U.K. Regulator Warns Commodity Firms Over Market Abuse
September 04 2015 - 12:40PM
Dow Jones News
LONDON—The U.K.'s financial regulator said firms that trade
commodities, from oil to gold, have learned little from recent high
profile cases of market abuse and are failing to adequately monitor
the risks of such abuse.
The Financial Conduct Authority said in an online newsletter
that the commodities trading firms that it reviewed were complacent
over the risks of market abuse. The FCA review also found that
commodities specialists had lower levels of monitoring and managing
of their credit, liquidity and market risk than other parts of the
financial services industry.
In recent years the finance industry has been roiled by several
cases of large scale market abuse, many centering on London. That
included the manipulation of the foreign-exchange markets,
wrongdoing in the settling of key interest rates, and the
manipulation of the setting of a gold benchmark.
"Many firms had not embedded the lessons learned from recent
market abuse cases," the FCA said in its Market Watch newsletter
posted on its website. "In some firms we found complacency toward
the risk of market abuse."
The FCA conducted a review into 12 firms that act in oil,
energy, metals and soft commodity markets, such as sugar and wheat.
The review comes after recent changes in the market, in which a
number of large banks, such as Barclays PLC and Credit Suisse Group
AG, left commodity markets.
The FCA said that many firms believe that commodity markets were
"'too deep, too liquid, and there are too many participants'" for
them to be manipulated. The London-based regulator said that this
ignored a number of abuse cases in markets as deep, or deeper, and
past cases in commodity markets.
Some of the biggest rogue trading scandals have happened in
commodities, including $2.6 billion in losses in the copper market
chalked up by a trader at Japan's Sumitomo in the late 1990s.
At the majority of firms reviewed by the FCA, traders and
brokers had a poor understanding of their responsibilities on the
use of inside and market sensitive information. The FCA said it saw
instances where information was being used to trade around
infrastructure outages and equity that had not been checked to make
sure it was appropriate.
Most firms had not carried out an assessment over whether they
had adequate monitoring and surveillance of such potential abuse,
the newsletter said.
The companies were also failing to identify suspicious
transactions and escalate them to the FCA through Suspicious
Transaction Reports (STRs). Banks, and other financial services
firms, are asked by regulators around the world to submit such
reports across their business, from suspected money laundering to
potentially illegal trades. The FCA said that only two of the 12
firms in the sample had submitted STRs relating to commodities
trading, although many had described events and market behavior
that may have requited such submissions
The FCA also said that many firms were also failing to monitor
their own risks. That includes safeguarding against potential
credit and liquidity risks, in which a company could become over
exposure to debt and markets and in managing their own access to
liquidity, or finance.
Write to Alistair MacDonald at alistair.macdonald@wsj.com
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(END) Dow Jones Newswires
September 04, 2015 12:25 ET (16:25 GMT)
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