Australia: ASIC launches case against COFCO over wheat futures manipulation

The Australian Securities & Investments Commission (ASIC) has initiated civil penalty proceedings in the Federal Court against Chinese-owned trading companies COFCO International Australia and COFCO Resources SA, alleging manipulation of Eastern Australia Wheat futures contracts.

The legal action comes almost two months after ASIC fined financial services company JP Morgan Securities Australia $775,000 for allowing the orders to be made using its platform.

The allegations relate to trades made on the ASX24 market for Eastern Australia Wheat futures January 2023 (WMF3) contracts.

ASIC alleges COFCO manipulated contracts on 34 occasions between 17 January 2022 and 3 March 2022, placing orders shortly before the close of the day session of the ASX24 for the improper purpose of affecting the daily settlement price for the WMF3 contract.

This conduct is commonly referred to as ‘marking the close’.

ASIC alleges that these orders caused the price for WMF3 contracts to not reflect the forces of genuine supply and demand in an open, informed and efficient market, and created artificial prices for WMF3 contracts on the ASX24.

In documents filed in the Federal Court on Wednesday, ASIC named COFCO Australia employee Nicholas McGaw as the trader authorised by COFCO Resources to execute the relevant WMF3 contracts.

Both COFCO Australia and COFCO Resources are subsidiaries of COFCO International.

ASIC alleges an arrangement existed between the companies where, for every WMF3 contract Mr McGaw executed on ASX 24 for COFCO Resources that resulted in a trade, both organisations would simultaneously enter into an offsetting over-the-counter contract with the same economic terms.

This contract partially transferred the risk from COFCO Resources to COFCO Australia.

It will be alleged that on 34 occasions just before close at 4.30pm, Mr McGaw “caused an offer to be made on ASX 24 for COFCO Resources to sell one or more lots under a WMF3 contract at a particular price”.

“In each case, Mr McGaw did so with the undisclosed intention of affecting the outcome of ASX’s calculation of the [daily settlement price (DSP)], such that the DSP would be lower than it otherwise would be, but for the offer,” the filing said.

“None of those impugned transactions constituted engagement in a genuine process of supply and demand: in each case, Mr McGaw’s purpose in causing the offer to be made was not for COFCO Resources to enter into a WMF3 contract as seller at the highest realisable price.

“Rather, as Mr McGaw explained in an email to JP Morgan on 8 March 2022, the rationale for that conduct was that “[COFCO International] was protecting its short position from another party bidding up the close”, i.e., the DSP.”

According to ASIC, most of the offers (22 of 34) resulted in a trade, and all of these had the effect intended by Mr McGaw: “the DSP as calculated by ASX for the relevant day was lower than it otherwise would have been”.

ASIC chair Joe Longo said the conduct impacted confidence in Australia’s commodity markets.

“This conduct is illegal; it erodes trust and confidence in our markets, increases costs for participants, hurts farmers, food manufacturers, importers and exporters, and impacts the prices Australians pay at the checkout,” Mr Longo said.

“We allege these companies engaged in a repeated pattern of manipulation to benefit themselves to the detriment of other participants in the market.

“Fairness in commodities markets has never been more important.

“Consumers and economies have felt the impact of distorted supply chains through the pandemic, the Russia Ukraine war and through increases in the cost of living.”

ASIC is seeking declarations and pecuniary penalties against both COFCO International Australia Pty Ltd and COFCO Resources SA.

The matter will be listed for a case management hearing on a date to be fixed by the Court.

Tags: WMF3, price, wheat, futures contracts, COFCO International Australia, COFCO Resources SA, manipulation, penalty