Not Our Market, Not Our Problem

If you believe the official hype, the FSA's apathetic conduct while the Libor scandal developed was entirely proper, despite being told explicitly by market participants that manipulation was afoot.

Regulator is warned about interest rate rigging, regulator fails to regulate, regulator conducts an internal inquiry to find out why, then - lo and behold - the self-same regulator rules that no negligence whatsoever occurred. If you believe the official hype, the FSA's apathetic conduct while the Libor scandal developed was entirely proper, despite being told explicitly by market participants that manipulation was afoot.

The FSA claims that, since they it was not responsible for collecting Libor submissions, it had no place intervening and regulating the suspicious goings-on in the ultra-opaque Libor arena. Yet the very institutions carrying out the rigging were directly regulated by the FSA, and at the very least the FSA should have been swiftly and sharply raising the issue with the firms' compliance departments. At the same time, given the amount of regulated exchanges directly influenced by Libor, Euribor, et al, the FSA should have invoked its special powers to delve into the matter - just like it has done with my gas price-fixing allegations.

In the case of the wholesale gas market, the FSA has got involved in the investigation due to the possibility that regulated commodity exchanges under its jurisdiction - such as ICE - may have been unduly influenced by the unregulated over-the-counter (OTC) market on which the suspicious trading occurred. With the spotlight firmly on the gas market thanks to the raft of press coverage of my claims, the FSA wanted to be seen to act decisively to stave off the kind of criticism levelled at its staff over Libor.

Cynics often point out that regulators are only keen to bare their fangs when the glare of publicity is upon them, and gas regulator Ofgem's extraordinary apathy in the wake of the price-fixing allegations seems to heavily support this theory. Despite being tipped-off about suspected market manipulation on October 17, it took the story breaking in the Guardian on November 12 before serious action was taken by Ofgem. Caroline Flint MP, the shadow energy secretary, claimed the delay "suggest[s] that Ofgem has serious questions to answer about whether it knew about reports of dodgy trading before they came to light [on November 12] and, if so, why it failed to act".

Ofgem's limited ability to properly regulate the wholesale gas market compounded the situation, with their powers impeded by a lack of a proper regulatory framework at both national and European level. They wheeled out this defence in response to heavy press criticism over the gas price-fixing scandal in exactly the same way as the FSA is now doing over Libor. But all this proves is that the regulators are not up to the task of regulating some of the most complex and critical traded markets underpinning the global economy, leaving corporations and citizens alike highly vulnerable as long as the status quo persists.

A raft of European regulation working its way through the legislative process is intended to clamp down on such lax systems, but is meeting a tidal wave of industry opposition which is likely to leave the final regulatory texts massively watered down and thus virtually ineffective. For example, oil producers, shippers and traders are desperate for their activities to remain in the unregulated OTC arena, free from proper scrutiny or intervention - and threaten explicitly to move their trading outside the EU should the regulatory climate turn inclement.

In turn, many politicians doff their caps to their industry masters, promising to accede to their demands, and vote accordingly at each stage of the negotiations, reducing the chances of serious regulatory change with every passing ballot. But, as seen with the likes of the FSA over Libor and Ofgem over wholesale gas trading, leaving the markets to their own devices brings scandal after scandal, and proves that traders can't remain a law unto themselves a moment longer.

That regulators brazenly admit knowledge of suspected market abuse, then brush criticism aside by saying the market concerned falls outside their jurisdiction or that they don't have sufficient powers to investigate, speaks volumes about what really motivates those at the organisations' helms. If they need a wider remit, or need extra powers, they should shout it from the rooftop as soon as the problems come to light, not sit back and wait for someone else to clean up the mess. And the sooner the better, because the markets are in far too parlous a state at present to be able to withstand many more such scandals.

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