The spectacular collapse of the Amaranth Advisors hedge fund in 2006 when it lost $6 billion on natural gas futures did pull back the veil on hedge fund activity in energy markets. Amaranth built up its huge position in natural gas futures through OTC contracts that exactly mirrored the contracts on the New York Mercantile Exchange but remained hidden from regulators, who were unable to enforce position limits designed to rein in speculative trading.
In hearings about Amaranth before various House and Senate committees as well as at the CFTC itself, it became clear, at least to many lawmakers, that contracts on unregulated trading venues can influence prices.
The case was so straightforward that it prompted the Federal Energy Regulatory Commission to flex its new post-Enron mandate to stop manipulation of energy prices by pursuing disciplinary action against Amaranth.
This led to a turf war with the CFTC, which claimed exclusive jurisdiction over futures trading and argued that FERC's mandate extended only to spot trading. FERC countered that when activity in the futures market affected spot prices, it was authorized to act.
Those proceedings ended in a joint settlement last August, before either CFTC or FERC held their administrative hearings and before an appellate court could decide the jurisdictional issue.
But the Amaranth case remains as a reminder of what a hedge fund can do in energy markets if these trades are not more transparent. Legislation bringing more visibility to the market and strengthening the hand of regulators will ensure that hedge fund activity in the energy markets will be more closely monitored and limited.
This article was written by Darrell Delamaide for OilPrice.com who focus on Fossil Fuels, Alternative Energy, Metals, Oil Prices and http://www.oilprice.com/articles-geopolitics.php" target="new">Geopolitics. To find out more visit their website at: http://www.oilprice.com
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