Index publishers’ woes endanger market transparency

Price reporting agencies have long warned of the consequences of overbearing regulation on their indexes. It now seems those prophecies are coming true

Mark Pengelly

The obstacles that stand in the way of developing liquid commodity markets are formidable. Common problems include a lack of standardisation and limited access to information, which may be the preserve of a small group of physical buyers and sellers.

The role of price reporting agencies (PRAs), which collect and disseminate information about physical deals, helps alleviate these difficulties. Although they sometimes downplay their work as ‘journalism’, PRAs have become an integral part of modern commodity markets. The indexes they publish are followed closely by physical market participants and are also used to price myriad futures contracts, as well as over-the-counter derivatives.

In recent years, that role has attracted unwanted attention from regulators eager to ensure every last piece of market infrastructure is supervised in the wake of the 2008 financial crisis. In 2012, the Madrid-based International Organization of Securities Commissions published its Principles for oil price reporting agencies, while the European Union is pressing ahead with plans first outlined in 2013 to more tightly regulate financial and commodity benchmarks. In the US, the Commodity Futures Trading Commission and Federal Energy Regulatory Commission have increased their enforcement activities, particularly when it comes to the manipulation of physical commodity indexes.

PRAs have responded to regulators’ sabre-rattling by saying they provide a much-needed service and make markets more transparent. They have also argued that subjecting their indexes to greater scrutiny might deter market participants from voluntarily contributing the data required to put them together.

It seems those concerns are well-founded. According to a July 14 report by San Francisco-based Cornerstone Research, the proportion of US natural gas trades reported to PRAs has been decreasing. The paper noted a 15% fall in the volume of reported trades at US gas hubs in 2014 – the third consecutive year of decline. Energy firms admit they have stopped contributing data on gas trades to PRAs because they are worried about the possible legal and regulatory risks.

[PRAs have] attracted unwanted attention from regulators eager to ensure every last piece of market infrastructure is supervised in the wake of the 2008 financial crisis

Both regulators and market participants should welcome the improved transparency and price discovery that PRAs bring. While it’s right that PRAs draw some regulatory scrutiny, authorities must avoid discouraging firms from sharing information with them. A lower volume of submissions makes price indexes less reliable and more prone to manipulation, which is hardly a desirable outcome.