In re Amaranth Natural Gas Commodities Litigation

The New York Mercantile Exchange (NYMEX) is an exchange based in New York City for the trading of commodity futures and options. Commodity futures are executory contracts for the sale of a commodity, such as natural gas, at a specific time and with delivery postponed to a future date. Futures sellers, also known as shorts, agree to deliver the commodity at a fixed price, whereas futures buyers, also known as longs, agree to buy the commodity at a fixed price. Typically, buyers and sellers do not settle their trades through actual delivery and acceptance of the underlying commodity. Instead, the buyer and seller usually offset their trades prior to the specified delivery date by purchasing an equal number of the opposite contract. NYMEX serves as a designated contract market subject to the regulatory jurisdiction of the Commodity Futures Trading Commission (CFTC). Trades made on NYMEX must be cleared through the exchange’s clearinghouse. The clearinghouse is made up of firms approved by NYMEX to serve as clearing members. Each clearing member effectively guarantees its clients’ trades and ensures that the counterparties are not subject to each other’s credit risks. The clearing firms guarantee their clients’ credit to the clearinghouse. To safeguard against nonpayment, the clearinghouse requires clearing members to deposit sufficient margin to cover short-term losses. The margin amount is calculated and adjusted each day. If the clearing firm’s open positions indicate a higher potential loss, the clearing firm may be required to post additional margin. When the risk decreases, the clearing firm may receive some of the margin back. In turn, the clearing firms require their own clients to post margin in roughly the same manner. Traders on NYMEX place their trades through futures commission merchants (FCMs). FCMs, which are also overseen and regulated by the CFTC, act as brokers for futures contracts.