia stepping out of the shadows left by the break up of Yugoslavia and the ethnic cleansing war of the 1990s, and following 8 years of negotiations, on July 1st Croatia became the 28th member of the E.U. One of its first decisions was to join the little-heard-of CEER or Council of European Energy Regulators, as well as engaging in higher profile bargaining about which Croatian politician will become the 28th Commissioner of the E.C.

Unlike the US where energy and finance market, banking, environment and other regulators have been coordinated at Federal and State levels for a long time, Europe is rushing to create continent-wide regulators to operate alongside member state regulators. As in the US however, European markets needing regulation have themselves integrated and converged, explosively grown, and are prey to market-wide rigging on a semi-permanent basis.

Discussion on whether Europe really needs to expand or not are, to be sure, absent among the agencies and institutions which relate to “the federalizing system” . Each member state, like US States, already has its own energy market regulators as well as financial, banking and other regulators but the European urge to federalize and “harmonize” now includes the physical goal of linking and joining national energy markets into a “unified market”. Unfortunately this convergence and unification happened a long time ago, among financial market players – and riggers.

More and stronger, more complex, and more expensive regulatory bodies are needed to try keeping abreast of the financial industry's growth and always-growing complexity. For energy regulators in Europe this need is shown by the CEER already having a more powerful Big Brother in the shape of the ACER, or European Agency for the Cooperation of Energy Regulators. The ACER agency is described as “working towards” a competitive, sustainable, secure and transparent internal energy market to the benefit of all EU consumers.

European and international bankers and brokers are working towards something very different – permanently rigged energy markets, both upstream and downstream. For them, accusations of rigging are a natural spinoff from the type and nature of their development towards always-larger numbers of tradable financial products, with fantastic nominal values.
 
The need for energy (and other) market rigging probes does not need proving. The European Union already has a massive-scale oil price fixing investigation under way (see for example. http://www.oilvoice.com/n/EU_oil_pricing_probe_moves_higher/ed9c25ed9ea8.aspx?). The main problem, for Europe, is that its continent-wide regulation is in its infancy. The role model for European energy market regulators is the U.S. Federal Energy Regulatory Commission, but the FERC's activity already shows that the global reach of the market riggers is clear  Spillover from the EC probe into oil price fixing, to the US, is already signaled by the US Federal Trade Commission taking an active interest, and possible near-term role in the European oil market rigging investigations.

LIBOR AND ENERGY
This week, the US FERC found the British-based bank Barclays Plc and four former traders guilty of price fixing or “manipulation of electricity markets”, in four States of the US, and ordered them to pay a combined $487.9 million in fines and penalties. As we know, Barclays is forever known as the key player in the London interbank offered rate (LIBOR) rigging scandal, which culminated in 2012.

The fines, penalties and awards to third parties the FERC imposed for energy market rigging are made up of Barclays and the traders having to pay $453 million in civil penalties to the U.S. Treasury within 30 days. Barclays must also surrender $34.9 million in profits which will be distributed to programs helping low-income families pay energy bills in the four States focused by the probe, California, Arizona, Oregon and Washington.

“Manipulating energy markets comes at a steep cost,” said U.S. Senator Ron Wyden, chairman of the Senate Energy Committee. He added that “Consumers have the right to heat and power their homes without fear that traders are stacking the deck against them to rack up unjust profits.”

US press reports have however included traders' comments that in this case, Barclays, other bankers, brokers and traders had manipulated power market prices across the US “for years”. The FERC however limited the litigious period to less than 3 years and the scope to four Western states.

This week's US FERC electricity market rigging fine surpasses the total of 290 million pounds ($440 million) that Barclays was forced to pay for its LIBOR rigging operations in July 2012. The $440 million was paid to the US CFTC (Commodity Futures Trading Commission), the United States Department of Justice and the UK Financial Services Authority for “manipulating the London interbank offered rate (LIBOR)”. As in this week's US electricity market rigging case, the rigging extended a long way back in time and had worldwide reach. The 'Financial Times' on 27 July 2012 published an article by a former trader who stated that LIBOR manipulation had been “common since at least 1991”.

Probes by regulators in several countries, over several years, into LIBOR rigging led to either prosecution or formal investigation of banks extending far beyond only Barclays. Also included were RBS (Royal Bank of Scotland), HSBC, Deutsche Bank, JP Morgan, Citibank and ICAP, the interdealer broker. In every case, as in the present US electricity market rigging case, as in the previous LIBOR scandal, typical stonewalling from “the players” is: “We believe that our trading was legitimate and in compliance with applicable law,” Marc Hazelton, a Barclays spokesman, said on July 16, 2013, obligatorily adding that:  “We intend to vigorously defend this matter.”

MOVE ON TO GREENFIELDS – OR RATHER THE JUNGLE
As in Europe and the US, the certainty is that energy markets are rigged and will be rigged. At a 2007 Chicago financial conference, lunching with the then-chairman of the US CFTC, he told me that it was basically impossible to keep abreast of the “ingenuity” of bankers, brokers and traders. More especially because, at the time, his Agency had so few high-level investigators able to understand the complex supports used for rigging – such as collateralized debt obligations (CDOs) and structured investment vehicles (SIVs), with typical contracts including a dozen pages of fine print.

The reason rigging is inevitable stems from the role of deregulation in the period of about 1980-2000. “We threw away the rule book”, making the present laborious and slow process of regulating markets part of a cycle. This started with regulation before about 1980, followed by deregulation, and then re-regulation after about 2000. At each stage the number of financial products, and the number of players, punters or gamblers crowding into the playfield, increased.

Due to this, investigations can only be long – enabling the players to set up new market rigging operations, or games on “new greenfield sites”. Europe's “converging and integrating” energy market promises to become a veritable jungle!

In the recent US FERC investigations that led to Barclays being fined about $440 million, the period in which Barclays had provenly manipulated electricity markets in four States, according to the FERC, ran from November 2006 to December 2008. The scam, according to the FERC, featured Barclays employees and allied traders buying fixed-price energy-related financial products -- usually at a loss -- with the intent of moving an index to benefit the bank’s other and much larger bets on swaps and derivatives – often in financial markets completely unrelated to energy. Most important of all, the litigious operations were unrelated to normal supply and demand fundamentals. They concerned manipulating one or more physical markets to benefit the performance of financial swaps and derivatives based on and derived from the physical markets, according to the FERC

SPECULATION BEGETS SPECULATION
Swaps and derivative instruments are nominally or theoretically designed “ to reduce risk”. Their explosive, in fact stupendous growth in recent years has, we might say ironically but the word is too pale, become a vast Sword of Damocles hanging over the heads of national governments. European governments in particular.

According to OECD economist Adrian Blundell Wignall, in a study titled 'Solving the Financial and Sovereign Debt Crisis in Europe', the derivatives-only category of sovereign debt-related exposure in Europe - the potential debt owned by banks like Barclays which can become real debts for nation states when they are forced to bail out collapsed banks - grew from 2.5 times total European GNP to 12 times total European GNP in 2008-2012. At end 2012 it reached about $180 trillion.

The energy market, therefore is nothing but a “financial support” or underlying security on which to cobble mountains of “risk limiting” derivatives, totally unrelated to the physical supply or demand for energy! Europe's increasingly convergent energy market offers particularly rich pickings.

Showing the strange logic of the players, the rationale used by market operators like Barclays is that by creating derivatives “we hedge the risk inherent in volatile markets”. Never once is there admission that markets are shredded, rather than simply “distorted” by the onslaught of derivatives and the related need to rig the “underlying security”, to keep the derivatives profitable.

European financial market and energy market regulation, as noted, is in its infancy but even in the US with a much longer history of Federal-scale agencies, Congress has been forced to increase the powers of regulators – to try keeping abreast of the manipulators. In 2005 the Congress granted the FERC additional enforcement powers, including the ability to fine violators as much as $1 million a day. This 2005 decision came several years after the “trigger event” or dawn of public awareness that massive and constant market manipulation is what “deregulation” really means.

In the US, the founding event was the Enron Corp. scandal. The physical spinoff from the collapse of Enron's wildly complex, of course fraudulent financial operations were rolling power blackouts in California. In Europe, the awaited “psychological” and political trigger event has as yet to happen, but the underlying energy market supports used by the banking, broking and trading fraternity to create very dangerous paper mountains of incomprehensible contracts – with very easy to understand fallout for governments and taxpayers when the card castles collapse - includes all possible energy markets. Electricity, gas, oil, emissions permits.

In Europe there is a possible way out – when or if anti-European political parties become powerful enough to “roll back Federal Europe”. The will o' the wisp of the Single Market for energy offers little in the way of potential benefits for European consumers, and the certain threat of ever-growing energy market rigging. As of today, European anti-trust regulators are continuing to investigate allegations of price manipulation and collusion by oil companies, bankers and traders in crude oil, refined-products and biofuels. Tomorrow, allegations of electricity market rigging will be heard. The future is mapped out – until and unless European voters act.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

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