Fear of CFTC regulations forces changes

News Date:	08/25/2009
Outlet:	Financial Times - New York Bureau
Contact:	Meyer, Gregory

As it ponders concrete caps on speculation in oil, natural gas and other commodities, the Commodity Futures Trading Commission is already sending tremors through the nascent commodity investment business.

In the past two weeks, the managers of several products that allowed investors to bet on raw materials prices have announced big changes, either because of direct CFTC intervention or fear of it. These exchange-traded funds and their cousins, exchange-traded notes, have grown to $59bn in five years, according to Morningstar. The obvious danger is that the CFTC’s intervention could tarnish their appeal to investors.

Barclays Global Investors on Monday said it temporarily stopped creating shares in the $1.5bn iShares S&P GSCI Commodity-Indexed Trust, which tracks a leading commodity index, citing “uncertainty” from potential new commodity rules.

This followed similar moves by managers of Barclays’ iPath Dow Jones-UBS Natural Gas ETN, Deutsche Bank’s PowerShares DB Crude Oil Double Long ETN and the United States Natural Gas Fund, or UNG, which said it would halt new share issues because of “current and anticipated new regulatory restrictions and limitations”.

“Every day the drumbeat gets a little louder,” says Matt Hougan, director of ETF analysis at IndexUniverse.com. “I would bet they will survive in some form, but not in the way we’re used to.”

The CFTC is expected to announce new limits on energy trading in the autumn. But it has already taken steps to curtail investors’ presence in commodity markets, imposing trading limits in IntercontinentalExchange’s US over-the-counter natural gas swap. Last week it also yanked exemptions from limits on corn and wheat futures issued to two commodity fund operators including Deutsche Bank.

The CFTC declined to comment on its communications with exchange-traded fund managers. Bart Chilton, one of four CFTC commissioners, said the agency’s “antennas” go up whenever a single trader holds positions that breach certain levels. “Regulators should be commodity-blind and price-neutral. That said, prices have to be fair and based upon economics, not on a trader or traders who have concentrated market-moving positions.”

John Hyland, chief investment officer at United States Commodity Funds, UNG’s manager, said he was working on the assumption that the fund would be able to rebalance its portfolio and start issuing new shares again.

“The proposed direction the CFTC is looking to go is likely to produce results that are very much the opposite of what they seem to desire,” Mr Hyland said. “They apparently are seeking an outcome of low prices and low volatility as being an ‘ideal state’. By eliminating financial investors from the marketplace and leaving it totally in the hands of oil companies, physical energy traders, and Opec, they are likely to end up with neither low prices nor low volatility.”