Federal commodities regulators want new powers to police energy derivative trades of the sort that contributed to the collapse of Greenwich, Conn.-based Amaranth Advisors LLC last year.
Amaranth lost $6 billion making leveraged bets on natural-gas futures and options on the New York Mercantile Ex-change Inc. and through unregulated trades that masked the fund's exposure.
A congressional study found that the
hedge fund used an unregulated electronic ex-change to avoid trading limits.
The
Commodity Futures Trading Commission on Oct. 24 asked Congress to allow it to install limits on traders in these now-unregulated electronic commodity exchanges and require reporting of large trader positions, among other regulatory tools.
"Changes to the Commodities Exchange Act are necessary in order for the commission to detect and prevent manipulation in these markets," CFTC Chairman Walt Lukken testified at a congressional hearing.
The commission also wants emergency authority to prevent disruptions of the delivery or cash settlement process and to require these unregulated ex-changes to monitor trading themselves, similar to the self-regulatory functions of the Nymex.
The changes the CFTC is seeking would allow the commission to oversee contracts that have been shown to affect the price of products on regulated exchanges, while not overburdening electronic ex-changes so that they consider moving overseas, Mr. Lukken said.
A CFTC report presented at the hearing found that the prices of key Nymex products were impacted by trade activity on the Atlanta-based IntercontinentalExchange Inc. on 20% of the trading days that commission staff examined.
Sen. Carl Levin, D-Mich., introduced a bill in September called the Enron Loophole Act that would make similar changes.
The measure is named after the bankrupt energy giant be-cause Houston-based Enron Corp. lobbied lawmakers to exempt these markets from the Commodity Futures Modernization Act of 2000.
Rep. Bart Stupak, D.-Mich., has introduced a similar bill in the House of Representatives.
Mr. Levin's Permanent Subcommittee on Investigations earlier this year found that Amaranth's domination of the natural-gas market during the spring and summer of 2006 distorted the price of the resource. The American Public Gas Association of Washington told congress that Amaranth's position had increased hedging costs for natural-gas buyers, which led to higher costs for consumers.
At a subcommittee hearing, the Municipal Gas Authority of Georgia said Amaranth's price distortion boosted the cost of its winter gas purchases last year by $18 million.
The call for increased regulation comes as Congress considers reauthorization of the Commodity Ex-change Act, which gives the CFTC its regulatory responsibilities in the commodities markets.
Nymex officials have said re-form is needed to ensure that regulated products don't have to unfairly compete with virtually identical products on unregulated markets.
The IntercontinentalExchange, which offers contracts based on crude oil and refined products, natural gas, power and emissions, as well as agricultural commodities, said the CFTC requests are consistent with its views seeking regulatory certainty for over-the-counter markets.
With or without new regulation, many financial advisers say commodities and derivatives aren't suitable for retail investors.
Commodities are useful for growers, farmers and other producers to mitigate risk inherent in the business of providing these products, said R. Saxon Birdsong, director of planning and investments with Columbia, Md.-based Baltimore-Washington Financial Advisors Inc., which manages $200 million in client assets.
"That's a valid reason for their existence," he said. "But they are not appropriate for retail investors, because there is a highly speculative nature to them."
Whenever there is a lack of transparency, investors don't really know what they are buying, Mr. Birdsong said. "That's always a bad thing," he said.
