CFTC Issues USD $55 million Fine From Whistleblower Lead

Case Facts

Platts Benchmark Overview

• The Platts benchmark with relevance here is assessed in the US. Specifically, the Platts U.S. Gulf Coast High Sulfur Fuel Oil benchmark (the “USGC HSFO Benchmark”) is assessed from Platts’s offices in Houston, Texas.
• The benchmark is assessed by Platts using their “market-on-close” (MOC) methodology. Like other Platts benchmarks, Platts widely and globally reports the daily USGC HSFO Benchmark as part of its subscription market-reporting services. End-users and other market participants, including those in the US, use this information as a price benchmark in industries such as shipping, bunker, and utilities, and as a reference price for the settlement of numerous derivatives.
• Platts generally determines the USGC HSFO Benchmark for a given day based primarily on bids to purchase, offers to sell, and trades in US Gulf Coast high-sulfur fuel oil during a defined period of time called the “window” managed by Platts.
• As relevant to those benchmarks and the MOC process during the Relevant Period, the bids, offers, and trades reported in the USGC HSFO Benchmark window were generally for a trade size of 45,000 barrels. During the Relevant Period, market participants typically reported bids, offers, and trades through online chats or through an interface called the Platts eWindow.

Trafigura’s Fraudulent and Manipulative Conduct

[1] Gasoline Trading While in Possession of Confidential Information Improperly Obtained from Mexican Trading Entity

• Between 2014 and April 2019, directly and through intermediaries, Trafigura improperly obtained material non-public information from an employee of the MTE in breach of that employee’s duties. For example, Trafigura was provided with documents that contained the pricing formulas used by the MTE to price and sell its physical gasoline to another trading entity in Mexico.
• At various times, Trafigura also received the MTE’s monthly import “programme” meaning the MTE’s total expected import volumes of gasoline, the types of gasoline to be imported in the forward month, and the destination ports for the gasoline.
• Trafigura also sometimes received competitor pricing information in the context of bilateral negotiations.
• The information was also material to some of Trafigura’s trading and business decisions, such as formulating business and negotiation strategies and determining prices to offer for gasoline products.
• Certain Trafigura traders in Houston, Texas entered into physical and derivative gasoline transactions while in knowing possession of this information.
• The MTE employee shared the information with Trafigura in breach of duties to his employer as set forth in employment policies and agreements, and for his benefit, including to improve his status within the MTE.
• Certain Trafigura traders understood the sensitivity of the improperly obtained confidential information, and took steps to maintain it in confidence and ensure that the MTE would not learn that they had it in their possession. Documents were sometimes hand-delivered from Mexico to the US in paper format leaving no electronic record that Trafigura had received the information into its possession.
• Trafigura traders in Houston did not tell their trading counterparts at the MTE that they had access to the information.

[2] Manipulation of the USGC HSFO Benchmark in February 2017

• Trafigura held derivatives and physical trade positions in the US that exposed Trafigura to fluctuations in the Platts price assessment for US USGC HSFO. 
• In January 2017, Trafigura traders observed an open arbitrage for fuel oil between the US Gulf Coast and Singapore that was estimated to be in excess of 10 million barrels.
• From approximately January to March 2017, Trafigura developed and deployed a large fuel oil export program designed to export fuel oil from the US Gulf Coast to Singapore in order to profit from the open arbitrage.
• In connection with its arbitrage strategy, Trafigura established a long derivative position in USGC HSFO, in part as an economic hedge for its anticipated purchases of physical fuel oil to export to Singapore.
• In January 2017, Trafigura traders entered into contracts for sale of approximately 3.5 million barrels of physical high-sulfur fuel oil from the American entity in Houston to its related company for delivery in Singapore in February, March, and April 2017. Trafigura sought to purchase physical barrels against the short physical position.
• Ultimately, the long derivative position entered into by Trafigura was in excess of its short physical position that resulted from their plan to purchase fuel oil in the US Gulf Coast for arbitrage—the excess essentially constituting a speculative position.
• The settlement value of Trafigura’s long derivative position was based on the average of the daily Platts USGC HSFO Benchmark value for the 19 trading days during the month of February 2017.

Manipulating the HSFO Platts benchmark to benefit long derivative speculative position 

• Because Trafigura’s long derivative position was larger than its short physical position, increases in the USGC HSFO Benchmark would benefit Trafigura because the gains from its derivative position would outweigh the increased prices it would need to pay for physical fuel oil.
• By bidding and purchasing physical fuel oil in the MOC window, Trafigura could execute trades that could result in an increase in the USGC HSFO Benchmark.
• Because the USGC HSFO Benchmark was based on transactions in the MOC window, higher prices paid by Trafigura for fuel oil in the MOC window could increase the Benchmark. The increase in Benchmark price would benefit Trafigura’s profits overall due to the application of leverage in its derivatives positions.
• Beginning on 1 February 2017, and continuing through to the end of the month, Trafigura bid heavily for and bought 80 cargoes (3.6 million barrels in total) of fuel oil in the Platts MOC trading window against its short physical position, an amount much larger than it had ever previously purchased in the window in a single month.
• Trafigura’s heavy bidding and buying activity in that short period tended to increase prices paid in the MOC window, and ultimately contributed to an increase in the daily Platts USGC HSFO Benchmark value, which benefitted Trafigura’s long derivatives position.
• Trafigura’s near exclusive use of the Platts window to source large quantities of fuel oil in one month departed from its past conduct, and the large volume created artificially high USGC HSFO Benchmark values throughout February 2017 that were not reflective of ordinary forces of supply and demand.
• This impact on the USGC HSFO Benchmark was to the detriment of market participants who looked to rely on the benchmark as a fair price reference of physical or derivatives trades.

[3] Non-Disclosure Agreements Impeded Employees’ Communications with the Commission

• Between 31 July 2017 and 2020, Trafigura required its employees to execute (and requested that former employees to execute) agreements that contained broad non-disclosure provisions that prohibited the sharing of Trafigura’s confidential information with third parties.
• The employment agreements and certain separation agreements defined “Confidential Information” broadly, and prohibited disclosing such information with no carve-out language that would have expressly permitted the sharing of information with the CFTC or law enforcement agencies (except to the extent required by law or court order) concerning possible violations of law, including the CEA CFTC Regulations.
• The language in these non-disclosure agreements thus were purported to prohibit individuals from voluntarily and directly communicating directly with the CFTC about possible violations of the CEA or CFTC Regulations.
• The non-disclosure provisions described above led to confusion among certain current and former Trafigura employees that allegedly had the effect of impeding their direct and voluntary communications with the CFTC.

Trafigura’s Remediation Programme 

Trafigura represented that it voluntarily undertook significant remedial steps to enhance its compliance programme, including, but not limited to:

• Developing and implementing enhanced, risk-based policies and procedures relating to market integrity;
• Enhancing processes and controls around communications relating to market activity;
• Investing additional resources in employee training and compliance testing; and
• Enhancing ongoing compliance monitoring and controls testing processes.