Amaranth case puts spotlight on loopholes Traders used unregulated exchange TARA PERKINS 00:00 EDT Tuesday, June 26, 2007 It is Aug. 29, 2006, the final day of trading in the September, 2006, natural gas futures contract. Brian Hunter, Amaranth Advisors LLC's top energy trader, is under pressure. In recent months, the New York Mercantile Exchange (Nymex) has been looking at some of Amaranth's trading. Around 11 a.m., Nymex compliance officials phone Amaranth's compliance officer, Michael Carrieri, to say the hedge fund should trade in an orderly manner today - especially the final half hour. The last 30 minutes before 2:30 p.m. make up the final settlement period that Nymex will use to calculate the final price for the September contract. On this day, Amaranth is a big seller, believing the September contract's price will fall. The details were revealed in a U.S. Senate subcommittee probe of the $6-billion (U.S.) collapse of the hedge fund in September. U.S. lawmakers called for more regulation in trading natural gas futures on electronic exchanges. Shane Lee, a former trader at Amaranth, said the hedge fund "was responding to the market rather than driving it." Speaking at a hearing of the Senate's subcommittee on investigations, Mr. Lee said natural gas prices were driven primarily by weather and demand for fuel. Trading would only have an impact on prices in the "extreme short term," he said. The panel also wrestled with how the government could regulate trading in other places such as foreign exchanges and among voice trades conducted between two parties. On the day in question, most of Amaranth's selling is linked to purchases of swaps for October. Amaranth is essentially betting the October price will be higher. Trading the opposite position is another hedge fund, Centaurus, a very big buyer of September contracts, believing that price will rise. In accordance with Nymex's warning, Amaranth stops trading on Nymex at about 1:15 p.m. But, unbeknownst to Nymex, both hedge funds are doing most of their trading today on ICE, or the Intercontinental Exchange. Trades on ICE are exempt from regulatory scrutiny and - unlike Nymex - ICE has no legal obligation to monitor positions held by traders, or report positions to the Commodity Futures Trading Commission (CFTC), according to the subcommittee, which released a report yesterday. The subcommittee spent nine months investigating, and subpoenaed trading records from Nymex, ICE, Amaranth and other traders. According to the report, Amaranth also wraps up its trading on ICE before long. At about 1:40 p.m. the price of the September contract begins to rise, and the price difference between the September and October contracts narrows. Until now, Centaurus' buying power has been about matched by Amaranth's selling power, keeping the price of the September contract fairly flat. In the last 45 minutes of trading, Centaurus buys nearly 10,000 September contracts on ICE and about 3,000 on Nymex. During the final hour of trading, the price of the September contract jumps by about 60 cents, or nearly 10 per cent, and the price of the October/September spread falls about 40 cents. As a result, for today, Amaranth's statements show a loss in its natural gas holdings of nearly $600-million. After trading closes, Mr. Hunter complains to another trader in an instant message. "Classic pump and dump," he writes. "Boy I bet you see some CFTC inquiries for the last two days." The trader, whose handle is "crummertd," replies: "Until they monitor swaps - no big deal - it's all swaps now." According to the subcommittee, the other trader's comment "captures the problem" that its report recommends be fixed. Current commodity laws are "riddled with exemptions, exclusions, and limitations that make it virtually impossible for regulators to police U.S. energy markets," Senator Carl Levin stated yesterday. He singled out the "Enron loophole" that means regulators can put limits on speculative trading on regulated markets like Nymex, but not on unregulated markets such as ICE. © The Globe and Mail