Calls for regulation of the over-the-counter (OTC) market and of hedge funds continue weeks after hedge fund Amaranth Advisors LLC’s $6+ billion loss due to wrong-way bets in the natural gas futures arena. The latest call for reform came Tuesday from the American Public Gas Association (APGA), which has asked both the House and Senate for “greater transparency” in natural gas trading.

In letters to both branches of Congress, APGA CEO Bert Kalisch, citing the Amaranth trouble and the August collapse of fellow hedge fund MotherRock LP (see Daily GPI, Aug. 4), said, “APGA believes that the excessive volatility created by the activities and subsequent fallout of these hedge funds further supports the need for greater transparency in natural gas trading.” Amaranth said over the weekend that it is now looking to shut down and that it has hired Fortress Investment Group LLC to help sell its remaining hedge-fund holdings (see Daily GPI, Oct. 3).

Kalisch added that the Amaranth incident highlights the ongoing impact that unregulated and unlimited speculative trading can have on the natural gas market. “The media has reported that Amaranth held large speculative positions in natural gas for months into the future and they also apparently traded heavily in price spreads between the summer and winter seasons,” Kalisch said in the letters. “The positions they held were excessive and the unwinding of these positions has lead to even more volatility in a market already plagued by volatility for many years. These actions may have kept prices inflated for many years into the future, and, although the market is correcting and prices are falling, the effects will be felt by the American public.”

Combating the belief that no one but the big players were hurt by Amaranth’s fallout, Kalisch said American consumers were the ultimate victims because they are supplied by utilities that utilize hedging programs to stabilize natural gas costs. “Prudent utilities did not wait until the end of summer to fix prices for the coming winter,” Kalisch hypothesized. “Thus, they fixed the price of portions of their winter gas requirements (likely a majority) well before the hedge fund fallout sparked a drop in prices.”

The APGA calls for reform are not the first in this situation. Immediately following the news of Amaranth’s difficulties, Connecticut Attorney General Richard Blumenthal reiterated his long-standing call for more oversight of hedge funds in general. Blumenthal said he is “collecting evidence and reviewing facts” concerning the large losses at Amaranth and renewed his call for “greater transparency and disclosure” in the hedge fund industry. (see Daily GPI, Sept. 20). Sen. Dianne Feinstein (D-CA) joined the chorus of criticism last week, blaming the Commodity Futures Trading Commission (CFTC) for failure to properly perform its oversight responsibility for energy trading markets. Feinstein also renewed her call for passage of legislation she has sponsored to increase transparency and accountability in energy trading markets for oil and natural gas (see Daily GPI, Sept. 28).

In a letter to the heads of the Senate Agriculture Committee last week, Paul N. Cicio, president of the Industrial Energy Consumers of America (IECA), said his group has voiced its support for legislation that would close a “substantial part” of a regulatory loophole by giving the CFTC oversight of the OTC energy electronic trading market (see Daily GPI, Sept. 27).

In his letters to Congress, APGA’s Kalisch also said that the vast majority of natural gas derivatives are currently traded without government oversight. “While the Commodity Futures Trading Commission (CFTC) monitors trading of natural gas contracts cleared through the Nymex, it receives very limited information regarding trading of natural gas derivatives on the Intercontinental Exchange or on the over the counter market where tens of thousands of trades are placed every day,” he said.

The APGA asked Congress to give the CFTC the authority to collect information concerning all positions held by the largest traders in the natural gas derivatives market and not just positions cleared through the Nymex Exchange. “Natural gas and other energy markets have a somewhat unique situation because of the vastness of the unregulated over-the-counter market compared to other commodities,” he said. “The Amaranth and MotherRock fallouts highlight the need for regulators to understand and have access to more data to monitor the natural gas market. We also feel a speculative position limit that crosses over both exchange traded and OTC derivatives would help deter speculative interests from taking excessive positions.”

Kalisch added that without comprehensive large trader position reporting, the government is currently “handicapped in its ability” to deter energy market misconduct. “Without giving the government the tools to prevent manipulation, market users and consumers of natural gas, who depend on the integrity of the natural gas market, cannot have the confidence in those markets that the public deserves. The minimal costs associated with this increased transparency are far outweighed by the benefits that will be provided in terms of consumer confidence.”

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