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Amaranth and its prominent trader Brian Hunter prosecuted

The CTFC lodged a complaint against the Amaranth hedge fund and its former prominent trader Brian Hunter for attempting to manipulate prices on the natural gas futures market...

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According to the Commodity Futures Trading Commission (CTFC) the American agency that regulates futures and option markets, the events took place 24 February 2006 and 26 February 2006, the last days of trading (?expiry day?) of the natural gas futures contracts “NYMEX March 2006” and “NYMEX May 2006”. The settling price is based on the volume-weighted averages of trades executed between 2:00 and 2:30 pm (the “closing range”).

The complaint suggests that Amaranth and Hunter bought up more than 3.000 NYMEX natural gas contracts prior to the closing range, by maintaining a short swap position on the Intercontinental Exchange (ICE) whose settling price is based on those of NYMEX.

They then sold the 3.000 futures contracts during the closing range, causing a dive in prices and at the same time, a substantial gain for them due to their possession of short swap positions on the ICE.

Moreover, the CTFC accused Amaranth and Hunter of having tried to cover up their actions by giving false statements to the NYMEX when responding to an enquiry that was carried out on the trading day of 26 April 2006.

Walter Lukken, president of the CTFC, is involved in ensuring that the futures markets operate in an open and competitive manner free from price distortions. The CTFC also agree to punish those who attempt to compromise the integrity of the futures markets.

One month ago, a parliamentary report was carried out by the Committee?s commission of inquiry on internal security and governmental affairs of the American Senate. It revealed the role of the Amaranth funds in the sharp rise in natural gas prices in the United States during the summer of 2006 and called for legislative measures in order to avoid a second offense.

Before its demise, Amaranth gave an impression of being a “Mammoth” on the American natural gas markets. According to the report, Amaranth had accumulated as many as 100.000 natural gas contracts, representing 28 billion cubic metres of gas, or 5% of the United States?s annual gas consumption.

The grand-scale speculation of funds led to a sharp rise in prices during the summer of 2006, even though "the fundamentals of supply and demand remained unchanged."

According to the report, certain companies such as those in public service have had to either absorb this supplementary cost or transfer it to the final consumer, like residents who pay a higher heating bill.

The Amaranth case is not just the story of a simple hedge fund dominating the market, but that of a failing regulation system which left energy markets at the mercy of every broker having sufficient resources to alter energy prices,” analyzed the report.

To avoid that such a situation arises again, the report called for an increase in the CTFC?s budget.

Next Finance , July 2007

Article also available in : English EN | français FR

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