What began with the UNG, appears to be spreading quickly across the entire commodity exchange-traded product space. Almost every day another fund is announcing the suspension of new share issues – at the risk of destabilising its tracking record, we might add — on fears the CFTC will soon act to restrict fund positions across commodity futures.
From the Financial Times
Investors who followed the dramatic growth of United States Oil at the end of 2008 and beginning of 2009 probably remember how it took up a vast share of the U.S. oil futures market on the New York Mercantile Exchange, or NYMEX. Without CFTC scrutiny, the fund never had to stop issuing shares, but it did produce tremendous distortions in the market as other traders front-ran its massive trades and prevented it from benefiting as the spot oil price began to rise. As assets fell, so did the contango produced by the USO’s holdings, and the fund finally began to move with the oil prices.
The bigger and badder sequel to USO began in the Spring of 2009 as money flooded into United States Natural Gas. Compared with crude oil, which has one of the largest and most liquid commodity futures markets in the world, natural gas is a sleepy corner of the market. Assets in UNG swelled to more than $4 billion by July 2009, by which point the fund held nearly every long position in the front-month contract of the NYMEX natural gas contract, as well as huge positions in the equivalent contract on the London-based Intercontinental Exchange, and substantial swap contracts with major broker-dealers. UNG was not the 800-pound gorilla of the natural gas market–it was King Kong.
Regulators did not step in as UNG continued to grow and its price continued to shrink. The SEC simply refused to approve more shares once the fund ran into its preapproved limits from its latest prospectus (a situation that has since changed). As UNG stopped issuing shares, we saw money start to pour into the similar iPath DJ-UBS Natural Gas Total Return Sub-Index ETN (though this fund is not an exact substitute for UNG, as it tracks a different contract one month further out on the futures curve). However, concerns about regulatory action seem much higher nowadays. PowerShares DB Crude Oil Double Long ETN stopped issuing new shares on August 18 at an effective position size of $960 million (double its actual assets to adjust for leverage). Just this morning, Barclays halted issuing new shares of GAZ.
Investors who followed the dramatic growth of United States Oil at the end of 2008 and beginning of 2009 probably remember how it took up a vast share of the U.S. oil futures market on the New York Mercantile Exchange, or NYMEX. Without CFTC scrutiny, the fund never had to stop issuing shares, but it did produce tremendous distortions in the market as other traders front-ran its massive trades and prevented it from benefiting as the spot oil price began to rise. As assets fell, so did the contango produced by the USO’s holdings, and the fund finally began to move with the oil prices.
The bigger and badder sequel to USO began in the Spring of 2009 as money flooded into United States Natural Gas. Compared with crude oil, which has one of the largest and most liquid commodity futures markets in the world, natural gas is a sleepy corner of the market. Assets in UNG swelled to more than $4 billion by July 2009, by which point the fund held nearly every long position in the front-month contract of the NYMEX natural gas contract, as well as huge positions in the equivalent contract on the London-based Intercontinental Exchange, and substantial swap contracts with major broker-dealers. UNG was not the 800-pound gorilla of the natural gas market–it was King Kong.
Regulators did not step in as UNG continued to grow and its price continued to shrink. The SEC simply refused to approve more shares once the fund ran into its preapproved limits from its latest prospectus (a situation that has since changed). As UNG stopped issuing shares, we saw money start to pour into the similar iPath DJ-UBS Natural Gas Total Return Sub-Index ETN (though this fund is not an exact substitute for UNG, as it tracks a different contract one month further out on the futures curve). However, concerns about regulatory action seem much higher nowadays. PowerShares DB Crude Oil Double Long ETN stopped issuing new shares on August 18 at an effective position size of $960 million (double its actual assets to adjust for leverage). Just this morning, Barclays halted issuing new shares of GAZ.
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