As noted here yesterday, FERC is taking action against Amaranth and its erstwhile energy trading star Brian Hunter for allegedly manipulating energy markets. FERC issued a show cause order, detailing the evidence collected and inviting Amaranth entities to explain why they should not be found in violation of Part 1c of the Commission’s regulations, which prohibits energy market manipulation.
Unlike the CFTC, which appeared comfortable only with a charge against Amaranth of attempting to manipulate markets, FERC is actually charging Amaranth with market manipulation. The difference may arise in the somewhat different legal authorities available to the two agencies. The CFTC is empowered by the Commodities Exchange Act, which gives the agency responsibility to prevent manipulation of futures exchanges. While the CEA doesn’t define manipulation, a definition has taken shape in the courts as cases have been litigated. FERC gained broader responsibilities to take action against energy market manipulation in the Energy Policy Act of 2005.
Amaranth is facing $291 million in penalties for manipulating the price of Commission- jurisdictional transactions by trading in the NYMEX Natural Gas Futures Contract in February, March and April 2006. While trading on NYMEX is under CFTC authority, FERC notes that many FERC-jurisdictional transactions are tied to the NYMEX prices that Amaranth sought to influence. In a news release, FERC said:
This case involves manipulation of the final, or “settlement,” price of the NYMEX Natural Gas Futures Contract on February 24, March 29 and April 26, 2006, by selling an extraordinary amount of these contracts during the last 30 minutes of trading before these future contracts expired, with the purpose and effect of driving down the settlement price.
And, as befits a charge of market manipulation, FERC presents evidence that Amaranth’s trading patterns influenced prices. Here is figure 2 from the show cause order, showing prices for the last day of trading on the NYMEX March gas contract. The target of Amaranth’s affection is represented by the dark-colored horizonal bar at the right of the chart, the average price during the last 30 minutes of trading which sets the settlement price for the contract (and which provides a benchmark prices relied upon in many other transactions):
Amaranth had held a short position in the March NYMEX contract during the period leading up to the last day of trading and a much larger short position on the IntercontinentalExchange. On the last day of trading Amaranth bought futures contracts sufficient to cover its short position and accumulate a 3000+ long position. Then, during the last 30 minutes of trading, Amaranth offered up its long position for sale, rapidly driving prices down.
Of course, markets tend to work along the principle, “fool me once, shame on you; fool me twice, shame on me.” When Amaranth tried to run the same game on the last trading days for the April and May NYMEX contracts (on March 29, 2006 and April 26, 2006), they didn’t find the market so accommodating (Click on any of the charts for larger images):
FERC observes (paragraph 98):
Notably, this profit was significantly less than it might otherwise have been because Amaranth’s selling at the end of the settlement period was preceded by a fairly pronounced increase in prices. In this respect, the manipulative trading was only able to make the contract settle “less high” rather than “lower.” But, that fact is not inconsistent with a manipulation – not every manipulation need be as successful as the manipulator might have hoped in order to be actionable.
After the May contract manipulative attempt, Amaranth appeared not to try the same strategy again, said FERC. FERC explains that “due to forces unrelated to these violations,” Amaranth’s natural gas positions sustained about $1 billion in losses during the month of May. Apparently creditors, and, surprise!, Amaranth senior management subsequently began exercising some oversight and control over Hunter’s trading activities. A bit too late, apparently, as Amaranth continued to “dominate the market” (as explained in great detail by the Senate subcommittee’s report) for a few more months, hemorrhaged a few billion dollars more, and finally folded in September.
Energy Trading Partners: Yesterday FERC also issued a show cause order in the case of Energy Trading Partners, which is alleged to manipulate gas prices in Texas among other faults. The CFTC also filed charges against Energy Trading Partners yesterday. Readers here may remember that we covered the ETP allegations last fall, when they surfaced in an Inside FERC’s Gas Market Report article. At the time I proclaimed that while the reporter had done a good job assembling a story, I wasn’t quite impressed with the allegations of market manipulation or assertions that there was a regulatory gap that required legislative action. By their actions yesterday, FERC and the CFTC apparently agreed with me that there is no regulatory gap, but sided with the allegations in the article that market manipulation took place. Score it: Inside FERC, 1 – Giberson, 1.
Stay tuned: Likely more commentary to come on both the Amaranth and ETP cases as time and space permits.