Quick Facts
Overview
The Federal Energy Regulatory Commission (FERC) approved a $7.5 million civil penalty settlement with Amaranth Advisors L.L.C., Amaranth LLC, Amaranth Management Limited Partnership, Amaranth International Limited, Amaranth Partners LLC, Amaranth Capital Partners LLC, Amaranth Group Inc., Amaranth Advisors (Calgary) ULC, and Matthew Donohoe for alleged violations of FERC's anti-manipulation rule under section 1c.1 of its regulations, stemming from trading activities in the New York Mercantile Exchange (NYMEX) Natural Gas Futures Contract during 2006 that raised concerns about impacts on physical natural gas prices.
Details of the Case
The case originated from a FERC investigation into trading activities by the Settling Respondents in the NYMEX Natural Gas Futures Contract (NG Futures Contract) during early 2006.
FERC issued a Show Cause Order on July 26, 2007, alleging that the respondents manipulated settlement prices through large sales during settlement periods, potentially affecting physical natural gas markets subject to FERC jurisdiction. The Settling Respondents did not admit or deny the allegations but stipulated to specific facts about their positions and trades on key dates.
They acknowledged accountability for trading that appeared atypical and anomalous, potentially eroding public confidence in settlement prices. The settlement was influenced by the diminished financial assets of the Settling Respondents, reducing the likelihood of collecting larger proposed penalties.
It resolves claims against all named parties except Brian Hunter and is coordinated with a related Commodity Futures Trading Commission (CFTC) action. The agreement requires dismissal of a pending appeal challenging FERC's jurisdiction and concedes FERC's subject matter jurisdiction over the matter.
WORKED EXAMPLES
February 24, 2006 Trading Activity: The Settling Respondents stipulated to holding significant positions in the March 2006 NG Futures Contract at the start of the trading day and selling substantial volumes during the settlement period.
- Positions: Amaranth entities began with a net short position in the futures contract.
- Sales: They executed sales that likely influenced the settlement price to be lower than it would have been without their trades.
- Impacts: This lower price increased the value of their related derivative swap positions; without their trading, the NG Futures Contract settlement price would likely have been higher, reducing swap values.
March 29, 2006 Trading Activity: Similar to February, the Settling Respondents held positions in the April 2006 NG Futures Contract and conducted sales during the settlement window.
- Positions: Net short in the futures contract at the day's open.
- Sales: Large-volume sales occurred, stipulating that the settlement price would likely differ absent their participation.
- Impacts: Their swap positions benefited from the actual lower settlement price; a higher price would have decreased swap values.
April 26, 2006 Trading Activity: Positions and sales mirrored prior months for the May 2006 NG Futures Contract.
- Positions: Started with a net short stance.
- Sales: Settlement-period trades were executed, with stipulation that prices would likely vary without them.
- Impacts: Derivative swaps gained value from the observed settlement price; alternative higher pricing would lower swap worth.
Exceeding Position Limits on February 23, 2006: Amaranth LLC's NG Futures Contract position surpassed NYMEX accountability levels and hedge exemptions.
- Limits: Exceeded applicable position limits without valid exemptions.
- Impacts: This violation contributed to concerns about market influence and potential manipulation.
Exceeding Position Limits on May 23, 2006: A repeat instance where Amaranth LLC held positions beyond NYMEX limits.
- Limits: Again surpassed position limits and hedge exemptions.
- Impacts: Highlighted ongoing non-compliance with exchange rules, raising questions about trading intent and market effects.
Fines and Penalties
The total civil penalty is $7,500,000.
- Initial Payment: $5,500,000 due on the first business day after the settlement's effective date.
- Remaining Payment: $2,000,000 due no later than one year from the effective date.
Key Quotes
"Amaranth Advisors L.L.C, Amaranth Advisors (Calgary) ULC, and Matthew Donohoe acknowledge that they are accountable for their trading in NYMEX NG Futures Contracts, which raised questions about the effect of the trading on prices in the physical natural gas market." (From the Settlement Agreement)
"The trading at issue appeared atypical, anomalous, and unusual, and, therefore, had the potential to erode public confidence in the validity of the NYMEX settlement price." (From the Settlement Agreement)
"The Settling Respondents concede the Commission’s subject matter jurisdiction in this proceeding." (From the Settlement Agreement)
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