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Like Libor All Over Again, But With TTF Gas Markets


EU officials are thinking of totally restructuring how gas and power markets are priced. It’s to do with how long-term contracts are adjusted when wholesale prices move, which very much resembles the way debt contracts used to be linked and adjusted with Libor benchmark rates.


Von der Leyen also said there had been a shift from pipeline gas to increased use of liquefied natural gas, but the benchmark used in the gas market, TTF, had not adapted.

She said the commission would work on developing a more representative benchmark for trading that reflects this change, and also ease liquidity pressures on energy suppliers by amending rules on collaterals and taking measures to limit intraday price volatility.

We will be back with a more comprehensive analysis shortly. But the important thing to remember about the Libor manipulation scandal of 2008 is that it wasn’t just a bunch of rates traders conspiring to set rates as high as possible. In the months before the global financial crisis broke out, central banks were also caught trying to influence Libor rates lower.

This hasn’t been argued enough but… it always felt logical to me that markets ended up underestimating how much liquidity was really needed precisely because central banks had messed up price signals by acting to suppress Libor. This very genuinely may have led to unintended externalities which then went towards breaking things entirely.

Governments capping energy prices, suspending power markets and now toying with benchmark mechanisms to artificially suppress prices is more than likely to lead to even bigger externalities.

I have a detailed understanding about how this stuff works. Many years ago I worked as a natural gas market price assessor at Platts, the commodities benchmarking agency. I am reminded of what one of the most senior people there frequently noted with respect to the many different mechanisms traders used to try and manipulate the market.

“There is no such thing as two prices. There can only be one price!”


“Even if they manage to influence prices in our window for a short time, the market will eventually rebalance around the out-of-window price.”

One of the problems Platts always faced was how to assess the market when there weren’t enough cargoes traded in a given assessment period. Did you take the mid price of the bid-ask spread at the close? Something more reflective of the trade in the day? How about the volumetric average?

It was all very complex and subjective. As a result there were different rules and mechanisms guiding this process depending on which market you were assessing and whether Platts was the leading benchmark provider or not.

The difference between Libor and commodity benchmarks was that the agencies (at least back when I was working there) were fully aware of the risk that they were being targeted by manipulators. What’s more, there wasn’t just one standard in the industry as there was in Libor. There were many competing agencies.

Given the background you would be a fool not to recognise that third-party price-assessing agencies are predisposed to being at the heart of market scandals and breakdowns. From credit rating agencies to the British Banking Consortium, it’s a “known known” risk at this point.

This time around, however, none of the fall out will be a question of us having not known better. It will instead be a question of governments brazenly deneutralising commodity markets without caring about the consequences. In that context I can’t help but reflect on the fact that commodity price assessing practices were born out of journalists picking up prices in the course of doing their job.

That makes what’s happening now highly analogous to telling journalists that prices over x amount are disinformation or fake news.

We know this will never work.

The more governments try to consciously suspend the organic price discovery process by taking control of it and removing price-assessing journalists from the picture, the more obvious their own manipulation will become.

Their actions may temporarily split the market into two but they will never fix the energy shortage problem plaguing the system.

The “black markets” governments inadvertently create through such practices will feedback through to “approved prices” in the long run.

When they do, I warn you, it will not be pretty.

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2 Responses

    1. The duration of the benchmark, whether it is averaged, traded or offered in structure is irrelevant to the the point of the argument. I’m very familiar with the the mechanics. As noted in the story I intend to revisit with more detail soon. The point I am making is more far ranging. It is to do with government sanctioned manipulation of benchmarks that influence the pricing of dependent contracts, irrespective of their details. Nitpicking the difference in structures is entirely off point. Obviously the two are not exactly the same. I never suggested they were.

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