CFTC starts cracking down on commodity ETFs

This has been working its way through the US government for a while and we are finally seeing the government crack down on so-called "speculators" in the commodity futures markets. Of course, one can't have a futures market without a speculator—they are the ones that take the opposite position to a commercial hedger—so it all comes down to what is perceived as a "bad" speculator versus a good one. MarketWatch reports:

The Commodity Futures Trading Commission said Wednesday that a Deutsche Bank commodities fund and a second, unnamed commodities investor could no longer avoid federal limits on speculating in grain futures.

The decision comes as the futures regulator, under pressure by lawmakers to reduce speculative trading in energy and other commodities, considers making it tougher for financial institutions, index funds and exchange-traded funds to build big positions in the futures markets.

The CFTC said it was withdrawing a May 2006 exemption issued to DB Commodity Services, a unit of Germany's Deutsche Bank, that allowed its DB Commodity Index Tracking Master Fund to exceed speculative limits on corn and wheat futures.

The exchange-traded fund aims to provide investors with broad exposure to commodities, according to Deutsche's Web site. Deutsche Bank spokeswoman Renee Calabro wouldn't comment on the CFTC decision except to say that its Powershares DB Agriculture Fund was also affected.

...


The threat of a regulatory clampdown on futures trading by index funds and exchange-traded funds has already prompted the U.S. Natural Gas Fund, an ETF, to halt issuing more shares to the public...

The commodities trading operations of some large investment banks is also under threat.


This ruling seems to be limited to grains but it's not clear if similiar rulings will be made for other commodities. It is also not clear who would be considered a "good" speculator and allowed to be exempt from the position limits.

Deutche Bank will probably have difficulties with its commodity funds after this ruling. It has a popular agriculture commodities fund with the ticker symbol DBA. I'm not knowledgeable in these matters but I would guess that it can probably circumvent the regulations by entering some derivative contract with a dealer that has the exemption (the "good" speculators will likely remain exempt.) If the ETF ends up having a fixed number of shares, which is probably what is required to satisfy this ruling, it would essentially be a closed-end fund (of course, a CEF behaves differently from ETFs and aren't as efficient.)

The story also mentions that another popular ETF, a natural gas ETF with the ticker symbol UNG, has stopped issuing new shares for the time being. I'm curious to see if similar requirements will be enforced for crude oil. The amount of oil contracts owned by crude oil ETFs is quite large (although it probably isn't as significant given the massive size of the crude oil market.)

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