Today’s Commodity Futures Trading Commission’s (CFTC)hearing on the oversight of trading on regulated futures exchanges and exempt commercial markets (ECMs) was prompted to some extent by a study by the Senate Permanent Subcommittee on Investigations (PSI) on excessive speculation in the natural gas market and specifically its claims that hedge fund Amaranth Advisors had attempted to manipulate natural gas markets prior to Amaranth’s implosion one year ago.
What the investigation revealed was that Amaranth, once prompted to reduce extremely large speculative positions in natural gas futures on the New York Mercantile Exchange (Nymex) by the exchange, was able to move those large open positions to the Intercontinental Exchange (ICE), which as an ECM does not have as stringent reporting requirements or speculative positions limits.
CFTC Acting Chairman Walt Lukken noted in his opening comments that energy markets have changed dramatically since the passage of the Commodity Futures Modernization Act of 2000 (CFMA), which created the ECM designation.
CFTC Commissioner Michael Dunne put it more directly, stating that when it comes to energy markets people are asking, “who is in charge…the answer seems to be no one.”
The difference is that ICE markets, specifically its Henry Hub Natural Gas swaps contract have become interchangeable with the Nymex gas contract and a near equal to it in terms of the markets’ reliance on it as a price discovery mechanism.
There was surprising agreement on this fact by both Nymex President and CEO Jim Newsome and ICE Chairman and CEO Jeff Sprecher. The battle appears to be between those that want to eliminate the ECM designation entirely and those who simply would like to see the CFTC step in and be able to demand more stringent reporting for ECM contracts that become the equivalent of a designated contract market (DCM) contract.
