SINGAPORE (Reuters) - Oil price agency Platts’ move to temporarily bar Lehman Brothers LEH.N from its trading window has highlighted its delicate dual role as the de facto regulator of the world’s physical energy markets.
Platts, whose physical price assessments are the cornerstone for most of the world’s energy markets, has put Lehman “under review”, which means it will not take the Wall Street bank’s bids, offers or deals into account when it assesses end-of-day cash market prices, industry sources told Reuters on Monday.
Such reviews, which are not uncommon, are normally reserved for companies that breach Platts’ rules of engagement during its daily half-hour trading “window”, failing to deliver on a contract, for instance. But market sources said they saw nothing to suggest that this was the case for Lehman Brothers.
Instead, they said, it appeared that Platts was acting in response to counterparty concerns about the No. 4 Wall Street bank’s credit condition after multibillion-dollar write-downs and ongoing fears about the fall-out of the subprime debacle.
But for some, Platts’ action itself was as great a concern.
“It’s a bit worrying,” said Gerard Rigby, a former Singapore-based oil trader who now runs Fuel First Consultancy in Sydney.
“Are they (Platts) a reporting agency or a pricing platform? They can determine who can trade on their own system. This is unusually powerful,” he added.
Platts, a unit of U.S. McGraw-Hill Cos Inc MHP.N, has neither the remit nor resources to gauge the credit-worthiness of companies whose deals it uses to set its benchmark, but it has intervened in the past when credit issues became an impediment to free trade, potentially distorting the market.
Platts was unable to comment immediately for this story and has declined to confirm or provide details about the review.
In statement on Monday it said its “routine” reviews take in a number of issues, including counterparty acceptance, and are meant to “ensure the integrity of the assessments” it publishes.
Lehman Brothers has also declined to comment on the review.
The oil industry has always been sensitive to any signs of Platts overstepping its primary function as a provider of price transparency in illiquid or opaque markets, from U.S. West Coast gasoline differentials to fuel oil cargoes in Singapore.
Traders said Platts has worked to make the assessment process as clear and objective as possible, as pressure mounted on both it and on regulators to improve oversight of unregulated markets in the wake of U.S. gas and power trading scandals.
But they also say it sometimes strays close to the gray line separating an independent price assessor from a regulator.
“Regulators are elected and chosen, not interviewed, hired and paid for their work like Platts, a Singapore-based trader said. “Their incentives are not lined up to their functions if they are to serve as regulators.”
Traders said the “review” would be unlikely to significantly affect Lehman’s oil trading operations, which are small compared to leaders in the sector like Goldman Sachs (GS.N).
While developed futures exchanges like the New York Mercantile Exchange (NYMEX) NMX.N fall under the authority of regulators like the Commodity Futures Trading Commission (CFTC), most of the world’s physical markets are unregulated.
To provide a benchmark price that can be used to settle long-term deals or derivatives trades, Platts gathers bids and offers on cash physical and over-the-counter derivative contracts during a half-hour daily trading period meant to concentrate market activity and provide a window of clarity.
Being excluded from posting bids or offers in that window — a practice known as “boxing” — does not prevent Lehman from trading with counterparties, but would mean its trades will not influence the benchmark end-of-day price set by Platts.
The review could at any given time be lifted, allowing Lehman to participate in the price assessment process again, and companies ranging from oil major Royal Dutch Shell (RDSa.L) to trader Gunvor have all resumed trade after being “boxed”.
And while traders often grumble about the Platts pricing system and its quasi-regulatory powers, some regular participants say the system works well enough, given the lack of alternatives.
“Traders have a choice not to participate in the Platts assessment, no one is arm twisting anyone to stick to Platts,” a senior China-based trader said.
“We are all seasoned players, and we know the referee and understand the rules, so let’s just play the game and move on.”
(Additional reporting by Dena Aubin in New York)
Editing by Jonathan Leff and Ramthan Hussain