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While the answer might appear intuitive, the argument as to whether or not they actually do has come to resemble the medieval theological dispute about how exactly many angels can dance on the top of the pin. Because, like angels, many investments in energy futures are invisible, which is often extremely hard to pinpoint where they take place. Yet, for most of us, including lawmakers on Capitol Hill, it seems apparent that when hedge funds buy and sell billions of dollars worth of gas and oil futures, it must be having a direct effect on energy prices.
“I think that extreme speculation in commodity futures can cause unexpected or unreasonable fluctuations or unwarranted changes in item prices,” Gensler said in a written response to lawmakers’ questions ahead of his nomination hearing. Gensler went on to pledge that if verified, the CFTC would be experienced by him guard against such speculation. He noted that non-commercial investors sometimes take into account up to 90% of open curiosity about a contract. Gensler’s answer, enshrined in draft legislation before Congress currently, is to make investments more noticeable by needing all over-the-counter derivatives to operate through an approved clearing house.
While the thrust of new legislation is to get a much better deal with on financial derivatives such as credit default swaps, it will give regulators a much better picture of all derivatives trading, including energy agreements. At the same time, the CFTC and the Exchange and Securities Commission payment both are beefing up their capability to monitor hedge account activity.
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The SEC for the very first time will require hedge funds to join up as investment advisors, and Gensler has pledged closer oversight of the funds that it supervises as product pool operators. The industry, predictably, is pushing back. “All of the trader groups displayed cases of non-optimal behavior (including small traders), but none were harmful to the studied markets consistently,” they said. A task push of the International Organization of Securities Regulators (IOSCO) released a report last March that emerged to an identical conclusion. These included suggestions regarding information about the fundamental commodities, access to and sharing of information about trading positions, beefing up enforcement capabilities, and improving global coordination.
6 billion on natural gas futures did draw back the veil on hedge fund activity in energy markets. 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 locations can influence prices.
The case was so simple it prompted the Federal Energy Regulatory Commission to flex its new post-Enron mandate to avoid manipulation of energy prices by seeking disciplinary action against Amaranth. This resulted in a turf battle with the CFTC, which claimed exclusive jurisdiction over futures trading and argued that FERC’s mandate extended only to place trading. FERC countered that whenever activity in the futures market affected place prices, it was certified to act. Those proceedings ended in a joint settlement last August, before either CFTC or FERC held their administrative hearings and before an appellate courtroom could decide the jurisdictional concern.
But the Amaranth case remains as a reminder of just what a hedge account can do in energy markets if these investments aren’t more transparent. Legislation bringing more visibility to the market and strengthening the hand of regulators will ensure that hedge account activity in the power markets could be more closely monitored and limited.
It was recently announced by Dr. Mark Eppli, Marquette University’s Interim Keyes Dean of Business Administration, that the Applied Investment Management program is expanding. This is a key part of the Dean’s DAY 1 vision which shifts the business enterprise curriculum across four years and adds a fresh freshman DAY 1 business course. With this interview, Dr. David Krause, Director of the AIM program, discusses the next monitor which is the first of the new applied business programs prepared by the Dean and the College’s Executive Council.