A report by the International Organization of Securities Commissions (IOSCO) to the G20 has warned the existing practices of price reporting agencies (PRAs) mean oil markets are "susceptible to manipulation and or price distortion."
The report said that the areas of potential concern included the methodology used to construct a price, the fact that price assessments involve the exercise of judgment, the voluntary nature of the submission of prices by the PRAs, and the absence of statutory regulation of PRAs.
Traders, banks, and fund managers voluntarily provide trade specifics to PRAs which use the information to publish spot oil prices.
According to the preliminary IOSCO Consultation Report, PRA published benchmarks are the basis for transactions in physical oil markets, exchanges, clearing houses and over the counter (OTC) oil derivatives contracts.
The report goes on to state that PRA prices are significant to the performance of these markets and have an impact on physical oil and derivatives markets, as well as on broader financial markets and the global economy.
IOSCO states that the information submitted to PRAs may be incomplete or false and therefore presents the opportunity to influence the assessment to any trader’s advantage.
The report recommends checks and balances be created to establish the veracity of the information submitted to PRAs, safeguards with respect to the exclusion of information provided to PRAs, and an audit trail and retention of information on how PRA made judgment calls that influenced published prices.
It further recommends follow up reviews by IOSCO, guidelines on challenging price and operational assessments in a timely and effective manner, and independent review committees at PRAs that provide regular stakeholder reports.
Lastly IOSCO recommends that markets comply with IOSCO recommendations in order to list prices based on a PRA assessment, and a mechanism to address discipline for non-compliance.
PRAs Argus Media, ICIA and Platts issued a statement in response to IOSCOs findings, proposing a Self Regulatory Code to increase transparency.
Platts President Larry Neal said: “Our efforts to develop and promote this Code, along with Argus and ICIS, reflect Platts’ commitment to fostering transparency, efficiency and integrity in the markets well into the future."
"We look forward to receiving industry feedback on the Code, and encourage other IPROs to join us in finalising its standards and signing on," he added.
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