Following up on its call late last month for legislation that would close a “substantial part” of a regulatory loophole by giving the Commodity Futures Trading Commission (CFTC) oversight of the over-the-counter (OTC) energy electronic trading market (see NGI, Oct. 2), the Industrial Energy Consumers of America (IECA) on Friday asked FERC to get involved and to investigate the facts surrounding the downfall of hedge fund Amaranth Advisors LLC in September.

Speaking at FERC’s Technical Conference Friday on Transparency Provisions of the Energy Policy Act of 2005, IECA President Paul N. Cicio stated that the New York Mercantile Exchange (Nymex) and OTC markets directly affect the price that manufacturing companies pay for physical natural gas. As a result, he said that “IECA encourages [the Federal Energy Regulatory commission (FERC)] to support government oversight of volume traded on all natural gas markets, not just the Nymex, but the entire OTC market.” In addition, he requested that the FERC subpoena Amaranth’s records to determine whether price manipulation did occur.

The requests come as the latest of many calls for regulation of the OTC market and of hedge funds following Amaranth Advisors more than $6 billion loss due to wrong-way bets in the natural gas futures arena (see NGI, Oct. 2; Oct. 9).

In his supporting position paper, Cicio said that since large market players are restricted from taking positions of over 12,000 futures contracts on Nymex, they are doing most of the business in the OTC market where CFTC has no authority to monitor how much volume large players control or require a large trader report like they can with Nymex trades. “It is not an accident that large traders take enormous positions to influence price without detection in the OTC markets,” he said.

“The CFTC knows that a significant gap exists,” Cicio said. “CFTC Commissioner [Michael V.] Dunn recently commented that, ‘Because the CFTC is barred from regulating the OTC energy markets, it cannot collect large trader data from unregulated energy markets, or conducting regular surveillance of them. It is virtually impossible to know, therefore, the extent of fraud and manipulation that may be occurring in the over-the-counter.'”

Cicio said the IECA holds that “markets work better” when participants “know there is strong government oversight that has the ability to catch and severely penalize market manipulation.” He added that both strong oversight and sufficient penalties are currently lacking in the energy OTC arena.

Estimating Amaranth’s losses at $9.2 billion while highlighting the fund’s downfall as the “most notable of a number of recent hedge fund failures in the energy markets,” Cicio noted that Wall Street Journal reports had Amaranth controlling at least 100,000 contracts. “This means that Amaranth controlled the equivalent of 1 Tcf of natural gas, the equivalent of 54% of our country’s monthly demand!” Cicio said. “This looks like market power to consumers. Amaranth Advisors trading records should be subpoenaed and manipulation should be investigated. As part of its investigation, FERC should determine who gained the $9.2 billion.”

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