On December 7, 2015, the U.S. Commodity Futures Trading Commission (“CFTC”) issued an order accepting an Offer of Settlement from Total Gas & Power North America, Inc. (“TGPNA”) and Therese Tran (“Tran”) (together “Respondents”) for their alleged violation of the CFTC’s regulations prohibiting manipulation or attempted manipulation. The CFTC found that TGPNA, through Tran and other traders under Tran’s direction, attempted to manipulate natural gas monthly index settlement prices through physical fixed-price trading during bid-week.
In its order, the CFTC stated that, during the relevant period, TGPNA’s West Desk traded both financial and physical natural gas products, primarily on the Intercontinental Exchange and in the over-the-counter bilateral market. In addition, the CFTC explained that TGPNA’s West Desk primarily traded (1) financial basis swaps where the buyer pays the seller the New York Mercantile Exchange final settlement price, plus or minus a differential, and the seller pays the buyer the monthly index settlement price at a particular location, as well as (2) financial index swaps, where the buyer pays the monthly index settlement price, plus or minus a premium or discount, in exchange for the daily index price. Furthermore, the order states that Respondents tracked TGPNA’s exposure to the monthly index settlement prices published by Platts and Natural Gas Intelligence.
The order goes on to allege that, during the monthly settlement periods for September 2011, October 2011, March 2012, and April 2012, TGPNA – through Tran and other West Desk traders under Tran’s direction – traded fixed-price natural gas in a manner designed to benefit TGPNA’s financial swaps. Specifically, the order alleges that the West Desk acquired large exposure to the monthly index settlement prices prior to the start of bid-week. The CFTC found that, depending on the direction of their exposure (i.e., long or short), Respondents executed a high volume of fixed-price trades during bid-week with the intent of favorably affecting monthly index settlement prices at several hubs. Furthermore, the CFTC found that the volume of Respondents’ trading accounted for a substantial percentage of the total market at the relevant hubs even though TGPNA had no material customers, assets, or transportation in the region. The order alleges that Respondents intended to affect the monthly index settlement prices to benefit their related financial positions, which were valued off of the indexes.
The CFTC argued that, by executing fixed-price trades to affect the monthly index settlement prices to benefit the West Desk’s related financial positions, Respondents attempted to manipulate natural gas monthly index settlement prices. In addition, the CFTC found that the Respondents intentionally employed a “manipulative device” by purchasing and/or selling large volumes of fixed-price natural gas before and during bid-week that were intended to benefit their related financial positions. The CFTC also found that circumstantial evidence shows that the Respondents acted with specific intent, or at least recklessly, and knew that their fixed-price trading had the potential to affect the monthly index prices and their related financial positions.
Ultimately, the CFTC concluded in its order that it would accept Respondents’ Offer of Settlement, which requires the Respondents to pay a $3.6 million civil monetary penalty, and imposes a bid-week trading limitation for two years.
Relatedly, FERC Staff has spent several years investigating Respondents for their bid-week trading activity in the southwest. On September 21, 2015 FERC Staff issued a Notice of Alleged Violations against TGPNA, Tran, and West Desk supervisor Aaron Hall for executing uneconomic physical natural gas trades during bid-week with the intent to move index prices in a way that benefited TGPNA’s financial positions (see September 28, 2015 edition of the WER).
A copy of the CFTC order is available here.