A Senate committee led by Michigan Senator Carl Levin issued a report Monday claiming that excessive speculation by hedge fund Amaranth Advisors caused wild price swings in natural gas markets in 2006 and “socked consumers with higher prices.”

Levin, who is chairman of the Senate Permanent Subcommittee on Investigations, stated in a release, “It’s one thing when speculators gamble with their own money; it’s another when they turn U.S. energy markets into a lottery where everybody is forced to gamble with them.”

The report, which was the result of a nine-month study, notes that the industry regulator, the Commodity Futures Trading Commission (CFTC) was hamstrung in monitoring the activity of Amaranth because once the fund reached speculative trading limits on the regulated New York Mercantile Exchange (Nymex) Natural Gas markets, it moved positions to the Intercontinental Exchange (ICE) Natural Gas swaps markets, where there are no speculative limits.

The report stated, “At times Amaranth controlled 40% of all of the outstanding contracts on NYMEX for natural gas in the winter season (October 2006 through March 2007), including as much as 75% of the outstanding contracts to deliver natural gas in November 2006.” It went on to say that when Nymex eventually told Amaranth to reduce its positions, they simply transferred those open positions to ICE, maintaining the same exposure.

Despite the claims in the report, Amaranth trader Shane Lee testified in hearings before the committee that market moves were not the result of Amaranth activity and that Amaranth reacted to the markets, not the other way around. Recent studies by both Nymex and the CFTC have dismissed claims that fund activity was driving energy markets but they where mainly focusing on the fund benchmarked to long-only commodity indexes.

The report recommends eliminating the so called “Enron Loophole,” which exempts certain electronic energy exchanges from regulatory oversight. It also recommends increasing the CFTC budget to allow greater oversight and paying for that with a user fee imposed on commodity markets.

Efforts to increase the CFTC’s oversight of OTC energy markets have been pushed by California Senator Diane Feinstein for several years but have consistently been defeated.

As I opened up my Chicago Sun Times today I noticed the full page ad by the Intercontinental Exchange (ICE) exclaiming to Chicago Board of Trade (CBOT) members, “DON’T BE SOLD SHORT.”

The ad in the sports section opposite the Chicago Cubs and White Sox box score, listed reasons why the ICE proposal to the CBOT was superior to the definitive agreement the CBOT’s board of directors reached with the Chicago Mercantile Exchange (CME). At the top of list was the $22.72 per share premium in the ICE offer as of Friday’s close. That premium grew to $26.14 after Monday’s close though it doesn’t include the $9.14 per share dividend to be paid to CBOT members as part of the CME’s most recent enhanced offer (though it is technically being paid by the CBOT). It goes on to tout the agreement reached with the Chicago Board Options Exchange (CBOE) over the Exercise Right Privilege (ERP), ICE’s fast growing stock and ICE’s ability to scale its technology to meet the needs of CBOT customers.

Not to be outdone the CME placed its own ad urging CBOT members to vote “YES” for the merger at the July 9 meeting. The CME cites the long-term potential, growth opportunities and a greater ability to integrate the CBOT and CME among other reason to go with the CME.

Later in the afternoon the CME put out a press release citing several analysts who have pointed out that ICE’s stock has had a tendency to improve when it seemed less likely they would win the battle for the CBOT. The implication being that ICE stock would drop precipitously if and when an ICE/CBOT deal is struck.

It is an interesting tactic because CME confirmed Monday was most likely the last day they could improve their offer to the CBOT without delaying the July 9 vote. As of the close of business there was no enhanced CME offer so it appears the two exchanges are prepared to go into the vote with their current offers.

This obviously can change as the vote has been delayed before.

This morning on my way into the office, I had an opportunity to speak with a woman passing out T-shirts and press releases across the street from the Chicago Board of Trade.

This isn’t the least bit unusual. What surprised me is that she wasn’t passing out Chicago Mercantile Exchange T-shirts, or ‘Better Together’ badges or stickers.

She was working for the Intercontinental Exchange, and she wasn’t hyping their agreement to buy the Winnipeg Commodities Exchange either. She was there doing grass roots, guerilla marketing for the ICE, urging passers by to vote ‘no’ on the CME proposal to acquire the CBOT, which is scheduled for July 9.

While the ICE hasn’t taken the Merc’s lunch money yet, by taking the Russell 2000 contract and now the WCE, Jeff Sprecher has taken two bites from Terry Duffy’s sandwich; and with just more than two weeks to go before the vote, I am eagerly watching to see what he will do about it.

A bit of overlooked news this week: Italy’s Borsa Italiana says it’s going to exercise its option on MBE Holdings, which owns 60% of MTS SpA, the OTC bond platform that handles the bulk of the Continent’s secondary government debt business — and designed the pan-European government bond indexes that provide the underlying instruments for Euronext’s portfolio of EuroMTS Government Bond Index Futures. Any comments on how this might alter the bidding landscape, especially with LSE and Borsa Italiana now talking to each other?

The battle between the Intercontinental Exchange and Chicago Mercantile Exchange over the Chicago Board of Trade took an interesting twist on Monday when ICE inked an exclusive agreement with Russell Investment Group parent of the Russell family of indexes.

The decision reverses Russell’s strategy of licensing its indexes to multiple exchanges and letting them fight over liquidity. Kelly Haughton, strategic director for Russell Indexes, says he believes this is a better way to go.

Continue reading ‘Now it is getting interesting’ »

One financial investor in the Chicago Board of Trade (CBOT) is saying publicly in a letter to CBOT Chairman Charlie Carey and president and CEO Bernie Dan that the terms of the Chicago Mercantile Exchange’s (CME) offer to merge with the CBOT are not good enough.

“The CBOT is only merging with the CME because everyone else is merging and it does not want to get left out, and that in of itself, is not a good reason,” says Chris Doll, managing partner at The Vernalis Group LLC, the managing partner of Amphora Fund LLP, which has invested more than 18% of its portfolio in the CBOT.

“As a long-term oriented shareholder, we are very interested in the unlocked value that still exists at the [CBOT],” Doll says in his letter dated June 11. “If there is still potential for value creation as an independent entity, and if the financial markets have yet to fully value this potential, then why should shareholders vote ‘YES’ to merge with any partner at this time,” he asks?

Doll sees possibilities for the CBOT to increase their value at the bargaining table if only they wait a bit longer. It had been less than a year from when the CBOT went public to when it considered the merger with the CME and it did not allow itself enough time to grow. For example, the agricultural contracts just went electronic last August and while it has been a success it can become even more successful. Also the pricing increases stemming from the CBOT fighting off competition from Eurex US have not been allowed to take full effect.

He adds that he does want to see the CBOT merge with the CME, but only if the CME offers a deal that better reflects the future potential value of the CBOT.

View the letter

Today, Futures magazine spoke with Jeff Sprecher, chairman and CEO of the Intercontinental Exchange Inc. (ICE) about his revised bid to acquire the Chicago Board of Trade (CBOT) and about his plan to file proxy materials with the Securities and Exchange Commission (SEC), which would allow him to communicate directly with CBOT members and tell them how and why to vote against the bid placed by the Chicago Mercantile Exchange.

1) Is the CBOT board required in anyway to respond to this enhanced bid?
“I don’t think they are required to respond, but I suspect that good corporate governance would suggest they would need to take a look at it and come to a conclusion on what to do.”

“Any board, using a fiduciary, would want to take a look at any proposal to show that they have done due diligence for the company.”

2) Is there any question you can get the proxy material through SEC procedures before July 9?
“We are confident to get through before July 9. What we are proposing to do is not particularly controversial with the SEC. And given our status in the merger, [we] designed our thinking and our process to position ourselves appropriately.”

3) What exactly does the proxy mean? Will members be able to vote on the ICE proposal July 9?
“No. We are putting ourselves in a position where we can talk directly to Board of Trade members and our belief that they should vote ‘no’ on the CME.”

“Under the SEC rules, we will be able to 1) solicit a shareholder list directly from the Board of Trade and 2) talk to those shareholders directly about why they should vote ‘no.’”

4) Will CBOT be required to allow ICE to present this proxy at or before the July 9 meeting? “Yes, under the proxy materials, we are simply going to be talking to shareholders [about] why they should vote against the CME/CBOT proposal, so there is nothing for the Board of Trade to present.”

5) Are talks with CBOE (Chicago Board Options Exchange) ongoing? Most CBOT members indicated that the current offer on licenses is inadequate.
“We have an ongoing dialogue with the CBOE. But beyond that, I don’t agree with your premise. There was a substantial revision in what we put out last night and it is too early to come to conclusion about how the members feel about it until they get a chance to understand, its revised CBOE proposal.”

With some 300 fund managers, traders and administrators in the Managed Fund Association audience, Anthony W. Ryan, assistant secretary of the U.S. Department of Treasury for financial markets gave a warning: with $1.4 trillion in assets under management in the hedge fund community, managers need to be vigilant to avoid any actions that could cause a “systemic event.”

Ryan, a former fund manager who joined the Treasury department last December, noted that the President’s Working Group missive release last February came to the conclusion that “stakeholders,” which include fund managers, lenders and counter parties, all those who manage private pools of capital, need strong market discipline, and that mixed with regulatory policy can reduce the chance of a systemic event.

He noted that a “perfect storm” for an event could include a situation that allowed easy credit, highly correlated strategies, connected lenders, inadequate information and undeveloped markets.

Continue reading ‘Let’s be careful out there’ »

Speaking at the Optionetics “Oasis 2007” seminar last week in Santa Clara, Calif., investment guru and commodities bull Jim Rogers provided his insights to a three-year trip around the world he took with his new wife, Paige Parker. He said his biggest return from the trip was his first child, a baby daughter. Rogers noted he never had children before because he didn’t want the bother, but it was his best experience to date and recommended everyone go out and start working on babies right away.

More seriously, Rogers gave his view of the world, stating that China will be the country of the 21st century, just as the United States was in the 20th century and Britain the century before that. He noted China had the “the best capitalists in the world,” despite being a Communistic country. In fact he alluded to moving his family to Asian soon. “China will be the next greatest country in the world, whether you like it or not.”

Other Rogers’ comments:

• Teach kids how to speak Mandarin. He said his nanny is Chinese and speaks only Mandarin to his baby girl, so she already is bi-lingual.
• Right now the Chinese shares market is in a bubble; don’t buy shares right now (although he couldn’t recommend when to buy it). He also noted he has huge amounts of Chinese stocks but wouldn’t say what despite intense audience questions.
• Although U.S. dollar has been the world’s reserve currency, the United States’ is the largest debtor in the world, owing the world $13 trillion, adding $1 trillion in interest debt every 15 months.
• It is terrible policy to debase the $ in the long run, history has showed this.
• Stay away from bonds unless you know how to go short.
• Stocks will be in a big trading range for several years.
• We are in the middle of a bull market in commodities, which is the second largest market in the world (only currency market is larger).
• Oil reserves are dropping. In fact, Indonesia will become an importer of oil by the end of the decade, which means it will be kicked out of OPEC, an exporting cartel.
• Best alternative fuel is nuclear, which is clean if controlled properly (This is a big if…even the United States has had problems in this area; imagine less developed countries control.)
• Biggest danger in the world is the water problem, or lack there of. He did recommend NOT to buy water as if and when it becomes serious, politicians will take it over.

Rogers new book, “A Bull in China” will be released soon. It will be based on his observations of his round the world trip.

U.S. Congressman Vito Fossella (R-NY) was to join with Chicago-based exchange leaders to discuss initiatives to enhance the capital markets and U.S. economic competitiveness following the first meeting of the “Capital Markets, Economic and Information Security” task force during a press briefing June 4, and they did, but the press was not present for it.

Futures was invited to a press conference, which took place afterwards — after Fossella spoke with the leaders from the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBOT), the Minneapolis Grain Exchange and the Kansas City Board of Trade — when it seemed they were all too tired to talk about it anymore.

However, there was something to take away from the 17-minutes they did speak.

Continue reading ‘Political wrangling’ »