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.)

Comments

Post a Comment

Popular Posts

Thoughts on the stock market - March 2020

Image
Right now, DJIA has a P/E of 16.8 and forwand P/E of 15.1, whereas S&P 500 is at 20.1 with forward P/E of 15.8. Source: WSJ market Data If you ignore interest rates and inflation expectations--both of these influence valuations but depends on your macro call-- the market is not cheap. Long-term P/E is around 15. Trailing P/E is around 20% (Dow) to 40% (S&P500) higher than average. Forward P/E is in line with long term average but that assumes a strong V recovery. Consensus forecast is for profits to drop 1.2% in 2020. In 2008, it dropped 25.4% so current forecast is a very mild recession. Covid-19 coronavirus is not going to last more than a few months but these forecasts are still too rosy in my opinion. So I wouldn't rely on forward P/E. The richly valued (mostly tech or high quality) have not fallen much but the distressed ones have. So if you want to outperform in the long run, I think one’s choice right now is to: • Wait for market to fall another, say
✖ READ MORE >>>

Warren Buffett's Evolution and his Three Investment Styles

Image
A Young Warren Buffett In a comment to one of my posts , Mark Carter, who incidentally appears to have a  good blog worth checking out , asked: "Buffett Prime is 1970's to early 1990's" Could you elaborate? I have vaguely indicated how I view Warren Buffett in the past, but I thought I would detail my view of his investing behaviour. This is more of an opinion piece and many others would disagree with me (if you do, I'm curious to hear your thoughts). I don't follow Warren Buffett as closely as many value investors so I may get some facts wrong. My view is that Warren Buffett went through three different phases, with each consisting of different investment techniques. The overall investment theory remained the same—what people call value investing—but his execution, tactics, and strategy differs across the three phases. Some people may break up his career into additional periods but my feeling is that the three I will describe essentially capt
✖ READ MORE >>>

Hugh Hendry discussion at the Alternative Investment Conference

Thanks to Value Investing World for bringing this Hugh Hendry interview to my attention. I may not agree with all the things—short-term orientation of hedge funds is actually worse IMO; the sharp pencil effect doesn't always work—but Hendry is a true contrarian and worth listening. Like Marc Faber or Jim Rogers, you also can't take everything Hugh Hendry says seriously. I had always felt Hugh Hendry was firmly in the deflation camp but I get the feeling that he is now opening up to high-inflation possibilities. Otherwise, his stance appears to be similar to past opinions.
✖ READ MORE >>>