Global financial watchdogs have backtracked on proposals for greater regulation of the physical oil market due to opposition from oil majors and bodies including the International Energy Agency and the Opec cartel.
The International Organisation of Securities Commissions, an umbrella group of financial regulators, pushed in favor of strong regulation this year on how commodities benchmarks, including Brent crude, are compiled. But the group has now backed away from its first proposals and on a final draft report seen by the Financial Times has largely suggested retaining the current status quo.
The Commodity Futures Trading Commission — in an internal memorandum also seen by the FT — named the IEA and Opec as the international organizations and Shell and Total of France as the oil companies involved in the talks. The CFTC, the US federal regulator, suggested there was unease among regulators about the draft.
The regulatory climbdown comes despite the draft saying that the potential for misconduct in oil “is not mere conjecture” and after several banks recognized they manipulated Libor, the benchmark used to price trillions of dollars in loans.
“Notwithstanding differences...the recent Libor settlements illustrate the vulnerability of benchmark setting processes to potential manipulation in order to benefit positions on derivatives markets,” the draft states.
Iosco, which groups financial regulators including the UK Financial Services Authority and the CFTC, sought to regulate the market in which price-reporting agencies such as Platts, a unit of New York-based McGraw-Hill, gather data about bids, offers and trades to publish prices in what are otherwise opaque markets. The indices published by the price reporting agencies help price deals in markets as different as crude oil in Singapore and gasoline in north-west Europe.
The regulators at first proposed that market participants sent all prices to the price-reporting agencies to gather a complete view of the market. Moreover, they proposed that only completed transactions be used to compile the benchmarks.
But amid strong opposition, the final draft instead proposes that pricing agencies continue to use their current system of bids and offers. In addition, the draft states that “there is no requirement on any physical market oil participant to submit transaction data”.
In its memo, the CFTC said that the final draft reflected the “fragile nature of the consensus”, adding that “international organizations and major oil companies uniformly objected” to mandatory reporting and the use of concluded deals.
“Had we insisted on these data submission measures, the international organizations made clear that they would object to the report and send their own message of alarm to the G20,” the memo from the CFTC, which co-chaired the group that drafted the rules together with the FSA, wrote.
Iosco’s draft came in response to a request from the Group of 20 in November last year. Iosco is expected to approve the draft next week to be reviewed by the G20 this year.
CFTC and Shell declined to comment, while Iosco, Total, IEA and Opec did not respond immediately to requests to comment.