As the congressional spotlight on commodities trading and regulation by the Commodity Futures Trading Commission (CFTC) grew brighter and hotter Thursday, it also narrowed its focus as legislators made clear they are almost exclusively interested in the natural gas market, the Amaranth case and the surrounding infrastructure, namely the CFTC, the New York Mercantile Exchange (Nymex) and IntercontinentalExchange (ICE).
Nymex President James Newsome vigorously defended the exchange before the House agriculture subcommittee on general farm commodities and risk. He responded to congressmen who quoted a Wall Street Journal report on Wednesday that said Nymex, which reports to the CFTC as a self-regulating organization (SRO), had failed to enforce its rules to limit ill-fated Amaranth’s large market positions. Specifically, the article noted that on eight occasions Amaranth had exceeded its position limits without incurring censure from Nymex.
Newsome said Nymex doesn’t act based on an isolated monthly incident, but rather amalgamates information to spot continuing abuse. He also said that when it finds abuse it counsels the abuser to unwind its positions on a schedule that will not unduly disturb the market. As it happened, Amaranth unwound its Nymex positions by moving them over to ICE, which at that point was not reporting large trader positions to the CFTC.
That has changed, ICE Chairman Jeffrey Sprecher told the committee. The barn door was closed when the CFTC put out a special call for ICE to report large trader positions post-Amaranth, and ICE has been sending daily feeds to the CFTC ever since. Sprecher emphasized that ICE believes the CFTC has all the authority it needs to demand reporting from ICE.
Both Newsome and Acting CFTC Chairman Walter Lukken said that while previously their monitoring had been focused on the front months, they would be following more closely contracts in the out months. It was pointed out during testimony that at one time Amaranth had 60% of the market in some of the forward months.
The House committee members clearly had paid attention to a Senate hearing earlier in the week and came loaded with very pointed questions (see Daily GPI, July 10). For instance, how could the system now in place have prevented the scenario in which the prices, probably driven higher by the Amaranth fiasco, became the prices that utility customers paid through the following winter, even though those prices fell soon after the Amaranth crash?
It was established that the so-called “Enron loophole,” is one that is not currently in use, nor is it key to the current market investigation. Another red herring that was disposed of is that there are other large over the counter (OTC) markets dealing with natural gas that need to be brought into the fold. The witnesses agreed that Nymex and ICE have 90% of the market for future trades in natural gas. Also, because the natural gas market is mostly continental, there is some question as to how excessive regulation can drive traders to overseas exchanges when everything clears on Nymex or ICE.
The congressmen also questioned whether bilateral market trades should be reported. The witnesses said there are few large positions in that market. Most market participants, wary of counterparty credit risk, clear through ICE or Nymex. However, legislation proposed Thursday would cover all natural gas trades of companies categorized as large traders.
The bill, H.R. 3009, the Market Transparency Reporting of United States Transactions (Market TRUST) Act was introduced by Reps. Sam Graves (R-MO) and John Barrow (D-GA). The language is similar to that which the congressmen inserted in 2005 in a reauthorization measure for the Commodities Exchange Act, which never made it through the Congress. It would do away with reporting exemptions for natural gas trades on foreign-based exchanges, and instruct the CFTC to collect books and records for large traders on all their natural gas transactions.
The bill was quickly endorsed by the American Public Gas Association (APGA). “The level of transparency created by this legislation will significantly reduce opportunities for market manipulation and restore public confidence in natural gas markets. Without additional authority as provided in the Market Trust Act, the CFTC role in the OTC market is limited to one of simply reacting to events after the fact. Such after-the-fact investigatory authority is grossly inadequate to provide American consumers with even a reasonable level of protection,” said APGA President Bert Kalisch.
“Last year’s blow-up of the Amaranth Advisors hedge fund and its impact on the natural gas markets highlights the increasingly significant role that OTC speculative trading has on the price of natural gas. APGA believes that by requiring large traders of natural gas to report their OTC positions to the CFTC, will it be able to routinely and prospectively assemble a complete picture of the overall size and potential impact of a large trader’s position. Had such a routine large trader report been in place in 2006, the CFTC would have been placed on notice about the relative size of Amaranth’s OTC position (which was many times larger than its exchange position) as it was accumulating its position.”
Lukken said the CFTC, which is near an all-time low on manpower with about 450 employees, would need more funds and personnel to expand its regulation of the natural gas futures market. The agency has jurisdiction over commodity and financial futures and options. That compares to nearly 1,300 FERC employees whose efforts are mainly directed at keeping tabs on interstate natural gas and physical power markets.
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