EU benchmark reform plan threatens oil price reporting

LONDON Thu Jun 6, 2013 8:56pm BST

An European Union flag flutters outside of the European Parliament in Brussels October 12, 2012. REUTERS/Francois Lenoir

An European Union flag flutters outside of the European Parliament in Brussels October 12, 2012.

Credit: Reuters/Francois Lenoir

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LONDON (Reuters) - Tough new rules proposed by the European Union for financial benchmarks would seriously threaten oil price reporting agencies (PRAs), industry sources say, as they could impose huge liabilities on oil publishers and participants.

Oil price reporting agencies were already under renewed scrutiny after European authorities raided the London office of lead price publisher Platts - a unit of McGraw Hill MHFI.M - as well as oil majors BP (BP.L), Shell (RDSa.L) and Statoil (STL.OL), saying they suspected oil prices had been manipulated.

The EU's draft law, which is unlikely to take effect before 2014, proposes that regulation of top benchmarks like Libor and oil be shifted to the Paris-based European Securities and Markets Authority (ESMA).

"This is heavy-handed regulation, and if it's applied as written, it will make oil price reporting unworkable," said a senior oil industry source who requested anonymity.

"These rules were designed for Libor and have nothing to do with open markets."

Platts - along with smaller rivals privately held Argus Media and ICIS, a unit of Reed Elsevier (REL.L) - provides clients with prices assessed by reporters canvassing sources in opaque energy markets. Their assessments are used as benchmarks to settle physical and derivative deals worth billions in a $2.5 trillion (1.60 trillion pounds) market.

"We share the EC view that benchmarks should be robust, reliable and promote confidence in the marketplace," said a Platts spokeswoman.

"But (we) are wary of any measures that could discourage participation in the price reporting process, inadvertently reversing the progress made in recent years in promoting transparency of pricing in energy and other commodity markets," she added.

Argus and ICIS were not available to comment on the consequences of the EU draft - made available on Thursday - which could yet be watered down.

The agencies have vigorously argued that commodities markets are very different from the rates market and should be exempt from external oversight and new regulations proposed in the aftermath of the Libor rate-rigging scandal.

"The EU regulations would make it very difficult for markets to operate," said an oil industry executive who also requested anonymity. "Draconian is a mild term for them."

LEGAL ELEMENTS

Of particular concern is a provision that would allow an energy company to sue a PRA if the publisher is thought to have made a mistake in its assessment.

"The entire basis of PRA businesses is that the prices are provided 'for information purposes' and are used by the market at the market's own risk," said the senior industry source.

Journalists at reporting agencies assess prices by calling as many traders as possible and contacting them via instant messaging to ask where they see the market, trying to avoid pitfalls such as reflecting only a buyer's or seller's views.

The proposed EU rules also put the onus on the price reporter to inform ESMA of suspected manipulation.

Another article stipulates the need for a legal agreement between data suppliers and benchmark providers.

"This will make the oil companies reluctant to supply any data to the price reporting agencies," said the industry executive.

Oil companies may also find the proposed EU rules unworkable because they are unlikely to sign a binding legal agreement about how they submit data, said the industry sources.

The PRAs are likely to have teams of lawyers poring over the 84-page EU document. "The fall back position is always, 'you can't regulate us - we're journalists,'" said the senior industry source.

The PRAs' preference was for the EU to adopt proposals put forward by the International Organisation of Securities Commissions (IOSCO) that outlined recommended practices, the industry sources said.

Thomson Reuters (TRI.TO), parent of Reuters news, competes with Platts, Argus and ICIS in providing news and information to the oil markets. Argus declined to comment.

(Additional reporting by Simon Falush and Dmitry Zhdannikov; Editing by William Hardy)

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