Amaranth: Selling Gas Futures to Pay the Swap Book

The Amaranth CFTC natural gas manipulation case ended for the fund’s two entities with a $7.5 million civil settlement over allegations that they sold futures near expiry to push down the price used to settle larger short swap positions. The alleged payoff sat in another market. For someone on a trading desk, in risk management or in market surveillance, the revealing connection is between the orders placed at the close and the positions that would gain from the resulting price.

Amaranth Advisors L.L.C. and Amaranth Advisors (Calgary) ULC agreed to the penalty in an August 12, 2009 consent order. The Commodity Futures Trading Commission alleged attempted manipulation on February 24 and April 26, 2006, and separately accused Amaranth Advisors L.L.C. of giving the New York Mercantile Exchange a false account of its trading.

How the Futures Settlement Reached the Swap Book

Amaranth’s alleged strategy depended on a price shared by different contracts. The court’s account of the Commission’s complaint explains that natural gas swaps traded through IntercontinentalExchange used the New York Mercantile Exchange natural gas futures settlement price. A lower futures settlement would benefit Amaranth’s short swaps.

The futures themselves concerned delivery of natural gas at Henry Hub in Louisiana. A long position carried an obligation to accept delivery, while a short position carried an obligation to deliver. Traders could offset those obligations by taking an equal and opposite position. According to the complaint, Amaranth could neither deliver nor accept physical gas, so it needed to close its expiring futures positions.

The pricing window made the timing matter. Under the exchange rules described in the opinion, the expiry settlement used a volume-weighted average of trades from 2:00 to 2:30 p.m. Larger trades carried more weight in that calculation. A seller concentrating orders in that window could influence a price that also determined the value of the linked swaps.

Under the alleged strategy, a fund could want a worse price for the futures it was selling because another part of its book stood to gain. Sell low. On purpose.

The Energy Bar Association’s 2017 Report of the Compliance & Enforcement Committee describes the same economic pattern in its review of the Federal Energy Regulatory Commission’s enforcement work: trades in one market made to benefit positions in a related market. It also identifies uneconomic trading and material misrepresentations among the conduct enforcement staff examined. That framework connects the price-setting trade, the position benefiting elsewhere and the explanation given afterward.

February Expiry Began With a Position Reversal

The Commodity Futures Trading Commission alleged that Amaranth built up futures to sell into the close even though it had begun the day short. February 24 was the expiration day for the March natural gas contract. On the previous day, the head natural-gas trader had told another Amaranth trader:

According to the complaint as recounted in the opinion, Amaranth started trading short more than 1,700 March futures contracts. By the beginning of the closing range, it was long more than 3,000. The Commission alleged that it sold those thousands of futures during the closing range while holding a short position in at least 12,000 swaps.

The complaint also described messages about the desired price effect. Around midday, the head trader said the March contracts needed “to get smashed” at settlement. Later, while the closing range was underway, he messaged that he had more to sell and was waiting until later in the window.

Those communications gave the Commission an account of purpose to put beside the trading sequence. The instruction about having futures ready for the close connected the earlier purchases to the alleged selling strategy.

April Orders Targeted the Last Minutes

The April allegation added another part of the trading desk’s calculation: a large buyer could push the settlement upward. The Commission alleged that Amaranth’s head trader expected Centaurus Advisors to buy substantial quantities of May natural gas futures during the April 26 closing range and wanted Amaranth’s selling to counter that buying pressure.

According to the court’s account, Amaranth accumulated May futures in the days before expiry. Early in the closing range, the head trader told colleagues that he was still waiting to sell despite the buyers in the market. Amaranth also held a short position in more than 19,000 swaps tied to the settlement.

The Commission alleged that Amaranth placed two sell orders with instructions to hold execution until the last eight minutes. At 2:22 p.m., it placed another order to sell 2,000 May contracts. That final order arrived so late and was so large that the broker could not finish executing it before trading closed.

For a broker or risk manager, that is a recognizable distinction between the time an order arrives and the time the desk wants it executed. Here, the Commission connected the instruction to wait with the trader’s concern about buying pressure and the swap position that would gain from a lower price.

The complaint also pointed to Amaranth Calgary’s own compliance manual. Issued between the two expiry dates, it prohibited marking the close: trading near the close for the primary purpose of changing the closing price. The Commission’s allegation put the desk’s instructions directly against the firm’s written rule.

NYMEX Asked Why the Selling Came So Late

The New York Mercantile Exchange’s inquiry focused on the concentration of Amaranth’s April sales at the very end of trading. In its August 2, 2006 letter, the exchange said that Amaranth had sold 99% of its contracts in the final four minutes and 75% in the final minute. It requested a written commercial explanation.

The Commission alleged that Amaranth’s August 15 response concealed the specific timing instructions it had given floor brokers. According to the opinion’s account of the alleged cover-up, the company gave false or misleading descriptions of its positions and strategy.

The contemporaneous order instructions explain what the desk wanted the broker to do. The later exchange response explains what the company wanted surveillance staff to believe. The Commission alleged a gap between them. The Commodity Futures Trading Commission’s civil action alleged both attempted manipulation and the false statements.

The Company Settlement Covered Trading and False Statements

The entity settlement resolved the Commission’s claims against the two Amaranth companies together. Both became responsible for the shared civil penalty, and the court permanently prohibited them from manipulating or attempting to manipulate commodity prices. The order separately prohibited Amaranth Advisors L.L.C. from concealing material facts or making false statements to exchanges and other registered market organizations performing their official duties.

Amaranth’s collapse came in September 2006. The trading alleged in this case concerned the earlier February and April expiries.

The Trader’s FERC Reversal and Separate CFTC Settlement

The former head natural-gas trader faced different outcomes from the two regulators. On March 15, 2013, the D.C. Circuit set aside the Federal Energy Regulatory Commission’s $30 million penalty because the Commodity Exchange Act gave the Commodity Futures Trading Commission exclusive authority over the futures conduct at issue. In a separate settlement, the trader agreed to a $750,000 CFTC civil penalty over the attempted-manipulation allegations.

The energy regulator retained its authority over manipulation in physical natural gas and electricity transactions within its jurisdiction. The later settlement permanently barred the trader from trading during the last-day settlement period in all CFTC-regulated products and during the daily closing period in CFTC-regulated natural gas products. It also permanently barred him from registering with the Commodity Futures Trading Commission or claiming an exemption from registration. The trading restrictions followed the windows at the heart of the case.

A Price-Setting Trade Can Pay Somewhere Else

The link between a price-setting transaction and a position elsewhere also appears in other energy cases. In the Parnon Energy and Arcadia case, the Commodity Futures Trading Commission alleged that the companies accumulated physical crude at Cushing through futures expiry and then sold it, with losses on physical oil offset by gains on derivatives. The physical and financial positions explained the alleged incentive together.

A closer parallel involved electricity futures traded to benefit Avista’s over-the-counter positions. The Solicitor General’s account of the administrative findings describes close trades that moved settlement prices, with recordings and testimony supporting the finding of intent. The recurring connection is between the timing of execution and the contracts whose value depends on that price.

The Commission accused WD Energy Services of influencing gas-price calculations through reported information. Its enforcement account described false price and volume reports intended to influence natural gas hub indexes. For market surveillance, the question extends from who traded to who supplied the information used to set the price.

What an Insider Can Explain About the Book

In an expiry-trading case, the valuable account connects the position before the close, the broker’s execution instructions, the related exposure and the desk’s explanation of its purpose. Amaranth’s alleged sequence shows why those connections matter: each part gives meaning to the next.

Our whistleblower experts work with people who can explain those connections from trading, brokerage, risk or compliance work. An outside market participant can also have information that matters. We examine how the trading account and the communications fit together, including what an exchange was told after it asked questions.

CFTC whistleblower awards can total 10% to 30% of the sanctions collected. Your knowledge of why a desk traded at a particular moment can be the connection that makes a complex book understandable.

You Know Why the Desk Waited

If you know why a gas desk held its orders for the close, or which swap position benefited, speak with our whistleblower experts. We build the case around the trading decisions you can explain, bring in CFTC whistleblower lawyers who understand energy derivatives, and stay beside you through the case.