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Economists Recommend 'Rulebook' to Analyze Market Manipulation

There is a need for a single "rulebook" to analyze alleged market manipulations in the wholesale electricity and natural gas markets of the United States and European Union (EU), according to a pair of economists with The Brattle Group, who propose an economic framework that they say would assist compliance efforts by distinguishing behavior that is patently manipulative and identifying safe harbors for legitimate trading.

The framework, which is detailed in a paper published this week in the Energy Law Journal, would provide uniformity to the analysis of manipulative behavior across cases, agencies, statutes and continents, according to economists Shaun Ledgerwood and Dan Harris. It would also assist surveillance and enforcement efforts by identifying the precursors of manipulative trading, they said.

"While the behavior prohibited by the U.S. and EU statutes is remarkably similar, there is in fact no common standard for defining market manipulation," said Ledgerwood. "Our proposed framework describes manipulation in a manner that could generally harmonize international compliance and enforcement efforts, providing a uniform approach that will more clearly define permissive and prohibited behavior within and across both the U.S. and EU jurisdictions."

A market manipulation involves three components, according to the framework proposed by Ledgerwood and Harris:

"The historical precedent in the U.S. has been set by a few successful manipulation cases and settlements that identify specific types of behavior, whereas the EU's guidance is stated in examples provided in recitals to the new REMIT [Regulation on Energy Market Integrity and Transparency] laws," the economists said. "This reliance upon examples to define manipulation, rather than a cohesive economic theory, paints an incomplete picture of the range of behavior that may be found to be manipulative and fails to provide market participants with concrete guidance as to trading 'safe harbors' that are protected from enforcement scrutiny."

The report also identifies market characteristics that accentuate the likelihood of successful manipulation, types of behavior that can trigger a manipulation and positions that could be targeted by a manipulation.

President Obama last week called on Congress to provide funding for a five-part plan to combat manipulation, fraud and excessive speculation in the energy markets (see Daily GPI, April 18). While the oil market is the primary target of the president's plan, the administration effort also has implications for natural gas traders and contracts.

Obama urged Congress to immediately approve funding for a six-fold increase in the surveillance and enforcement staff for oil futures market trading at the Commodity Futures Trading Commission (CFTC). He also requested that Congress provide the Commission funding for critical information technology upgrades to strengthen monitoring of energy market activities. In addition, the president proposed raising the CFTC's authority to impose criminal and civil penalties for manipulation of key energy markets to $10 million per violation.

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