EnergyBiz - September/October 2007 - (Page 94) How big might this be? Bigger than any other market currently traded. It’ll be huge. EnErgyBiz nEwsomE EnErgyBiz nEwsomE Bigger than oil? It can dwarf oil. EnErgyBiz These would be the vehicles for a utility to hedge its risk if it has power plants that exceed allowed carbon dioxide emissions? nEwsomE Yes. Any industry that is creating emissions that needs to neutralize that will have the ability to do so through an exchange contract. It will be very broad and global in nature. EnErgyBiz Are you advising Congress on the best way to go? nEwsomE We’re meeting with Congress. We’re meeting with regulators. We formed an advisory committee that’s made up of environmental groups, industry and the trading community. We’re as focused on this as anything we’ve focused on since I’ve been at NYMEX. EnErgyBiz What can be learned from Europe’s problems launching a cap and trade system? nEwsomE We’re trying to learn from their mistakes. But it’s pie in the sky to believe that uniform global standards are going to be developed. Getting everyone on the same page with regard to at least general philosophies and general standards would be a great first step. ‘‘ AmArAnth And mArket Problems Do speculators distort prices? All the markets react to fundamentals of supply and demand. There’s a lot of discussion in the Congress now that speculators drive the prices up. Speculators are not price makers. They are price followers. There’s no doubt that electronic trading has allowed access of more market participants. But I think Amaranth Advisors, which last year lost $6 billion on natural gas futures, is a perfect example that at the end of the day, the fundamentals of the marketplace always win, even if you’ve got $6 billion in the marketplace and you’re betting that prices are going to move in a direction that the fundamentals do not support. EnErgyBiz nEwsomE EnErgyBiz What lasting conclusions can be drawn from the problems at Amaranth? nEwsomE What Amaranth was doing in the traditional OTC market and what they were doing on the Intercontinental Exchange neither we nor the CFTC had access to. The question is how do we increase the transparency so that the regulators in the market can do a better job of managing the risk of a major market player? EnErgyBiz nEwsomE EnErgyBiz any industry that is creating emissions that needs to neutralize that will have the ability to do so through an exchange contract. it will be very broad and global in nature. nEwsomE When I came here three years ago, the role of hedge funds, the role of speculators in the markets, was a big issue. The information that is submitted to the CFTC is broken down into commercial participants and noncommercial participants. The CFTC didn’t have the ability to really pull out hedge funds as a category so we did it. In natural gas, the volume of trading by hedge funds was just below 10 percent, which was much lower than most people thought. The hedge funds tended to hang onto their positions longer than most market participants. That would actually decrease the volatility, not increase it. The level of increased trading by hedge funds had been offset by an increased level of trading by commercial participants, so that there was no real change in the percentage of activity. Both had increased. ’’ 95 gAs Futures EnErgyBiz How would you characterize natural gas futures markets for the last year or two? nEwsomE Certainly there’s been volatility across Do you think hedge funds will continue to grow? They’ll continue to grow. What has been their impact on NYMEX? www.energycentral.com E n E rgyB i z http://www.energycentral.com
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