UPDATE 2-US govt needs bigger energy-trading role-senator

(adds comments from Sen. Coleman, CFTC proposed rule, paragraphs 5, 7, 12)

By Tom Doggett

WASHINGTON, June 25 (Reuters) - U.S. Congress must give regulators authority to track speculative energy trading like that carried out by hedge fund Amaranth Advisors and prevent manipulation in markets that operate with little, if any, government oversight, a key Democratic senator said on Monday.

U.S. regulators were powerless to stop "excessive speculation" by Amaranth because the giant hedge fund exploited an unregulated electronic exchange to "dominate" and "distort" natural gas markets in 2006, according to a nine-month probe by the Senate Permanent Subcommittee on Investigations.

"Congress needs to do much more to safeguard U.S. energy markets from price manipulation and excessive speculation," panel chairman Sen. Carl Levin said at a hearing on the issue.

The Michigan Democrat wants to give the Commodity Futures Trading Commission authority over electronic exchanges like the ICE, which is currently exempt from CFTC oversight.

Sen. Norm Coleman, the top Republican on the panel, said "it is simply unacceptable that this rapidly increasing segment of our energy markets remains largely unchecked."

Lawmakers in the Senate and the House of Representatives are pushing legislation to provide the CFTC with such power.

There are more than 500 energy-related hedge funds with a combined $67 billion in speculative capital in energy markets.

Amaranth racked up $6.4 billion in losses from bad natural gas contract bets before it folded last year. The fund commanded 40 percent of the gas for delivery in the 2006-07 winter months, the panel's staff concluded, based on over 2 million trading records subpoenaed from the New York Mercantile Exchange (NYM.N) and IntercontinentalExchange Inc. (ICE.N)

In August 2006, with NYMEX enforcement staff bearing down on the fund for repeatedly violating exchange position limits, Amaranth took its massive natural gas trading to the ICE, where no such limits or oversight exist.

Levin said Congress should close the "Enron loophole" inserted in legislation in 2000 after the lobbying efforts by now-defunct energy trader Enron Corp., which exempts electronic exchanges like the ICE from CFTC oversight.

"Closing this loophole would make NYMEX and ICE subject to the same market oversight and put the cop on the beat in all U.S. energy markets," Levin said.

In a related matter, the CFTC last week proposed a rule requiring all traders on regulated exchanges like the NYMEX to disclose to the agency, upon request, all their contract positions on unregulated markets like the ICE.

Shane Lee, a former Amaranth trader, told the panel he did not consider the fund's trading to be excessive and that requiring the ICE to have reporting requirements similar to the NYMEX would impose "administrative burdens" on traders.

"However, such measures would increase transparency, allow hedge funds and other traders to monitor the amount of open interest (in contracts) and help deter any potentially improper conduct," he said.