This week ASIC, the Australian financial market regulator, announced (click here) an enforcement action against COFCO Resources SA, a Chinese-owned Agricultural company, for the alleged manipulation of Australia Wheat futures traded on the ASX24 market between 17 January 2022 and 3 March 2022. The Notice of Filing comprises two documents (click here and here) in relation to the case which is still to be heard by the court. The second document, the 18-page “Concise Statement”, contains a detailed breakdown of the complaint which is briefly summarised below:
- This case relates to trading on the ASX24 exchange in derivatives on the Eastern Australia Wheat Futures Contracts for the delivery of wheat in January 2023 (the “WMF3” contract);
- ASIC contends that on 34 occasions between 17 January 2022 and 3 March 2022 (“Relevant Period”), COFCO caused offers to be made on ASX24 to sell WMF3 contracts with the undisclosed intention of affecting the calculation performed by the ASX exchange of the daily settlement price for the WMF3 contract;
- The settlement price is a quotation determined daily by the ASX for the purpose of margining and settling WMF3 contracts and, according to the statement:
“…is intrinsic to the integrity of, and therefore public confidence in, Australian commodity derivatives markets more broadly“
- On each trading day, immediately after the close of the day trading session for the WMF3 contract at 4.30pm Australian Eastern Daylight Time (AEDT), ASX calculated the settlement price in accordance with rules. The final ask price and the price of the final trade in the contract are both capable of affecting the settlement price under these rules;
- A trader employed by COFCO Australia traded WMF3 on contracts on behalf of COFCO Resources via JP Morgan Securities (JPMS), its broker. Contracts relevant to the case are listed in the Annexure of the Concise Statement (see pages 7 to 18);
- In an internal trading arrangement, each trade in WMF3 executed by the trader for COFCO Resources resulted in a simultaneous offsetting contract in the form of a bilateral over-the-counter OTC) contract transferring the position to COFCO Australia;
- At all times during the 17 January to 3 March 2022 period, COFCO Resources had a net short position in WMF3 contracts and COFCO Australia had an equivalent net short position in the offsetting bilateral OTC contracts;
- On the 34 occasions subject to this complaint, shortly before the 4.30pm close of the ASX24 day trading session, the trader placed asks to sell one or more lots of WMF3 with the intention of affecting the outcome of ASX’s calculation of the settlement price – specifically to make it lower than it otherwise would be;
- According to the complaint, none of the 34 transactions constituted engagement in a “genuine process of supply and demand” - in each case the purpose of the trade was not for COFCO Resources to enter into a WMF3 contract as seller at the highest realisable price but rather, as the trader explained in an email to JP Morgan:
“[COFCO International] was protecting its short position from another party bidding up the close“
- This meant that at the time each offer was made, it was likely that the offer would result in a trade with another participant - most of the offers (22 out of 34) resulted in a trade, and most of the offers (22 out of 34) had the effect intended by the trader i.e. the settlement price calculated by the ASX for the relevant day was lower than it otherwise should have been;
- ASIC concluded that these activities either created an artificial price for trading, or maintained the price at a level that was artificial in the WMF3 contracts by ‘marking the close’ (note that this language is not used in the official court filings but only in ASIC’s announcement). In each case, the trader created a false or misleading impression with respect to the market for WMF3 contracts;
This behaviour breached various rules and regulations as summarised in the complaint:
- Section 1041A of the Corporations Act 2001 - prohibits a person from taking part in or carrying out a transaction that has or is likely to have the effect of creating an artificial price for trading, or maintaining at a level that is artificial a price for trading, in financial products on a financial market;
- Section 1041B(1)(b) - prohibits a person from doing, or omitting to do, an act if the act or omission has, or is likely to have, the effect of creating, or causing the creation of, a false or misleading appearance with respect to the market for, or the price for trading in, financial products on a financial market;
- Sections 1041A and 1041B(1) - civil penalty provisions;
The Chair of ASIC commented on the case as follows:
“ASIC is committed to responding to market manipulation in energy and commodities markets. This conduct is illegal; it erodes trust and confidence in our markets…Fairness in commodities markets has never been more important…We have the systems, people and powers to identify misconduct and will not hesitate to take action against those manipulating our markets“
RegTrail Insights
A date for the court hearing has yet to be set. As is now commonplace in ASIC enforcement cases, the level of detail published is commendable and a model many European regulators should look to emulate. ASIC has demonstrated that it is capable of pursuing commodity market abuse cases. Firms active in these markets should ensure that the appropriate systems and controls are in place to prevent and detect potentially abusive behaviour.