CFTC resolves attempted gasoline benchmark manipulation case with a critical but encouraging dissent

In the dynamic world of financial regulation, the Commodity Futures Trading Commission (CFTC) has been actively addressing market manipulation with enforcement actions to ensure market integrity. The CFTC's recent settlement involving TOTSA TotalEnergies Trading SA (TOTSA) highlights the CFTC's commitment to policing commodity futures markets and preventing market manipulation. Alongside this, Commissioner Caroline D. Pham continued to voice criticism of the CFTC's enforcement approach, advocating for transparency and consistency in evaluating commercial hedging activity.

CFTC's Enforcement Action Against TOTSA – Case Overview

The CFTC recently imposed a $48 million penalty on TOTSA for attempting to manipulate the market for EBOB-linked gasoline futures contracts. This enforcement action underscores the CFTC's dedication to maintaining fair market practices and deterring similar misconduct in the future.

• Market manipulation attempt. TOTSA's actions were alleged to be a calculated attempt to influence the market for EBOB-linked futures contracts, which are crucial in setting prices for EBOB, a type of refined gasoline predominantly used for automobiles in Europe.
• Violation of regulations. By engaging in this scheme, TOTSA was found to have violated the Commodity Exchange Act (CEA) and CFTC regulations, which are designed to protect market integrity and ensure a level playing field for all participants. The case serves as a stark reminder of the importance of adhering to regulatory standards and the potential consequences of noncompliance.

TOTSA's scheme involved selling physical EBOB gasoline below market prices to influence the Argus EBOB Benchmark, which determines the value of EBOB-linked futures contracts. This strategic manipulation was aimed at benefiting TOTSA's derivatives positions, highlighting the complex interplay between physical and financial markets.

• March 2018 transactions. In March 2018, TOTSA engaged in unprecedented sales of physical EBOB, accounting for over 60% of the volume transacted by all brokered market participants. This aggressive selling strategy was designed to drive down the Argus EBOB Benchmark, thereby increasing the value of TOTSA's short futures position.
• Short futures position. TOTSA maintained a large short position in March-settled EBOB-linked futures, which would gain value if the reported price of physical EBOB declined. This position created a financial incentive for TOTSA to manipulate the physical EBOB market, underscoring the potential conflicts of interest that can arise when executing complex trading strategies.

The CFTC found that TOTSA violated CEA Section 6(c)(1) and Regulation 180.1(a)(1), by attempting to sell gasoline at lower prices than buyers were willing to pay in order to depress the price of EBOB-linked futures and increase the value of TOTSA's short position in those futures.

• Civil monetary penalty. TOTSA was ordered to pay a $48 million civil monetary penalty. This penalty serves as a deterrent to other market participants who might consider engaging in similar schemes.
• Cooperation and challenges. While TOTSA provided some cooperation during the investigation, the speaking order stated that TOTSA failed to timely produce certain WhatsApp communications, which hindered the investigation.

Commissioner Pham's Dissent

As seen in recent CFTC enforcement actions, Commissioner Pham continues to raise concerns about the CFTC's enforcement strategy. Her critique focuses on several key areas, emphasizing the need for a balanced approach that supports both market integrity and innovation. Her dissent to the TOTSA settlement stated that there was a lack of evidence to support the alleged charges, and she was concerned about the consequences of asserting that legitimate commercial hedging activity is illegal. She criticized the CFTC for relying on speculative and circumstantial evidence while failing to consider substantial evidence of market conditions and fundamentals. She also expressed concern about the impact of this decision on the ability of commercial end-users to manage risks in volatile markets.

Commissioner Pham's dissent is consistent with her recent comments calling for greater transparency in enforcement actions, arguing that clear communication is essential for maintaining trust and confidence in the regulatory process. In her statement accompanying another recent CFTC settlement in In re Raizen Energia SA, Commissioner Pham made the following recommendations:

• Clear communication. The CFTC should provide clear and transparent guidance to market participants, ensuring that they understand the rules and rationale behind enforcement actions. This clarity can help prevent unintentional violations and promote compliance.
• Avoiding ambiguity. Enforcement should not create confusion but rather offer regulatory clarity. By providing detailed explanations of enforcement actions, the CFTC can help market participants better understand their obligations and avoid future violations.
• Strategic approach. Enforcement should not only be punitive but also provide constructive guidance on acceptable market behavior and a framework for innovation. By adopting a strategic approach, the CFTC can encourage compliance while supporting the growth of new products and services.
• Encouraging Innovation. Regulatory clarity can help foster innovation within the financial markets without compromising integrity. By providing clear guidelines and support for innovative initiatives, the CFTC can help ensure that the U.S. remains a leader in financial innovation.
• Consistency in actions. Ensuring consistency in the interpretation and application of CFTC regulations and that enforcement actions are predictable is essential for maintaining market confidence. By adopting a consistent approach, the CFTC can help market participants understand their obligations and avoid unintentional violations.
• Guidance over punishment. Prioritizing guidance and education over merely punitive measures can help promote compliance and support market development. By providing clear guidance and support, the CFTC can help market participants navigate complex regulatory requirements and avoid potential pitfalls. Developing "a better approach to self-reporting and cooperation credit [would] encourage firms to come forward with issues and recognize firms that take accountability measures," thus allowing the CFTC to more efficiently "target true bad actors."

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