On Friday, three days before a Senate subcommittee begins hearings on "Excessive Speculation In The Natural Gas Market," the Commodity Futures Trading Commission (CFTC) proposed a broad expansion of its regulations on reporting commodities market transactions, including futures and electronic exchange transactions, as well as cash market transactions and hedging transactions.

The CFTC proposed amendment would require entities holding a "reportable position" (above a certain level, i.e. large traders) in a commodity futures market regulated by the CFTC to keep and make available, if requested by the CFTC, its books and records for all of its transactions in that commodity, including transactions on electronic systems, over-the-counter (OTC), swap markets and on otherwise exempt boards of trade including foreign boards of trade.

The CFTC pointed to a close relationship among transactions by a company in the regulated futures market run by the New York Mercantile Exchange (Nymex) and other transactions the company makes in the cash or OTC markets, for instance in the cash market and on the IntercontinentalExchange (ICE) electronic market. The agency needs to see all of a company's transactions in order to detect attempts to manipulate the market, the proposed amendment said.

"It is critical that staff be able to assess the reportable trader's overall position in the same commodity in nonreporting transactions in order to see the complete picture of the reportable trader's positions in the commodity," the CFTC said, pointing to the growing volume of trading in non-reporting markets, including those of foreign-based exchanges.

In recent years the CFTC has issued 18 no action letters allowing various foreign boards of trade to make their systems available for direct access in the United States without revealing trades to the CFTC. ICE Futures, registered in the United Kingdom, holds a no action waiver. ICE has said, however, that it has cooperated with the CFTC in providing requested information on large trades (see Daily GPI, Jan. 30).

But, it is not just electronic trades that the CFTC wants to see. It also wants to look at physical trades offsetting futures market positions, and it calls for more clarity in reporting hedging transactions.

The hearing before the Senate permanent subcommittee on investigations, scheduled for Monday, June 25, with a follow-up session July 9, "will examine the reasons for the extreme price levels and volatility in the natural gas futures markets in 2006 and how excessive speculation by a single hedge fund, Amaranth LLC, dominated the natural gas market and distorted natural gas futures prices."

Amaranth lost more than $6 billion when it took a huge wrong-way position in the natural gas market (see Daily GPI, Sept. 22, 2006). That came just a month after another hedge fund, MotherRock, had to close its doors because of gas market losses (see Daily GPI, Aug. 4, 2006).

More recently the Bank of Montreal reported a loss of approximately $400 million on wrong-way trades in the natural gas market (see Daily GPI, April 30).

The subcommittee hearing also is aimed at assessing "the need for statutory and regulatory changes to prevent manipulation and excessive speculation on unregulated exchanges from detrimentally affecting energy prices." Witnesses at the morning session will include a number of parties that have been very critical of the impact of natural gas trading on consumer prices. Afternoon witnesses will include a former trader for Amaranth.

A staff report by the subcommittee a year ago, before the Amaranth crash, was highly critical of the CFTC's failure to monitor OTC, electronic and foreign exchange trading. (see Daily GPI, June 28, 2006). CFTC commissioners told the then Republican-led Congress they didn't need more oversight authority, and measures to expand regulation of commodities markets were not approved.

As the Democratic-led Congress begins to look into the issue, the CFTC amendment seeks to use the agency's current authority to extend its reach into OTC markets, arguing that it cannot adequately monitor the regulated markets without looking at what's going on in all markets. This possibly could head off new legislation specifically bringing those markets under its purview.

The CFTC proposed amendment to Regulation 18.5 calls for comments to be submitted to the CFTC at secretary@cftc.gov by July 23.

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