Oil price agency fires back at EU benchmark reform plan

Tue Jul 9, 2013 12:44pm EDT

* New EU rules could ruin oil market transparency - Argus Media

* Law could make North Sea Brent benchmark unworkable - Argus

* European Commission says has right to regulate oil price agencies

By Peg Mackey and Barbara Lewis

LONDON/BRUSSELS, July 9 (Reuters) - Rigorous legislation proposed by the European Commission on financial benchmarks could destroy transparency in the oil market and force up energy costs for consumers and industry, oil price publisher Argus Media said on Tuesday.

The new rules aim to regulate oil price reporting agencies (PRAs), whose daily assessments are used as benchmarks to settle physical and derivative deals worth billions, as well as the market sources who submit data to them.

Oil price publishers such as Platts - now the focus of an oil pricing probe - along with smaller rivals Argus and ICIS, want Brussels to adopt guidelines put forward by the International Organisation of Securities Commissions (IOSCO) that outlined recommended practices.

"The legislation is unworkable for commodity markets. As both IOSCO and UK regulator Ofgem have warned, voluntary contributions and price information from market sources to journalists are vulnerable to precipitous regulation," said Adrian Binks, Chairman and Chief Executive of Argus Media.

"The result will be to destroy transparency in the European oil and other energy markets and ultimately disadvantage European manufacturing and the consumer."

In a 28-page briefing paper sent to Brussels, privately held Argus also says the proposals, if enacted, could make benchmarks such as North Sea Brent unworkable, make risk hedging highly problematic and put Europe's energy security at risk.

"It would make voluntarily providing market data to PRAs so difficult and risky that the flow of information would be significantly reduced, resulting in less transparency and in commodity price benchmarks that are less robust and less reliable," it says.

"Yet only these weaker benchmarks from dysfunctional and less transparent energy markets would be allowed to be used in financial contracts. This would be an extraordinary and detrimental outcome."

Platts, a unit of McGraw-Hill, and ICIS, a unit of Reed Elsevier, share the views of Argus, say industry sources, and are commissioning external studies of the impact of the Commission's proposals on the energy market.

Brussels is expected to formally unveil its benchmark proposals in September, according to EU officials.

COMMISSION SAYS HAS RIGHT TO REGULATE

The PRAs provide clients with prices assessed by reporters canvassing sources in the opaque $2.5 trillion energy market. Journalists contact traders to see where they value the market - trying to avoid pitfalls such as reflecting only a buyer's or seller's views.

The fallback position for some PRAs is that if the companies are journalistic, the European Union has no remit to touch them. Brussels has a different view.

"The fact that a company engages in journalistic activities does not exempt it from financial legislation," a European Commission source told Reuters.

"What the Commission is preparing is a legislative proposal on the regulation of benchmark setting as an activity - not the activity of journalism."

Oil price publishers were already under renewed scrutiny after European authorities raided the London office of Platts - - as well as oil majors BP, Shell and Statoil , saying they suspected oil prices had been manipulated.

The 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).

The agencies have strenuously 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 primary difference is that the benchmarks in the energy and commodity markets derive from a need to develop pricing information for physical transactions, unlike benchmarks specific to financial markets that were set up purely to allow the pricing of financial instruments," says the Argus paper.

Though oil and trading companies have yet to formally consult with the Commission on its benchmark proposals, they are broadly aligned with the PRAs.

"In its current form, this proposal would create grave disturbance in the physical market, if not chaos," said a senior oil executive who requested anonymity.

Platts said it stood by its statement of June 6: "We share the EC view that benchmarks should be robust ... and we will continue to work with the Commission and others on this issue, but are wary of any measures that could discourage participation in the price reporting process."

Thomson Reuters, parent of Reuters news, competes with Platts, Argus and ICIS in providing news and information to the oil markets. (Editing by David Evans)