In comments that were welcomed by the Senate Permanent Subcommittee on Investigations, IntercontinentalExchange Chairman and CEO Jeffrey C. Sprecher Monday signaled his support for legislative action that would eliminate excessive speculation in natural gas trading markets and establish limits on the positions that traders could hold on the electronic exchange.

He further favored increased funding and staffing for the Commodity Futures Trading Commission (CFTC) and the elimination of the so-called Enron loophole, but said he did not believe a “complete overhaul” of the current regulatory system was warranted. .

Sprecher indicated that Atlanta, GA-based ICE was receptive to more market oversight. But “I don’t think it should end at ICE;” it should include other over-the-counter (OTC) markets, he said during the Senate subcommittee’s second hearing into speculation in natural gas trading markets.

ICE would have no problem with Congress authorizing the CFTC to give ICE the power to go after excessive speculation on its exchange, Sprecher said. “I think we’re making progress here,” replied Subcommittee Chairman Carl Levin (D-MI), who welcomed many of Sprecher’s remarks “I’m [also] delighted that ICE supports Congress [giving] it position limits like Nymex,” Levin noted. The senator was not as delighted with the testimony later in the day of the acting CFTC Chairman Walter Lukken, who appeared to be opposing greater accountability.

Currently, “we have broad antifraud [and] antimanipulation responsibility,” and pass along to the CFTC “what we may see” on the exchange, as well as information garnered from the market, Sprecher said.

ICE is “a very good competitor of ours,” and should be subject to the same CFTC regulation as Nymex because of the “aggregation of risk” on its exchange, said Nymex President James Newsome, who prior to joining Nymex was chairman of the CFTC.

At the first hearing on June 25 (see Daily GPI, June 26), the subcommittee staff released a report that found the gas trading positions held by Greenwich, CT-based Amaranth Advisors LLC in 2006 amounted to “excessive speculation” that ultimately influenced the price consumers paid for gas last winter. The Amaranth hedge fund collapsed last September, experiencing an estimated $6 billion in trading losses.

To prevent future Amaranths, Levin has called for Congress to close the Enron loophole in the Commodity Exchange Act (CEA), which he said allows electronic trading exchanges, such as ICE, to escape full regulation by the CFTC.

ICE “does not operate — and has never operated — pursuant to an ‘Enron loophole’ under the CEA,” Sprecher testified. “The ‘Enron loophole’ …completely excused Enron from the CEA and the CFTC’s jurisdiction in all respects in connection with its operation of ‘Enron Online,’ an electronic network. The basis for this immunity was that Enron Online functioned as a ‘one-to-many’ platform, with Enron serving as a party to every transaction executed on its system.,” he said.

“None of this is applicable to ICE. ICE is not eligible for the immunity under which Enron operated and has never claimed or sought to operate as such. Indeed, ICE fully supports the closing of the so-called ‘Enron loophole’ and endorses the report’s recommendations in this regard without reservation,” Sprecher noted. “While ICE does not operate under this [Enron loophole] provision, and, to our knowledge, it is not currently being relied upon by other market participants, it creates an unnecessary opportunity for dealers to operate OTC markets completely outside of the CFTC’s regulatory jurisdiction.”

He further disputed the assertion that ICE is not subject to CFTC regulation. “Transactions on ICE…are fully subject to the antifraud and antimanipulation provisions of the CEA, and ICE itself is subject to the CFTC’s oversight authority and to recordkeeping and reporting requirements,” Sprecher said. Specifically, ICE is required to prepare and maintain for five years records of all transactions executed on its markets; report to the CFTC certain information regarding transactions in products that are subject to the CFTC’s jurisdiction that meet specified trading volume levels; report to the CFTC certain trader information on the execution of transactions in ICE’s cleared natural gas market; and record and report to the CFTC complaints of alleged fraud or manipulative trading activity related to certain ICE products, he noted.

In short, “ICE is not an ‘unregulated’ or ‘dark’ market,'” as was claimed during the first hearing, Sprecher said.

He also disputed the report’s claim that the CFTC and Nymex were unable to conduct proper surveillance of gas trading by Amaranth because they did not have access to and could not obtain information about Amaranth’s trading on ICE. “The contention…is not accurate…The CFTC has the authority to make special calls to ICE for any information that it requires, and the CFTC has in fact exercised this authority to require additional information from ICE both before and since” the collapse of Amaranth, Sprecher said.

“Under current law, the CFTC and Nymex have (and had at the time of Amaranth’s trading) the legal authority and ability to obtain any available information regarding trading by market participants on ICE, and as a result no additional legislation or regulation is needed to fill this perceived ‘gap’ in the system,” he noted.

Sprecher said that the ICE currently reports to the CFTC on a daily basis on natural gas contract positions for transactions executed on its platform. “This information is being provided pursuant to a special call from the CFTC for this data, which illustrates the CFTC’s statutory and regulatory authority to obtain available information regarding transactions executed on ICE. It also illustrates ICE’s commitment to ensuring that the CFTC has access to the information it needs,” he noted.

The CFTC should have a “pretty good view” of trading activity on both ICE and Nymex now, Sprecher said. But he said there are limits on the information ICE can provide to regulators, since it does not clear the transactions that are executed on its platform. This is done by LCH.Clearnet.

As a self-regulatory organization, Nymex has the “power under its rules to request information from its members regarding their trading on other markets, including ICE, and to compel members to produce this information…Even prior to the events related to Amaranth, Nymex rules required its members to disclose to Nymex, upon its request, their trading strategies, including those on other markets, in connection with positions exceeding Nymex accountability levels,” Sprecher said.

Nymex’s Newsome, however, noted that Nymex did not begin to receive requested information from ICE about Amaranth’s trading on the exchange until after the collapse of Amaranth in September 2006 (see Daily GPI, Sept. 19, 2006).

In August 2006, Nymex became concerned about the large number of contracts that Amaranth held on the exchange and ordered it to reduce its position. “We were concerned that the size of their position could disrupt markets,” he said. He noted that Nymex notified the CFTC of its action against Amaranth. “The CFTC seemed very satisfied with the position we were taking with Amaranth.”

Amaranth complied with Nymex’s order, but it shifted the contracts to the less-regulated ICE. “The permanent subcommittee report [concluded] that Amaranth was motivated and able to circumvent regulatory constraints by trading on ICE in part because ICE participants are not subject to position limits or position accountability rules. This assertion again reflects a misunderstanding of ICE’s markets, the regulatory of ICE and the distinction between ICE and the futures markets.”

Part of the fault for Amaranth lies with Nymex, according to Sprecher. “The permanent subcommittee report itself points out [that] over the course of several months Nymex took no action as Amaranth consistently exceeded its accountability levels; in fact, Nymex increased the limits applicable to Amaranth, apparently based solely on Amaranth’s unsubstantiated requests and without seeking information about Amaranth’s trading on ICE or other markets, despite its ability to request and obtain such information from market participants,” he said.

The Senate subcommittee leaders — Levin and Sen. Norm Coleman of Minnesota, the panel’s ranking Republican — were frustrated with what they perceived as a lack of concern by the CFTC’s recently appointed acting chairman over Amaranth’s decision to flout the Nymex order and switch to ICE. Levin wanted to know “why the CFTC seems to be resisting something that even ICE accepts” — greater accountability. “You don’t seem troubled” by the fact that Amaranth moved from the regulated Nymex to ICE after it was ordered by Nymex to limit its position, Coleman told Lukken.

Unless the CFTC does something to prevent excessive speculation in the future, “you’re not preventing the next titanic,” Levin said. “Very clearly there is a problem here…That calls for us to take some type of action,” agreed CFTC Commissioner Michael V. Dunn.

When people exceed accountability limits and then move to ICE, Lukken conceded that that was troubling. “We may not have every regulatory tool in the toolbox,” Lukken said, but the CFTC has a big anti-manipulation hammer that it uses to enforce its regulations.

At the first hearing, an energy official estimated that Amaranth’s activities cost consumers billion of dollars in additional costs last winter. But ICE’s Sprecher doubted that consumers lost money.

“To the extent that other market users or consumers incurred losses or higher costs as a result of Amaranth’s loses, which we do not believe to be the case, that is obviously regrettable,” he said. “However, it is not the responsibility of Congress or the regulators to protect market participants against fundamentals, poor decisions or major losses. Their role is to ensure that the markets are able to function properly, free of abuses such as manipulation and fraud, and that market participants are treated fairly,” Sprecher noted.

“Despite the collapse of Amaranth, the fact is that the markets and regulatory system did their job, neither the price nor supply of natural gas experienced any significant impact, and the effects of Amaranth’s collapse was largely contained to a discrete time period and, unlike other hedge fund issues, did not lead to a bailout or market contagion.”

The CFTC’s Lukken noted in a recent speech that “despite the stress to the system incurred by Amaranth’s falter, the CFTC’s regulatory safeguards — as well as those of the exchanges, clearinghouses and intermediaries — worked as intended and the impact of this failure did not spread systemically beyond the firms involved,” Sprecher said.

Similarly, the Federal Energy Regulatory Commission reported that “despite Amaranth’s loss and subsequent sale of its natural gas positions, activity in the futures market related to this time period…remained fairly stable at record levels,” he noted.

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