Institutional Investor's Alpha Magazine - February 2008 - (Page 34)

Joseph Kelliher, chairman of the Federal Energy Regulatory Commission, is leading a push for the agency to wield more clout over futures trading. of Amaranth over allegations that it manipulated prices in the March, April and May 2006 natural-gas contracts on the New York Mercantile Exchange. The FERC’s action in the well-publicized Amaranth case introduces a new regulator into the futures markets, a change that worries many investors, especially hedge fund managers and other noncommercial players. Any enforcement action by any regulator creates a compliance challenge in such markets, and if Kelliher prevails, hedge fund managers will have to begin to factor in possible enforcement by the FERC — on top of regulation by the CFTC — as they plan investment strategies. The FERC is ﬂexing the relatively new muscle it was granted by the Energy Policy Act of 2005, which was written by the very subcommittee that Lukken and Kelliher faced. That law gives the agency a mandate to go after “any entity” that manipulates energy prices in the FERC’s jurisdiction — and the natural-gas market ﬁts that description. But Lukken’s agency, asserting that its founding legislation, the Commodity Exchange Act of 1974, gives it exclusive jurisdiction over futures trading, is challenging the FERC. At the heart of the dispute is the CFTC’s goal of re- taining exclusive jurisdiction. If Lukken and the CFTC prevail, hedge fund managers will breathe a sigh of relief. Their hope is that they can continue to deal with a single regulator, one they are conﬁdent understands the futures markets. As far as Kelliher and the FERC are concerned, the CFTC is free to continue with its case. Parallel enforcement is hardly unprecedented. In securities cases, state enforcement actions sometimes run simultaneously alongside Securities and Exchange Commission actions, such as crackdowns on fraud against retirees. And the FERC’s new mandate includes punishing traders who manipulate energy prices, in the belief that, as in the case with Amaranth, the FERC can perhaps inﬂ ict more harm than the CFTC because it has the power to impose greater penalties and its burden-of-proof hurdles are less stringent. In December, Lukken had been called before the House panel to account for his agency’s resistance to the FERC’s actions. Almost as soon as the hearing began, he was on the receiving end of tough questioning by Congressman Barton, the ranking Republican member of the Energy Committee. Barton began his interrogation by reminding the witness that Barton himself had put the language in the Energy Policy Act about the FERC taking action against any entity that manipulates prices when he was chairman of the House Energy Committee and chairman of the House-Senate conference committee that hammered the bill into its ﬁnal shape. Barton also took it upon himself to read aloud the entire section of the Energy Policy Act that addresses FERC jurisdiction. Then he looked down from his perch on the committee bench at Lukken and asked, “Do you think that ‘any entity’ doesn’t mean ‘any entity’?” The acting CFTC chairman gamely replied that his agency supported “the broad grant of jurisdictional authority given to the FERC.” But he added: “Our mandate is to uphold the Commodity Exchange Act, which also has an exclusive jurisdiction provision enacted by Congress in 1974 to protect against duplicative regulation and differing legal standards in those markets. So we have to read those two statutes in context.” Barton ﬁred back in succinct fashion. “There’s no way you can have exclusive jurisdiction,” he said. Lukken chose not to argue — at least not in public. But he continues to resist, and the futures industry comes down squarely on the side of Lukken and the CFTC. The Managed Funds Association — the Washingtonbased lobbying group that represents hedge funds as well as funds of funds and managed futures funds — is joined by the Futures Industry Association, the Chicago Mercantile Exchange and the Nymex in opposing the FERC action against Amaranth. John Gaine, a special adviser to the MFA who until recently was the organization’s president (Richard Baker, 34 • INSTITUTIONAL INVESTOR’S ALPHA • FEBRUARY 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - February 2008

Institutional Investor's Alpha Magazine - February 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Alternative Perspective The Good Guys: A Simple Plan Cover Story: Energy and Commodities: Fueling Opportunity Regulation: Energy Trading: The Brawl on the Hill Interview: Master of Values Regulation: Hedge Fund Registration: Way Out West Research Center: Top Hedge Fund Analysts Alpha Bytes: Rocket Man Unhedged: Commentary: Structured for Success

Institutional Investor's Alpha Magazine - February 2008

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