In what appears to be a response to recent congressional calls for more market transparency and an inquiry into potential market manipulation, the New York Mercantile Exchange (Nymex) said earlier this month that it will require all traders with positions above the standard expiration position limit of 1,000 gas contracts going into the final day of trading for an expiring contract to reveal their complete book of positions linked to the settlement price of the expiring contract.
Nymex said the newly instituted uniform verification procedures will document market participants' exposure justifying the use of an approved exemption in the Nymex natural gas futures contract. The exchange said it has developed a form for submission of this information, which will be provided to all market participants who currently maintain any natural gas contract exemptions. "Please note that Nymex may, as per its authority pursuant to any exemption, request underlying documentation as to any information supplied," the exchange told its participants.
The move by Nymex follows a Senate Energy and Natural Resources Committee inquiry earlier this month into whether traders of natural gas futures contracts are engaging in market manipulation tactics that drive up the prices ultimately paid by end-use gas consumers (see Daily GPI, Feb. 8). As part of the inquiry, Committee Chairman Sen. Jeff Bingaman (D-NM) sent letters to the heads of the Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC) asking them whether they have detected "potentially anomalous market behavior" in gas futures contract trading that may have influenced Nymex prices that are used by many gas suppliers in their contracts.
Nymex said it will assess this information according to a two-pronged test: Positions in excess of 1,000 contracts must offset a demonstrated risk in the book; and the net exposure of the entire book (including the hedge position in the natural gas contract justified under the first test) must be no more than 1,000 contracts on the side of the market that could benefit through trading by that market participant during the closing range.
Nymex's example was if a market participant holds a short position in excess of 1,000 natural gas contracts and will (potentially) be buying back that position during the closing range, the position of the complete book must be no more than net long 1,000 contracts.
Nymex said the consequences of failure to meet these tests are: If test No. 1 is not met, the position must be reduced prior to the closing range to a level justified as a hedge or to the position limit of 1,000 contracts; If test No. 2 above is not met, the position must be reduced to the position limit of 1,000 contracts prior to the closing range.
Any market participant that does not abide by the procedures is subject to revocation of the exemption and/or disciplinary action by Nymex.
"Within the context of the markets and Nymex as a self regulatory organization, we routinely review our surveillance procedures and make adjustments from time-to-time in order to promote orderly markets," said Keil Decker, a spokesman with Nymex. "What we have done is proactively implemented these procedures...within the paradigm of an SRO [self regulatory organization]."
The Senate investigation is focusing on how the CFTC and FERC monitor trading of Nymex gas futures contracts, particularly during end-of-month gas trading. A weighted average price is formed during the last half-hour of trading on expiration day, which is used to set the market settlement price for gas. This price is used as the basis for a great deal of contractual supply agreements for gas to flow the entire next month. The Senate also is examining how rigorously the agencies are carrying out their oversight and enforcement activities.
In launching the inquiry, Bingaman cited the collapse of the Amaranth Advisors LLC hedge fund last fall and recent volatility in the gas futures market. In September 2006, it was revealed that Amaranth's energy trading desk co-head lost billions by betting wrongly on the future direction of natural gas prices. The fund's losses were reported to be somewhere in excess of $6 billion, and ultimately led to the closure of the Greenwich, CT-based fund (see Daily GPI, Oct. 3, 2006). Among other clients who suffered massive setbacks, the collapse of the hedge fund reportedly cost the County of San Diego as much as $87 million in investments set aside for employee pensions.
Also on the market regulatory front, U.S. Sens Dianne Feinstein (D-CA), Olympia Snowe (R-ME), Carl Levin (D-MI) and Maria Cantwell (D-WA) announced plans this month to introduce the Oil and Gas Traders Oversight Act (see Daily GPI, Feb. 14), which would require companies that trade in the electronic over-the-counter (OTC) energy trading business to keep records for five years on large trading positions and report those positions to the CFTC or the Justice Department upon request. The bill also would require persons in the United States who trade U.S. energy commodities on foreign futures exchanges to keep similar records and report large trades.
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