A Senate committee led by Sen. Carl Levin (D-Mich.) issued a report in July claiming that excessive speculation by hedge fund Amaranth Advisors caused wild price swings in natural gas markets in 2006 and “socked consumers with higher prices.”
The report, which was the result of a nine-month study by the Senate Permanent Subcommittee on Investigations, notes that the industry regulator, the Commodity Futures Trading Commission (CFTC), was hamstrung in monitoring the activity of Amaranth because once the fund reached speculative trading limits on the regulated New York Mercantile Exchange (Nymex) Natural Gas markets, it moved positions to ICE’s Natural Gas swaps markets, where there are no speculative limits.
Despite the claims in the report, Amaranth trader Shane Lee testified in hearings before the committee that market moves were not the result of Amaranth activity and that Amaranth reacted to the markets, not the other way around.
Lee is in good company. In his written testimony before the subcommittee, CFTC Acting Chairman Walt Lukken disputes some of the initial findings in the report. The regulator pointed out that natural gas futures prices were already showing unusually wide spreads between winter and non-winter delivery months prior to Amaranth accumulating its positions. The testimony stated, “[Our] analysis of Amaranth’s data failed to conclude that Amaranth’s trading was responsible for the spread price level…all of the data are consistent with the hypothesis that the March/April spread price, and similar winter/summer spreads, declined due to changes in perception of market fundamentals.”
Lukken’s testimony supported previous analysis that spreads widened in anticipation of another active hurricane, which Amaranth was betting, and when the season was mild, spreads reverted to the mean and Amaranth suffered huge losses.
The report recommends eliminating the so called “Enron Loophole,” which exempts certain electronic energy exchanges from regulatory oversight. It also recommends increasing the CFTC budget to allow greater oversight and paying for that with a user fee imposed on commodity markets.
Jeffrey C. Sprecher, chairman and CEO of ICE, also disputed some of the findings in the report. ICE operates an “Exempt Commercial Market” (ECM) in energy swaps but does not operate under the “Enron Exemption.”
The ECM structure does not face the same position limits and reporting requirements as a designated contract market (DCM).
Sprecher pointed out in his testimony that while ICE does not have to register as a DCM, it is subject to CFTC oversight and regulatory requirements and that “the CFTC and Nymex have (and had at the time of Amaranth’s trading) the legal authority to obtain any available information regarding trading on ICE.”
Nymex President and CEO Jim Newsome in his testimony supported giving additional legal authority to the CFTC, which should use such authority to monitor aggregate positions on both ICE and Nymex.
Futures Industry Association President John Damgard called the report good politics.
“[Walt Lukken] is absolutely correct in saying we haven’t made a determination that Amaranth had any affect on pricing at all.”
Damgard added that it would be tough to get new legislation passed in an election year.
