U.S. derivatives markets regulator Commodity Futures Trading Commission (CFTC) has announced that it has issued an order simultaneously filing and settling charges against Trafigura Trading LLC, a global commodities merchant with its principal place of business in Houston, Texas, for multiple violations of the Commodity Exchange Act (CEA) and associated CFTC regulations. The order requires Trafigura to pay a $55 million civil monetary penalty and implement certain remedial measures to ensure future compliance with the CEA.

The order includes three violations:

1. Between 2014 and 2019, Trafigura traded gasoline while in knowing possession of material nonpublic information it knew or should have known had been misappropriated from a Mexican trading entity (MTE).
2. In February 2017, Trafigura manipulated a fuel oil benchmark to benefit its futures and swaps positions, including derivatives traded on United States registered entities.
3. Between 2017 and 2020, Trafigura required current employees and former employees to sign employment and/or separation agreements containing non-disclosure provisions prohibiting them from disclosing company information, with no exception for law enforcement agencies or regulators, which illegally impeded individuals from voluntarily communicating with Division of Enforcement (DOE) staff during the investigation.

“As reflected in today’s Order, Trafigura misappropriated material non-public information and engaged in manipulative conduct that affected published benchmark rates,” said Director of Enforcement Ian McGinley. “This enforcement action is yet another example of the CFTC’s commitment to ensuring the 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 puts the market on notice that the CFTC will not tolerate attempts to silence potential witnesses.”

Trafigura Case Background

Misappropriation of Material Nonpublic Information

The order finds that between 2014 and April 2019, directly and through intermediaries, Trafigura improperly obtained nonpublic information material to the gasoline market from an MTE employee in breach of the employer’s rules. Among other things, Trafigura received MTE’s pricing formulas used to sell its physical gasoline to another trading entity in Mexico, as well as the MTE’s monthly import “program,” meaning the volumes, types, and destination ports for gasoline the MTE planned to import in the next month.

Trafigura also sometimes received competitor pricing information in the context of bilateral negotiations. The MTE considered this information confidential and material to its own business, while the information was material to Trafigura’s trading and business decisions, such as its negotiation and pricing strategies for gasoline products. Trafigura traders in Houston, Texas entered into physical and derivative gasoline transactions while knowing this confidential information.

Manipulative Conduct

The order further finds that Trafigura manipulated the benchmark price of U.S. Gulf Coast high-sulfur fuel oil throughout the month of February 2017. From approximately January to March 2017, Trafigura developed and deployed a large fuel oil export program designed to export fuel oil from the U.S. Gulf Coast to Singapore in order to profit from an observed open arbitrage for fuel oil. In connection with its arbitrage strategy, Trafigura established a long derivative position in U.S. Gulf Coast high-sulfur fuel oil, in part as an economic hedge for its anticipated purchases of physical fuel oil to export to Singapore. However, the long derivative position Trafigura entered was in excess of its short physical position that resulted from its intent to buy fuel oil in the U.S. Gulf Coast for arbitrage—the excess essentially constituting a long speculative bet on fuel oil prices in February 2017.

Beginning on February 1, 2017, and continuing through the end of the month, Trafigura bid heavily for and bought cargoes of fuel oil in the benchmark’s trading window, in 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 window, and ultimately created artificially high benchmark values, which benefited Trafigura’s long derivatives position. This impact on the fuel oil benchmark was to the detriment of market participants who looked to rely on the benchmark as a fair price reference.

Impeding 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 provisions that prohibited the sharing of Trafigura’s confidential information with third parties. These non-disclosure provisions did not contain carve-out language expressly permitting communications with law enforcement or regulators such as the CFTC. The provisions caused confusion that resulted in an impediment to voluntary and direct communications with the CFTC about possible violations of the CEA and CFTC regulations in violation of the CEA’s prohibitions against impeding direct communications with the CFTC.

The order finds that Trafigura’s conduct defrauded its counterparties, harmed other market participants, and undermined the integrity of U.S. and global oil markets. This case is brought in coordination with the DOE’s Corruption Task Force and Insider Trading Task Force.

The CFTC said that it thanks the Comisión Nacional Bancaria y de Valores of Mexico and the Swiss Financial Market Supervisory Authority for their assistance in this matter.