Inside the Beltway: FERC Orders Barclays to Pay $470M for Gaming CA Market

By Published On: July 19, 2013

Federal regulators slapped a $435 million penalty on Barclay’s Bank for allegedly illegally gaming derivatives and physical trades in the Intercontinental Exchange market in California and other western states over a two-year period. In addition, it is to pay $35 million for “unjust profits.” The trades at issue were outside the California Independent System Operator market. The exchange “is not monitored or administered by the ISO,” said Steven Greenlee, grid operator spokesperson. FERC’s order is expected to head to federal court because the penalty is not expected to be repaid by the bank or traders. The Federal Regulatory Commission concluded this week that Barclays and four of its traders “violated the commission’s Anti-Manipulation Rule from November 2006 to December 2008 by manipulating the energy markets in and around California through the use of a coordinated, fraudulent scheme.” Barclays called foul, insisting it plans to “vigorously defend this matter." Kerry Cohen, Barclays spokesperson, added, “We believe the penalty assessed by the FERC is without basis, and we strongly disagree with the allegations made by FERC against Barclays and its former traders.” Gary Ackerman, Western Power Trading Forum executive director, said if “named parties in a FERC investigation refuse to pay, then the matter goes to federal court where a more competent jury can evaluate this case.” FERC found that the bank’s traders took opposing positions in parts of the market—in the index, or “physical positions” in relation to its financial swaps—at the “four most liquid points in the western market” to drive up its profits. The four traders “traded fixed price products not in an attempt to profit from the relationship between the market fundamentals of supply and demand, but instead for the fraudulent purpose of moving the Index price at a particular point so that Barclays’ financial swap positions at that same trading point would benefit,” ruled FERC. Much of the evidence used to prove intentional market gaming was from electronic exchanges between traders. One cited by FERC, for example, is an instant message exchange between one of the traders fined by FERC, Scott Connelly, and a former colleague. “The former colleague describes that morning’s trading as ‘a shitshow’ to which Connelly responded, ‘crazy—I love it.’ He then went on to say that ‘your boy started crying this morning. [H]e sent me an [ICE] message—said he was calling ferc,” and then added, ‘[lots of laughs],’” according to FERC’s order. Barclays was ordered to pay a $435 million penalty and the traders a combined $18 million. Trader Connelly faces a $15 million penalty for the alleged unjust trades. The three others were hit with $1 million in fines. The separate $35 million plus interest the bank was ordered to pay as “disgorgement” of unjust profits is to be divided up between California and three other western states’ low income energy assistance programs. California is to get the largest share of $22 million. Arizona is to reap $6.65 million, and Oregon and Washington $3.1 million each. “The Federal Energy Regulatory Commission sent a strong message to traders and banks today that manipulating energy markets comes at a steep cost,” stated U.S. Sen. Ron Wyden (D-OR).

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