Glencore: Moving the Benchmark to Suit the Book

In the Glencore CFTC oil manipulation settlement, the Commodity Futures Trading Commission ordered $1,186,345,850 in civil penalties and repayment of gains over allegations of fuel-oil benchmark manipulation, misuse of confidential information and corrupt trading advantages. The trading story starts with a desk that could benefit from pushing the same benchmark higher when selling and lower when buying. If you know the cargo contract, the pricing days or the derivatives book, you may recognize why those window trades mattered.

The May 24, 2022 order named Glencore International AG, Glencore Ltd. and Chemoil Corporation. It described alleged conduct from approximately 2007 to at least 2018. Glencore’s physical and derivatives oil business operated worldwide, with substantial trading operations in New York and San Francisco.

Can the Commodity Market Be Manipulated?

Commodity market manipulation can work through the price used to settle other trades. In Glencore’s case, the CFTC alleged that traders tried to move Platts fuel-oil assessments in the direction that benefited their physical contracts and derivatives positions. The benchmark carried the effect from the window into other parts of the book.

S&P Global Platts publishes price assessments that buyers and sellers use as benchmarks. A physical oil contract can price at the benchmark plus or minus a negotiated dollar adjustment reflecting quality or other terms. Futures and swaps can settle against that same assessment. Shipping companies, bunker-fuel buyers and utilities use these prices too.

The order describes how Platts assessed the relevant benchmarks during the period at issue. Before the daily market-on-close trading window, Platts generally published a starting price called the peg. Authorized participants then reported bids, offers and trades, usually through online chats or the Platts eWindow. Platts used that activity to assess the benchmark and generally required delivery on window trades.

Information supplied outside the window also mattered. The CFTC alleged that Glencore gave Platts selectively incomplete or inaccurate accounts of market conditions and supply and demand. Those messages could influence the assessment alongside the bids and offers.

The World Federation of Exchanges research project’s 2024 working paper, An Analysis of Market Manipulation Definitions Around the World, distinguishes manipulation through false benchmark submissions from manipulation through trading itself. It also describes trades designed to affect payments under a separate contract. That is the useful connection here: the window activity and the position that benefited need to be read together.

The Fuel-Oil Benchmarks Behind the Positions

The Glencore and Chemoil CFTC fuel-oil benchmark case covered the Los Angeles Bunker benchmark, New York Harbor low-sulfur fuel oil, New York Harbor high-sulfur fuel oil and U.S. Gulf Coast high-sulfur fuel oil. The civil order alleged manipulation and attempted manipulation in Los Angeles, and attempted manipulation of the Gulf Coast and New York benchmarks.

The Los Angeles assessment covered 380 CST 3.5% bunker fuel. The New York Harbor assessments covered No. 6 fuel oil at 1% and 3% sulfur. Those product specifications identify which physical trades could feed each assessment.

Those markets connected different trades. In Los Angeles, large cargo purchases and sales used the average benchmark on specified pricing days. In the Gulf Coast and New York Harbor, Glencore also held futures and swaps that settled against the average daily benchmark for a month or part of a month.

The CFTC alleged that traders sometimes increased derivatives positions to amplify the exposure they wanted to benefit. A bigger position meant more riding on the assessment. The incentive becomes clearer when the physical and derivatives books sit side by side.

The Los Angeles Cargo and the Singapore Blend

The Los Angeles allegations explain why a trader could want a higher benchmark one day and a lower one another day. The order describes cargo trades with a Mexico-based state-owned company priced against the Los Angeles Bunker benchmark. A higher assessment increased what Glencore received on a sale. A lower assessment reduced what it paid on a purchase.

The CFTC’s examples follow those incentives. In May 2013, Glencore sold approximately 40,000 metric tons of fuel oil under a contract priced on specified days. The CFTC alleged that a senior trader directed an employee to submit bids and raise them during those windows, producing artificially high assessments and additional revenue on the cargo.

The same order describes the reverse in October 2015. On pricing days for cargo purchases, the senior trader allegedly directed the employee to submit offers and lower them, depressing the benchmark and saving Glencore money on the purchases. The commercial objective changed with the contract.

An informal joint venture added another reason to want the benchmark down. According to the CFTC’s account, from around December 2012 to around January 2016, the state-owned company bought fuel-oil cargos from another counterparty at benchmark-linked prices. Glencore supplied cutter stock for blending. The state-owned company sold the resulting blend into Singapore, and the parties coordinated the venture and shared its profits.

A lower Los Angeles benchmark meant cheaper input oil and more profit to share. The allegation reaches from a pricing window in the United States to a blend sold in Singapore. We see the absurdity in a desk helping set the market’s reference price while working to turn it into its own discount.

The Gulf Coast and New York Positions Behind the Orders

The Gulf Coast examples put the position beside the activity intended to benefit it. In November 2012, the CFTC alleged that Glencore had long exposure exceeding 8,800,000 barrels through physical trades and derivatives. A higher monthly average would generate more revenue. Traders reported bids and raised bids approximately 728 times that month, accounting for the majority of that buying activity in the window.

In July 2018, the direction reversed. The order describes short exposure exceeding 4,000,000 barrels, which would benefit from a lower monthly average. Traders allegedly reported offers and lowered offers approximately 530 times that month, accounting for the majority of that selling activity in the window.

New York supplied the same connection on different books. The CFTC alleged that traders tried to raise the low-sulfur and high-sulfur assessments through bids and raised bids when Glencore held positions that would benefit from a higher benchmark.

The bid count tells only part of this story. The position explains why the desk wanted the price to move. And the CFTC’s account identifies who stood on the other side: counterparties with opposite exposure and market participants relying on the benchmark as a fair reference price.

Confidential Information and Bought Trading Access

The CFTC also alleged that Glencore obtained confidential information from employees and agents of state-owned companies, including in Mexico, and used it in physical transactions, derivatives trading and negotiations. Those employees and agents owed their employers duties to keep the information confidential. According to the order, the information circulated among oil traders and personnel in the United States, London and Singapore for use in physical and derivatives business.

The order reproduces a Glencore employee warning a trader about the information’s source:

That warning makes the alleged advantage plain. According to the CFTC, Glencore was negotiating with a business whose confidential information it already held. In an October 2013 example, the CFTC described personnel using that information to analyze a potential project and possible negotiating positions for a meeting that included the global head of the oil department.

The separate corrupt trading-access allegations concerned payments to employees and agents of state-owned companies in Brazil, Cameroon, Nigeria and Venezuela. The CFTC alleged that supervisors knew about, and sometimes directly participated in, the corruption. The agency also alleged that cash and third-party invoices concealed payments, with descriptions such as “marketing services” and “commission.” Traders and intermediaries allegedly used coded terms including “newspapers” and “chocolates.”

In its announcement of Vitol’s December 3, 2020 settlement, the CFTC likewise addressed allegations of corruptly obtained confidential information and attempted physical-oil benchmark manipulation. The recurring advantage is access to information that other bidders do not have, joined to trading that can move the reference price. An invoice can explain how the access was purchased while a position file explains why it paid.

Can CFTC Prosecute Criminal Violations?

The CFTC brings civil and administrative enforcement actions. The Justice Department prosecutes criminal violations.

In its guilty plea, Glencore Ltd. admitted a fuel-oil price-manipulation conspiracy involving the Los Angeles and U.S. Gulf Coast benchmarks. The Justice Department’s account of the plea and court filings identifies the products as intermediate fuel oil 380 CST at the Port of Los Angeles and RMG 380 fuel oil at the Port of Houston. The admitted scheme included employees at Chemoil. Employees submitted bids and offers during pricing windows to push the assessments in directions that benefited physical contracts and derivatives positions.

The U.S. Postal Inspection Service investigated Glencore Ltd.’s commodity-price case. The FBI investigated Glencore International A.G.’s separate foreign-bribery case. In its guilty plea, the company admitted concealing bribes through sham consulting agreements, inflated invoices and intermediary companies.

What Is the Penalty for Market Manipulation?

The Glencore civil order imposed an $865,630,784 penalty and required Glencore to repay $320,715,066 in gains. The order’s payment terms allowed payments under the coordinated Justice Department resolutions to count toward these civil obligations.

What Evidence Is Required to Prove Fraud?

In this case, the evidence connects benchmark submissions to the positions they were meant to benefit and the people directing the trades. The order ties trading instructions to pricing days, window submissions to benchmark exposure, and confidential information to negotiations and trades.

The same World Federation of Exchanges working paper describes automated systems flagging unusual patterns for analysts to investigate. It also identifies reports from intermediaries, the public and whistleblowers as sources of detection. An insider’s account can explain the commercial purpose behind the pattern.

Our whistleblower experts examine that connection with you. A cargo contract may identify the relevant pricing days. A derivatives position file may explain why the desk wanted a higher assessment even while buying physical oil. Instructions, messages and payment records may show who directed the trading, who supplied confidential information and what an intermediary was paid to do.

What Is the CFTC Whistleblower Program?

The CFTC Whistleblower Program can reward people whose original information leads to successful enforcement. Its awards total 10% to 30% of qualifying monetary sanctions collected, shared when more than one whistleblower earns an award.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. The Glencore proceeding discussed here belongs to the separate CFTC enforcement and award system.

The CFTC published a Notice of Covered Action for Glencore and Chemoil on May 26, 2022. If your knowledge connects the benchmark, the book and the instructions behind the trades, we bring in CFTC whistleblower lawyers who know benchmark manipulation to build the case with you.

You Know Why the Desk Wanted That Price

If you saw window instructions follow a cargo’s pricing days, or confidential counterparty information reach the trading desk, talk with our whistleblower experts about what you saw. We build your strongest CFTC whistleblower case with you, bring in CFTC whistleblower lawyers who understand physical oil and derivatives, and stay beside you through the case.