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Half-Empty Tankard

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Now is not a good time to run a price reporting agency. Following allegations of market manipulation in November, a seismic event last week saw a triumvirate of broking firms seek to wrest control of the setting of gas prices, with the launch of their own benchmark, dubbed the Tankard Index.

Having gone live on 6 February, the compilers of the Tankard Index are said to believe that their product will eventually usurp the current system of gas market pricing, in which price reporting agencies (PRAs) rely on voluntary submissions from gas traders in a Libor-style attempt to read the pulse of the wholesale market.

The failings of the incumbent system are well documented, with an FT leader column describing the price-setting process as "mind-bogglingly primitive", noting that "physical energy and commodities markets are so vulnerable that an absence of foul play would be more surprising than its presence". My own cache of evidence handed over to the FSA and Ofgem in November reveals traders convinced that the market is regularly manipulated, and - according to industry sources - was a prime catalyst in sparking the Tankard Index to life.

The Tankard Index is being trumpeted by its creators as a vital ingredient in the attempt to make the ultra-opaque wholesale gas market more transparent and robust. However, cynics have already noted that the notion of brokerage firms assuming ultimate responsibility for setting prices in place of PRAs will simply lead the market out of the frying pan and into the fire. At least one of the brokerage firms behind Tankard is caught up in the Libor scandal, with ICAP forced to admit last month that one of its subsidiaries was the subject of an FSA investigation into the affair.

While the Tankard Index will be based on a different methodology to that used by the main three PRAs, it appears to be just as vulnerable to potential manipulation should malevolent traders seek to exploit the system for their own gain. A spokesman for Tankard acknowledged that 'nothing is foolproof', and - given recent fines levied against major banks and energy traders for intentionally rigging commodity prices - there seems little chance of self-regulation foiling future attempts to game the market.

Just as price reporting agencies are far too close to traders for comfort, so are brokerage firms when it comes to setting prices on which all commodity users can rely. Price reporters are regularly leaned on by traders to influence their assessments of the market or even to retroactively amend prices for previous days' contracts. The proximity of the PRAs to the traders - whose subscriptions to PRAs' prices are the lifeblood of the price-reporting business - makes it far harder for reporters to ignore undue pressure than it would be if the assessment process was in the hands of an outside regulator with no vested interests.

If the FSA took responsibility for setting daily prices, there would be no question of traders trying to lean on those individuals assessing the market, since the entire operation would be conducted at arm's length and under heavy scrutiny from no-nonsense FSA officials. Yet, with the wholesale over-the-counter gas market largely free from regulatory oversight, the price-setting process is far from sufficiently secure, to the detriment of consumers right down the gas chain to private homes and businesses.

Just as PRAs make their living from the largesse of trading firms, so too do brokerage houses. Thus the birth of the Tankard Index does not appear to herald a new dawn in terms of reliability, and should not be seen as anything but a figleaf by those politicians and legislators seeking to resolve the current problems dogging the wholesale market.

A raft of new European market regulation is currently working its way through the European Parliament, Council and Commission, and - if it manages to avoid being derailed by heavy industry lobbying pressure - could make a real and worthwhile difference to the credibility of commodity markets. While some lawmakers are going as far as to demand that all energy trading should take place on regulated exchanges, at very least the responsibility for assessing and determining wholesale gas prices should be taken out of the hands of market-friendly private companies and passed over to national regulatory bodies. The Tankard is half-empty, and the market desperately needs one brimming over with trust, robustness and integrity.

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