“(Reuters) – Emboldened energy market regulators are mounting an aggressive new campaign to stamp out a once-common trading practice that crosses physical and paper markets, unnerving traders who fear a backlash over years-old deals.
Away from the contentious debate over Dodd-Frank derivative market reforms that followed the 2008 financial crisis, this new battle takes place in the gray area separating cash markets for commodities like crude oil and power from the swaps or futures contracts that are tied to those prices.
While many companies legitimately trade in both markets, often to hedge their positions, regulators say others are manipulating one market in order to profit in the other.
The Federal Energy Regulatory Commission (FERC), armed in 2005 with expanded powers to tackle manipulation, is leading the charge with advanced enquiries into several big energy firms and banks, its orders show. The Commodity Futures Trading Commission (CFTC), which gained a broader mandate to pursue price fixing in derivative markets in 2010, joined the fray last year.
A broadside last month reverberated across the industry: FERC accepted a record $245 million settlement with Constellation Energy over allegations the utility’s traders had scheduled physical flows of electricity at a loss in order to reap a greater profit on derivative positions.
Initially viewed by some analysts as a concession from Constellation to win approval of its merger with Exelon Corp, more signs are starting to emerge of a broader effort to address a type of trading activity that in the past had threatened to slip between financial regulators with differing mandates and a history of battling over regulatory turf.
The FERC declined to discuss its enforcement approach on Wednesday, but FERC Chairman Jon Wellinghoff told Reuters in March that the commission has beefed up market enforcement. The Constellation settlement signals “there is no profit to be made in manipulating the market; it will be a huge net loss for you,” he said.
Last week FERC quietly gave notice of “alleged violation” by four former Barclays Capital power traders for deals in California between 2006 and 2008 that were similar to what Constellation did in New York — making uneconomic trades in physical electricity markets to profit from financial swaps on the Intercontinental Exchange….”
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