The US derivatives regulator Commodity Futures Trading Commission (CFTC) announced that it has ordered the filing and concurrent settlement of charges against Trafigura Trading LLC, a global commodities trader headquartered in Houston, Texas, for multiple violations of Commodity Exchange Act (CEA) and related CFTC regulations. The order requires Trafigura to pay a civil monetary penalty of $55 million and implement certain corrective measures to ensure future compliance with the CEA.
The order covers three offences:
- Between 2014 and 2019, Trafigura traded gasoline while knowing that it had material non-public information that it knew or should have known had been misappropriated by a Mexican trading entity (MTE).
- In February 2017, Trafigura manipulated a fuel oil benchmark to benefit futures and swaps positions, including derivatives traded in entities registered in the United States.
- Between 2017 and 2020, Trafigura required current and former employees to sign employment and/or separation agreements that contained non-disclosure clauses prohibiting them from disclosing company information, without exception to law enforcement or regulatory authorities , which unlawfully prevented individuals from voluntarily communicating with Department of Enforcement (DOE) Personnel during the course of an investigation.
“As reflected in today’s Order, Trafigura misappropriated material non-public information and engaged in manipulative behavior that affected published reference rates,” said Director of Enforcement Ian McGinley. “This enforcement action is yet another example of the CFTC’s commitment to ensuring that derivatives markets remain free from trading abuses that undermine their integrity.”
Director of the Whistleblower Office Brian Young commented,
“This is the first CFTC action charging a company for interfering with whistleblower communications. This groundbreaking action demonstrates the CFTC’s commitment to protecting potential whistleblowers and lets the market know that the CFTC will not tolerate efforts to silence potential witnesses.”
Trafigura case background
Misuse of non-public information materials
The ruling finds that between 2014 and April 2019, directly and through intermediaries, Trafigura improperly obtained non-public gasoline market information from an MTE employee in violation of employer rules. Among other things, Trafigura received MTE’s pricing formulas used to sell its natural gasoline to another trading entity in Mexico, as well as MTE’s monthly import “schedule,” meaning the volumes, types and ports of destination for the gasoline that MTE planned to import into the next month.
Trafigura also sometimes received competitor pricing information as part of bilateral negotiations. MTE considered this information confidential and important to its own business, and the information was important to Trafigura’s commercial and business decisions, such as trading and pricing strategies for gasoline products. Trafigura traders in Houston, Texas traded gasoline in physical and derivatives markets while knowing this confidential information.
Manipulative Behavior
The order further finds that Trafigura manipulated the benchmark price of US Gulf Coast high-sulfur fuel oil throughout February 2017. From January to approximately March 2017, Trafigura developed and deployed a large fuel oil export program that was designed to export fuel oil from the US Gulf Coast to Singapore in order to take advantage of an observed open fuel oil arbitrage. In connection with the arbitrage strategy, Trafigura established a derivative position in US Gulf Coast high-sulfur fuel oil, in part as a hedge against expected purchases of natural fuel oil for export to Singapore. However, the derivative long position entered by Trafigura was larger than its small physical position arising from its intention to buy US Gulf Coast fuel oil for arbitrage – the excess is essentially a long speculative bet on February fuel oil prices of 2017.
Starting on 1 February 2017 and continuing through the end of the month, Trafigura made large bids for and bought fuel oil cargoes in the benchmark’s trading window, far more than it had ever bought in the window in a single month. Trafigura’s heavy bidding and buying activity in this short period tended to increase the prices paid on the window and ultimately created artificially high reference values, which benefited Trafigura’s position in long derivatives. This impact on the fuel oil benchmark was to the detriment of market participants who sought to rely on the benchmark as a fair reference price.
Blocking Voluntary Communications with the CFTC
Finally, the order finds that between July 31, 2017 and 2020, Trafigura required its employees to sign employment agreements and its former employees to sign separation agreements, with broad non-disclosure clauses that prohibited the disclosure of Trafigura’s confidential information with third parties. These non-disclosure provisions did not contain language expressly permitting communication with law enforcement or regulatory authorities such as the CFTC. The provisions created confusion that resulted in a barrier to voluntary and direct communications with the CFTC regarding potential violations of the CEA and CFTC regulations in violation of the CEA’s prohibitions on obstructing direct communications with the CFTC.
The order finds that Trafigura’s conduct deceived its counterparties, harmed other market participants and undermined the integrity of the US and global oil markets. This case is being heard in coordination with the Foreign Ministry’s Special Corruption Task Force and the Special Person Negotiation Task Force.
The CFTC said it thanks Mexico’s Comisión Nacional Bancaria y de Valores and the Swiss Financial Market Supervisory Authority for their assistance in this matter.