Avoiding the tough questions concerning Amaranth

There is nothing like providing a good roadmap of a problem and then doing nothing. A clear case for regulatory action can be made from reading the testimony of the Acting CFTC Chairman. The Senate investigation found evidence that when Amaranth could no longer take positions in the NYMEX natural gas futures, they just switched there business to ICE. ICE does not have any position limits, so a trader who wants to control large positions can do it with impunity on the ICE after his position limits have been used up at the NYMEX.

The problem is that these two markets are closely linked. Switching trades from NYMEX to ICE is not trading separate markets but trading essentially the same contracts. This can lead to the potential for manipulation. The following quote states that a link between the markets for potential manipulation is clear, but the Acting Chairman concludes that they do not have the ability to analyze a potential manipulation problem. Nonetheless, he is able to conclude that the ability to manipulate prices has been reduced by having these two markets - one with limits and the other without. Someone will have to help me understand how that conclusion could be reached

“Given that price discovery may be conducted at both ICE and NYMEX, successful manipulation of the ICE price would be reflected in the NYMEX price. Arbitrage between ICE and NYMEX makes it possible for ICE prices to influence NYMEX prices. Since the Commission has not conducted a review of surveillance practices at ICE, our response cannot be as soundly based as would be the case were we asked about manipulation possibilities at NYMEX. However, the ability to manipulate prices on either has likely been reduced, given that ICE has broadened participation in contracts for natural gas.”

Testimony of the Acting Chairman of the CFTC Walter Lukken before the Permanent Subcommittee on Investigations Committee on Homeland Security and Governmental Affairs United States Senate on July 9, 2007. See the full testimony for some light reading. http://www.cftc.gov/files/opa/speeches07/opalukken-26.pdf

This type of poor analysis and attempts to avoid the difficult issues associated with Amaranth will make for an environment where more regulation is forced on the futures markets. Regulatory overkill in response to extreme cases and poor oversight will have far-reaching effects on many of the traders who have always played by the rules.