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AMERICAN PUBLIC GAS ASSOCIATION 

TESTIMONY OF LAURA CAMPBELL 

ASSISTANT MANAGER OF ENERGY RESOURCES, 

MEMPHIS LIGHT, GAS & WATER 

ON BEHALF OF THE AMERICAN PUBLIC GAS ASSOCIATION 

BEFORE THE COMMODITY FUTURES TRADING COMMISSION

SEPTEMBER 18, 2007

Acting Chairman Lukken and Members of the Commodity Futures Trading Commission 

(“Commission”), I appreciate this opportunity to testify before you today and I thank the Commission 

for calling this hearing to examine the critically important issues of trading on regulated exchanges and 

exempt commercial markets. My name is Laura Campbell and I am the Assistant Manager of Energy 

Resources for Memphis Light Gas & Water (MLGW). MLGW is the nation’s largest three-service 

municipal utility and currently provides service to more than 420,000 customers. Since 1939, MLGW 

has met the utility needs of Memphis, Tennessee and Shelby County residents by delivering reliable and 

affordable electricity, natural gas and water service. Natural gas is the most popular means of residential 

heating in the MLGW service area and we currently provide natural gas to more than 313,000 

customers.

I testify today on behalf of the American Public Gas Association (APGA). APGA is the national 

association for publicly-owned natural gas distribution systems. There are approximately 1,000 public 

gas systems in 36 states and almost 700 of these systems are APGA members. Publicly-owned gas 

systems are not-for-profit, retail distribution entities owned by, and accountable to, the citizens they 

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201 Massachusetts Avenue, NE, Suite C-4 i Washington, DC 20002i 202.464.2742 i 202.464.0246 (fax) 
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serve. They include municipal gas distribution systems, public utility districts, county districts, and 

other public agencies that have natural gas distribution facilities. 

APGA’s number one priority is the safe and reliable delivery of affordable natural gas. To bring natural 

gas prices back to a long-term affordable level, we ultimately need to increase the supply of natural gas. 

However, equally critical is to restore public confidence in the pricing of natural gas. This requires a 

level of transparency in natural gas markets which assures consumers that market prices are a result of 

fundamental supply and demand forces and not the result of manipulation or other abusive market 

conduct. 

APGA’s members have lost confidence that the prices for natural gas in the futures and the 

economically linked over-the-counter (“OTC”) markets are an accurate reflection of supply and demand 

conditions for natural gas. Restoring our trust in the validity of the pricing in these markets requires a 

level of transparency in natural gas markets which assures consumers that market prices are a result of 

fundamental supply and demand forces and not the result of manipulation or other abusive market 

conduct. APGA strongly believes that this level of transparency currently does not exist, and this has 

directly led to the current lack of confidence in the natural gas marketplace. 

APGA believes that statutory changes are necessary to remedy the lack of market transparency which 

undermines the public’s confidence in the pricing integrity of these markets. Accordingly, APGA has 

called upon Congress to pass legislation that would increase transparency in the natural gas markets. 

We also believe however, that there are measures that the Commission can, and should, take within its 

existing authorities to improve the current situation. Although legislative changes are necessary to 
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restore public confidence in these markets, we believe that the immediate steps to increase transparency 

in these markets that the Commission can take would have a positive impact on the situation. 

The Market in Natural Gas Contracts 

The market for natural gas financial contracts is composed of a number of segments. Contracts for the 

future delivery of natural gas are traded on the New York Mercantile Exchange (“NYMEX”), a 

designated contract market regulated by the Commission. Contracts for natural gas are also traded in the 

OTC markets. OTC contracts may be traded on multi-lateral electronic trading facilities which are 

exempt from regulation as exchanges (“exempt commercial markets” or “ECMs”). They may also be 

traded in direct, bi-lateral transactions between counterparties, through voice brokers or on electronic 

platforms. OTC contracts may be settled financially or through physical delivery. Financially-settled 

OTC contracts often are settled based upon NYMEX settlement prices and physically delivered OTC 

contracts may draw upon the same deliverable supplies as NYMEX contracts, thus economically linking 

the various financial natural gas market segments, including regulated futures markets, ECMs and 

bilateral trading, whether conducted on an electronic trading platform or otherwise. 

The exemption under Section 2(h)(3) of the Act providing for ECMs was added as part of the 

Commodity Futures Modernization Act of 2000 (“CFMA”). In general, the greater flexibility of a 

principles-based regulatory framework provided for by the CFMA has worked exceedingly well with 

respect to the regulated markets, as has the CFMA’s overall concept of tiered regulation based upon the 

characteristics of the trader and of the commodity traded. However, since enactment of the CFMA, 

changes in the nature of trading and the composition of traders on ECMs warrant reconsideration of the 

provisions relating to ECMs. More broadly, as discussed in greater detail below, issues surrounding the 
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lack of transparency are particularly acute with respect to trading in contracts for natural gas and the 

lack of transparency with respect to the market for natural gas should be reconsidered. In this regard, 

differentiating the appropriate regulatory response based upon the characteristics of the particular 

commodity traded is consistent with the overarching framework and philosophy of the CFMA. 

Specifically, with respect to ECMs, there is scant legislative or regulatory history with respect to the 

intent behind the Section 2(h)(3) exemption. Nevertheless, the trading platforms that have qualified for 

exemption under this provision have evolved since enactment of the CFMA in a number of ways. 

Initially, such markets tended to be an electronic substitute for voice brokers with respect to the trading 

of OTC contracts. Their participants were generally limited to those in the trade and trading likely 

carried with it counterparty credit exposure. Since then, however, ECMs have introduced cleared 

transactions, effectively removing the counterparty risk of such transactions which initially distinguished 

their trading from trading on futures exchanges. In addition, ECMs over the years have attracted greater 

numbers of non-trade market participants, such as hedge funds. The introduction of clearing of 

contracts that are financially settled based upon the settlement prices of regulated futures contracts along 

with this broader and deeper non-trade customer base has, over time, rendered trading on some ECMs to 

be largely indistinguishable from trading on regulated futures markets. These markets are economically 

linked through arbitrage and the prices on one affect prices on the other. 

Although the focus of the Commission in convening this hearing has been the implications of trading on 

ECMs with respect to price discovery and hedging in the markets, the issue with respect to natural gas 

market is broader in scope. The economic links between the natural gas futures contracts traded on 

NYMEX and those contracts, agreements and transactions in natural gas traded in the OTC markets 
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(which include but are not limited only to trading on ECMs) are beyond dispute. Increasingly, the 

price of natural gas in many supply contracts between suppliers and local distribution companies 

(“LDC”), including APGA members, is determined based upon monthly price indexes closely tied to the 

monthly settlement of the NYMEX futures contract. Accordingly, the futures market serves as the 

centralized price discovery mechanism used in pricing these natural gas supply contracts. Moreover, 

without question, a participant’s trading conduct in one venue can affect, and has affected, the price of 

natural gas contracts in the other. 1 

Generally, futures markets are recognized as providing an efficient and transparent means for 

discovering commodity prices.2 However, any failure of the futures price to reflect fundamental supply 

and demand conditions results in prices for natural gas that are distorted and which do not reflect its true 

value. This has a direct affect on consumers all over the U.S., who as a result of such price distortions, 

will not pay a price for the natural gas that reflects bona fide demand and supply conditions. If the 

futures price is manipulated or distorted, then the price a consumer pays for the fuel needed to heat their 

home and cook their meals will be similarly manipulated or distorted. 

Today, the Commission has effective oversight of NYMEX, and the Commission and NYMEX provide 

a significant level of transparency with respect to NYMEX’s price discovery function. But, the OTC 

markets, which include but are not limited to ECMs, lack such price transparency. The lack of 

1 See “Excessive Speculation in the Natural Gas Market,” Report of the U.S. Senate Permanent Subcommittee on 

Investigations (June 25, 2007) (“PSI Report”). The PSI Report on page 3 concluded that “Traders use the natural gas 

contract on NYMEX, called a futures contract, in the same way they use the natural gas contract on ICE, called a swap. . . . 

The data show that prices on one exchange affect the prices on the other.” 2 See the Congressional findings in Section 3 of the Commodity Exchange Act, 7 U.S.C. §1 et seq. (“Act”). Section 3 of the 

Act provides that, “The transactions that are subject to this Act are entered into regularly in interstate and international 

commerce and are affected with a national public interest by providing a means for . . . discovering prices, or disseminating 

pricing information through trading in liquid, fair and financially secure trading facilities.” 
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transparency in a very large and rapidly growing segment of the natural gas market leaves open the 

potential for a participant to engage in manipulative or other abusive trading strategies with little risk of 

early detection; and for problems of potential market congestion to go undetected by the Commission 

until after the damage has been done to the market. It simply makes no sense to have transparency over 

one segment of the market and none over a much larger segment, especially when the OTC markets are 

the fastest growing sectors of the natural gas marketplace. APGA strongly believes that it is in the best 

interest of consumers for Congress to rectify this situation by passing legislation that would ensure an 

adequate level of transparency with respect to OTC contracts, agreements and transactions in natural 

gas. However, we also urge the Commission to take immediate steps to apply its existing authority as 

broadly as possible in order to assure that it obtains as much information as is possible under its current 

authority relating to large trading and open positions in all of these related market segments. 

Regulatory Oversight 

NYMEX, as a designated contract market, is subject to oversight by the Commission. The primary tool 

used by the Commission to detect and deter possible manipulative activity in the regulated futures markets is its 

large trader reporting system. Using that regulatory framework, the Commission collects information 

regarding the positions of large traders who buy, sell or clear natural gas contracts on NYMEX. The 

Commission in turn makes available to the public aggregate information concerning the size of the 

market, the number of reportable positions, the composition of traders (commercial/non-commercial) 

and their concentration in the market, including the percentage of the total positions held by each 

category of trader (commercial/non-commercial). 
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 The Commission also relies on the information from its large trader reporting system in its surveillance 

of the NYMEX market. In conducting surveillance of the NYMEX natural gas market, the Commission 

considers whether the size of positions held by the largest contract purchasers are greater than 

deliverable supplies not already owned by the trader, the likelihood of long traders demanding delivery, 

the extent to which contract sellers are able to make delivery, whether the futures price is reflective of 

the cash market value of the commodity and whether the relationship between the expiring future and 

the next delivery month is reflective of the underlying supply and demand conditions in the cash 

market.3

 

Although the Commission has issued “special calls” to one electronic trading platform, and that platform 

has determined to voluntarily provide the Commission with information on traders’ large positions,4

 the 

Commission’s large trader reporting surveillance system does not routinely reach traders’ large OTC 

positions.5 Despite the links between prices for the NYMEX futures contract and the OTC markets in 

natural gas contracts, this lack of transparency in a very large and rapidly growing segment of the 

natural gas market leaves open the potential for participants to engage in manipulative or other abusive 

trading strategies with little risk of early detection and for problems of potential market congestion to go 

undetected by the Commission until after the damage has been done to the market, ultimately costing the 

consumers or producers of natural gas. 

Amaranth Advisors LLC

3 See letter to the Honorable Jeff Bingaman from the Honorable Reuben Jeffery III, dated February 22, 2007. 4 Id, at 7. The COMMISSION presumably issued this call for information under Section 2(h)(5) of the Act. 5

 As explained in greater detail below, special calls are generally considered to be extraordinary, rather than routine, 

requirements. Although special calls may be an important complement to routine reporting requirements in conducting 

market surveillance, they are not a substitute for a comprehensive large trader reporting system. 
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Last year’s blow-up of the Amaranth Advisors LLC and the impact it had upon prices exemplifies these 

linkages and the impact they can have on natural gas supply contracts for LDCs. Amaranth Advisors 

LLC was a hedge fund based in Greenwich, Connecticut, with over $9.2 billion under management. 

Although Amaranth classified itself as a diversified multi-strategy fund, the majority of its market 

exposure and risk was held by a single Amaranth trader in the OTC derivatives market for natural gas. 

Amaranth reportedly accumulated excessively large long positions and complex spread strategies far 

into the future. Amaranth’s speculative trading wagered that the relative relationship in the price of 

natural gas between summer and winter months would change as a result of shortages which might 

develop in the future and a limited amount of storage capacity. Because natural gas cannot be readily 

transported about the globe to offset local shortages, the way for example oil can be, the market for 

natural gas is particularly susceptible to localized supply and demand imbalances. Amaranth’s strategy 

was reportedly based upon a presumption that hurricanes during the summer of 2006 would make 

natural gas more expensive in 2007, similar to the impact that hurricanes Katrina and Rita had had on 

prices the previous year. As reported in the press, Amaranth held open positions to buy or sell tens of 

billions of dollars of natural gas. 

 

As the hurricane season proceeded with very little activity, the price of natural gas declined, and 

Amaranth lost approximately $6 billion, most of it during a single week in September 2006. The 

unwinding of these excessively large positions and that of another previously failed $430 million hedge 

fund—MotherRock— further contributed to the extreme volatility in the price of natural gas. The 
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Report by the Senate Permanent Subcommittee on Investigations affirmed that “Amaranth’s massive 

trading distorted natural gas prices and increased price volatility.”6

 

The lack of OTC transparency and extreme price swings surrounding the collapse of Amaranth have 

caused bona fide hedgers to become reluctant to participate in the markets for fear of locking-in prices 

that may be artificial. 

Greater Transparency Needed 

APGA members, and the customers served by them, do not believe there is an adequate level of market 

transparency under the current system. This lack of transparency leads to a growing lack of confidence 

in the natural gas marketplace. Although the Commission operates a large trader reporting system to 

enable it to conduct surveillance of the futures markets, it cannot effectively monitor trading if it 

receives information concerning positions taken in only one segment of the total market. Without 

comprehensive large trader position reporting, the government is currently handicapped in its ability to 

detect and deter market misconduct. If a large trader acting alone, or in concert with others, amasses a 

position in excess of deliverable supplies and demands delivery on its position and/or is in a position to 

control a high percentage of the deliverable supplies, the potential for market congestion and price 

manipulation exists. 

Over the last several years, APGA has pushed for a level of market transparency in financial contracts in 

natural gas that would routinely, and prospectively, permit the Commission to assemble a complete 

6 See PSI Report at p. 119 
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picture of the overall size and potential impact of a trader’s position irrespective of whether the positions 

are entered into on NYMEX, on an OTC multi-lateral electronic trading facility which is exempt from 

regulation or through bi-lateral OTC transactions, which can be conducted over the telephone, through 

voice-brokers or via electronic platforms. The passage of legislation will ultimately be required in order 

to achieve this needed level of transparency. However, the Commission can take some immediate steps 

which would improve the current situation. 

Bi-lateral trading 

Because Amaranth’s trading was largely conducted on both a regulated futures exchange and on an 

unregulated electronic trading facility, the immediate focus has been confined to the relative inequality 

of transparency between those two multi-lateral trading venues. Moreover, because the volume of 

transactions in bi-lateral markets may not be as apparent as the volume of transactions on exchanges or 

electronic trading facilities there may be a tendency to discount the impact that the bi-lateral markets 

have upon the price discovery process. APGA believes that, to be comprehensive, a large trader 

reporting system must include large positions amassed through the OTC bi-lateral markets in addition to 

those accumulated on futures exchanges or on OTC electronic trading facilities. 

Bi-lateral trading can also take place on an electronic trading venue that may be as attractive to traders 

as multi-lateral trading facilities. Enron On-line, for example, was an all-electronic, bi-lateral trading 

platform. Using this platform, Enron offered to buy or sell contracts as the universal counterparty to all 

other traders. On the Enron On-line trading platform, only one participant--Enron--had the ability to 
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accept bids and offers of the multiple participants--its customers-- on the trading platform. This one-tomany model constitutes a dealer's market and is a form of bi-lateral trading.7

 

Section1a(33) of the Act further defines bi-lateral trading by providing that, "the term 'trading facility' 

does not include (i) a person or group of persons solely because the person or group of persons 

constitutes, maintains, or provides an electronic facility or system that enables participants to negotiate 

the terms of and enter into bilateral transactions as a result of communications exchanged by the parties 

and not from interaction of multiple bids and multiple offers within a predetermined, nondiscretionary 

automated trade matching and execution algorithm. . . . ." This means that it is also possible to design 

an electronic platform for bi-lateral trading whereby multiple parties display their bids and offers which 

are open to acceptance by multiple parties, so long as the consummation of the transaction is not made 

automatically by a matching engine. 

Both of these examples of bi-lateral electronic trading platforms might very well qualify for exemption 

under the current language of sections 2(g) and 2(h)(1) of the Commodity Exchange Act. It is entirely 

foreseeable that if a Commission large-trader reporting regime were expanded to require the reporting of 

positions entered into only on multi-lateral electronic trading facilities and does not include bi-lateral 

electronic trading platforms too, traders who wish to evade the new reporting requirement would simply 

be able to move their trading activities from an electronic trading facility to a bi-lateral electronic trading 

platform, just as Amaranth moved its trading from NYMEX to ICE. 

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 This stands in contrast to a many-to-many model which is recognized as a multi-lateral trading venue. This understanding 

is reflected in section 1a(33) of the Act, which defines "Trading Facility" as a "group of persons that . . . provides a physical 

or electronic facility or system in which multiple participants have the ability to execute or trade agreements, contracts or 

transactions by accepting bids and offers made by other participants that are open to multiple participants in the facility or 

system." 
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Moreover, even in the absence of electronic trading, the ability of traders to affect prices in the natural 

gas markets through direct or voice-brokered bi-lateral trading should not be underestimated. For 

example, a large hedge fund may trade bi-laterally with a number of counterparty/dealers using standard 

ISDA documentation. By using multiple counterparties over an extended period of time, it would be 

possible for the hedge fund to establish very large positions with each of the dealer/counterparties. 

Each dealer in turn would enter into transactions on NYMEX to offset the risk arising from the bi-lateral 

transactions into which it has entered with the hedge fund. In this way, the hedge fund’s total position 

would come to be reflected in the futures market. 

Thus, a prolonged wave of buying by a hedge fund, even through bi-lateral direct or voice-brokered 

OTC transactions, can be translated into upward price pressure on the futures exchange. As futures 

settlement approaches, the hedge fund’s bi-lateral purchases with multiple dealer/counterparties would 

maintain or increase upward pressure on prices. By spreading its trading through multiple 

counterparties, the hedge fund’s purchases would attract little attention and escape detection by either 

NYMEX or the Commission. In the absence of routine large-trader reporting of bi-lateral transactions, 

the Commission will only see the various dealers’ exchange positions and have no way of tying them 

back to purchases by a single trader. 

Need for Legislation 

As previously stated in this testimony, establishing the level of transparency that APGA maintains is 

warranted will require the passage of legislation. In July, Congressmen Barrow (D-GA) and Graves (RPA) introduced H.R. 3009, The Market Transparency Reporting of United States Transactions Act of 
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2007 (Market TRUST Act). APGA strongly supports this bipartisan legislation. The Market TRUST 

Act would protect consumers by establishing an appropriate level of transparency that would provide the 

Commission with the tools to help detect and deter market abuses from occurring before they impact 

consumers. 

Specifically, the bill expands the large trader reporting system to mandate the reporting of positions held 

in financial contracts for natural gas in all segments of the market. It is APGA’s position that large 

traders should report their positions regardless of whether they are entered into on designated contract 

markets, on electronic trading facilities, on OTC bi-lateral electronic trading platforms, in the voicebrokered OTC markets or in direct bilateral OTC markets. This would treat all trading positions in 

financial natural gas contracts equally in terms of reporting requirements. Extending large trader 

reporting to OTC natural gas positions and to positions entered into on electronic trading facilities will 

provide the Commission with a complete picture of the natural gas marketplace and ensure that the cop 

on the beat has the tools necessary to be effective. 

It is important to note that the Market TRUST Act is narrow in scope. The comprehensive large trader 

reporting system established by the bill applies only with respect to financial contracts, agreements and 

transactions in natural gas. The legislation is not intended to, and would in no way effect swaps on any 

other underlying commodity or interest. Natural gas contracts are more susceptible to manipulation than 

other commodities or instruments because the deliverable supply of natural gas is often small relative to 

the size of the derivatives positions held by large traders and, as mentioned previously, natural gas is 

constrained by the manner in which it can be delivered. These conditions do not necessarily pertain to 
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other commodities or instruments which are “exempt commodities” under the Act8 and they most 

certainly do not pertain to contracts, agreements or transactions in the “excluded commodities” under 

the Act. 9 Accordingly, it must be emphasized that the Market TRUST Act is limited to contracts in 

natural gas. It would have no effect with respect to the OTC markets in financial swaps or in any other 

contracts, agreements or transactions on an “excluded commodity” or in any “exempt commodity” other 

than natural gas. Moreover, the provisions in the bill with respect to financial contracts, agreements or 

transactions in natural gas are merely a reporting requirement and would not impose any regulatory 

requirements with respect to such transactions. 

In addition, the Commission’s large trader reporting system would not in any way result in the public 

release of information relating to an individual entity’s trading positions. Information collected through 

the Commission’s large trader reporting system is used for the government’s market surveillance 

purposes only and is kept confidential by the Commission in accordance with Section 8 of the Act. Any 

information which is made publicly available by the Commission, as described above, is on an 

aggregated basis and does not disclose individual trading positions. 

Although some have raised concerns about the costs of expanding the large trader reporting system, we 

believe the costs would be reasonable. Insofar as the Commission’s large trader reporting system is 

already operational, the Commission will not be creating an entirely new program to collect this 

information. In addition, large traders, such as those which would be required to report to the 

8

 “Exempt commodities” are defined in Section 1a (14) of the Act as, “a commodity that is not an excluded commodity or an 

agricultural commodity.” Thus, for example, exempt commodities include other energy commodities and base and precious 

metals. 

9

 “Excluded commodities” are defined in Section 1a(13) of the Act and include interest rates, currency, indexes and various 

other types of financial instruments or interests. 
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Commission, will likely have automated recordkeeping systems for their own internal risk management 

purposes that could be adapted for the purpose of reporting positions to the Commission. Finally, as 

discussed above, certain trading facilities have already taken steps to make information available to the 

Commission. Accordingly, APGA believes that the costs of a comprehensive large trader reporting 

system for natural gas as prescribed by the Market TRUST Act would be reasonable and are far 

outweighed by the benefits in terms of helping assure consumers that the market price is a reflection of 

appropriate market forces. 

Commission Action 

The need to provide the Commission with additional surveillance tools through legislation is not meant 

to imply that the Commission has not been vigilant in pursuing wrongdoers using its current statutory 

authority. In this regard, we note that the Commission has assessed over $300 million in penalties, and 

has assessed over $2 billion overall in government settlements relating to abuse of these markets affirms 

this. These efforts to punish those that manipulate or otherwise abuse markets are important. But it must 

be borne in mind that catching and punishing those that manipulate markets after a manipulation has 

occurred is not an indication that the system is working. To the contrary, by the time these cases are 

discovered using the tools currently available to government regulators, our members, and their 

customers, have already suffered the consequences of those abuses in terms of higher natural gas prices. 

Greater transparency with respect to traders’ large positions, whether entered into on a regulated 

exchange or in the OTC markets in natural gas will provide the Commission with the tools to detect and 

deter potential manipulative activity before our members and their customers suffer harm. 
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In this regard, the Commission recently proposed to amend to its Rule 18.05 “special call” provision to 

make explicit that its special call authority to traders applies to OTC positions, including bi-lateral 

transactions and transactions executed on the unregulated electronic trading facilities where the trader 

has a reportable position on a designated contract market in the same commodity.10 APGA commends 

the Commission for this proposal. As stated in our formal comments to the Commission, APGA strongly 

supports the proposed amendment to the language of Rule 18.05. 

APGA believes further, however, that the proposed amendments to Rule 18.05 offers both the means 

and the opportunity whereby the Commission, acting within its present authorities, could take immediate 

measures to increase transparency in these markets and to begin to address the current lack of public 

confidence in their pricing integrity. Rule 18.05 provides the Commission with a potentially powerful 

tool for increasing its knowledge with respect to a reportable futures trader’s position in all segments of 

the natural gas market. However, the Commission apparently does not view this authority in quite this 

way, noting that “the Commission anticipates that special calls for pertinent information relating to nonreporting transactions would continue to be made on an infrequent basis.11 

APGA believes that the Commission’s should give further consideration to the role that Rule 18.05 

could play in enabling the Commission to carry out its surveillance responsibilities with respect to the 

natural gas markets and thereby fulfill the “purpose of [the Commodity Exchange] Act to deter and 

prevent price manipulation or any other disruptions to market integrity . . . .”12 For example, the 

Commission could take the position that it will aggressively use its authority under Rule 18.05 to issue 

10 “Maintenance of Books, Records and Reports by Traders, 72 Fed. Reg. 34413 (June 22, 2007). 11 Id. at 34416. 12 Section 3 of the Commodity Exchange Act, 7 U.S.C. §1 et.seq. 
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special calls to all reportable traders in natural gas requesting that they provide information to the 

Commission with respect to their over-all position in natural gas contracts across all segments of the 

natural gas market.13 

Moreover, Commission large trader reporting rules require that a trader submit a report the day 

following a decline in its position below the reportable level.14 The Commission could use its Rule 

18.05 authority to require that the final report filed include information regarding the trader’s over-all 

position across all market segments. This would provide the Commission with the ability to know that a 

trader has not reduced its over-all position, but merely shifted its position from the regulated market to a 

less transparent market, exactly the path that Amaranth took when ordered to reduce its NYMEX 

position. 

Admittedly, Rule 18.05, even as it is proposed to be amended, only applies when a trader has a 

reportable position on a regulated futures market. Thus, by refraining from trading on the regulated 

futures market or by maintaining positions in the regulated futures market below the reporting level, a 

trader could avoid being required to report, even on a special call basis. For this reason, legislation to 

enhance the Commission’s authority by providing a comprehensive large trader reporting system that 

includes all segments of the market is necessary. Such a comprehensive large trader reporting system 

would have enabled the Commission to spot the relative size of Amaranth’s OTC position prior to its 

collapse. A comprehensive large trader reporting system would enable the Commission, while a scheme 

is unfolding, to determine whether a trader is using the OTC natural gas markets to corner deliverable 

13 To the extent it becomes accepted operating procedure, the burden of any such reporting could be reduced by providing for 

a standard, electronic format for responding to such requests. 14 17 C.F.R. §17.00(a)(2). 
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supplies and manipulate the price in the futures market.15 A comprehensive large trader reporting 

system would also enable the Commission to better detect and deter other types of market abuses, 

including for example, a company making misleading statements to the public or providing false price 

reporting information designed to advantage its natural gas trading positions, or a company engaging in 

wash trading by taking large offsetting positions with the intent to send misleading signals of supply or 

demand to the market. Such activities are more likely to be detected or deterred when the government is 

receiving information with respect to a large trader’s overall positions, and not just those taken in the 

regulated futures market. 

Nevertheless, APGA believes that the Commission should consider immediate measures within its 

current authorities, such as those suggested in this testimony, to increase transparency, even if the 

increase is only incremental and incomplete. Pending the passage of legislation to provide for a 

comprehensive large trader reporting system that reaches across all segments of the natural gas market, 

such immediate measures would no doubt have a positive impact on the current situation. 

Finally, APGA believes that greater public involvement would assist the Commission as its policies 

necessarily evolve to meet the challenge of these new conditions in the energy markets. In this regard, 

APGA urges the Commission to establish an Advisory Panel on Energy Markets composed of industry 

experts, including representatives of consumer organizations, to offer technical advice on issues relating 

15 See e.g. U.S. Commodity Futures Trading Commission v. BP Products North America, Inc., Civil Action No. 06C 3503 

(N.D. Ill.) filed June 28, 2006. 
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to reporting and surveillance of the markets, as well as spotting new trends and issues that it should 

address.16

 

* * * * * 

Natural gas is a lifeblood of our economy and millions of consumers depend on natural gas every day to 

meet their daily needs. It is critical that the price those consumers are paying for natural gas comes 

about through the operation of fair and orderly markets and through appropriate market mechanisms that 

establish a fair and transparent marketplace. Without giving the government the tools to detect and 

deter manipulation, market users and consumers of natural gas who depend on the integrity of the 

natural gas market cannot have the confidence in those markets that the public deserves. 

 

16 If it is not possible to gain approval for a formal Advisory Committee, APGA recommends that the Commission convene 

an on-going program of conducting Commission roundtables relating to these issues.