Natural Gas: a hot topic

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.

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To liquidate

Everything seems to be under attack these days. Now it is the ETF department where regulators are asking questions about leveraged ETFs and commodity ETFs. These have become so big that they start to dominate the underlying markets. What do we read?
From Reuters:

It was the second day in a row in which holdings had fallen. [GOL/SPDR] SPDR has shed about 53 tonnes over the past month, the largest drop ever for the fund.
"The rise in SPDR holdings has been a major factor driving the market higher and if the fund is now turning around to be a seller, that would be a major bear factor,

But there is more.

A US legislative plan to regulate the near-$600,000bn market in OTC derivatives suggests that lawmakers debate the idea of banning so-called “naked credit default swaps”, which allow investors to speculate on the creditworthiness of companies. The proposal by key congressional committees would push most derivatives on to an exchange or clearing house but leaves open the issue of whether to outlaw CDSs, in which the buyer does not own the underlying asset.

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Attack

Away with the leveraged ETFs.
On Wednesday, Dow Jones reported Morgan Stanley Smith Barney had also placed under review the sales of its leveraged and inverse exchange-traded funds “that regulators said might not be suitable for individual investors”.
This, obviously, has big implications for an industry which until recently appeared confident of further growth, largely via the ETF-isation of ever more exotic underlying assets.
The key point the current blowup demonstrates is that an important distinction should now be made within the industry which currently tends to use the ETF name as an umbrella term for all its offshoots – plain vanilla index-focused ETFs, exchange-traded-commodities (ETCs), exchanged-traded-notes (ETNs) and exchange-traded-products (ETPs).
The latter, of course, being more suited to institutional rather than retail investors.
Meanwhile, if you want to see how things can really go wrong in an ETF structure, note the following SEC filing from the United States Natural Gas Fund (UNG) released late on Wednesday, in which the fund — already forced into the bilateral market by position limits — admits it could now be forced into buying completely unrelated assets with a poorer correlation to natural gas futures.

As Olivier Jakob, an energy market analyst at Petromatrix sums up the story:
We have in the past called the ETFs on single-commodity Futures a cancer for the Futures market. From the current CFTC hearings on position limits it does seem that the main commodity investment banks are now in the process of trying to manage rather than fight the process of setting position limits in the energy markets. In order to preserve some of their core business we would think that investment banks will have to sacrifice the concept of open-ended commodity ETFs.

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A long time...

Even Bernie Madoff was sentenced to 150 years in jail (and than some), it doesn’t mean his case is closed. So much money was in play that a lot of second rang players had their fair share in this scheme.
What about the fact that UK investiogators knocked at the door of Sonja Kohl , president of Bank Medici, an Austrian outlet. The allegation is that this small bank charged millions of pounds to an outpost of the Madoff empire for worthless research.
Why did I miss this opportunity?

Detail: Bank Medici, which invested most of its $3.2bn in the Madoff empire and ran investor “feeder” funds in Luxembourg and Ireland, is one of the most spectacular casualties of the disgraced tycoon’s scheme. It is now under the control of the Austrian authorities and is to wind down most of its operations.

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Regulation

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A lot is going on

There is a lot going on for the moment.
Most important things: month-end flows have triggered a wave of dollar buying. One of the reasons could be the FX-flows from equity fund managers due to the MSCI rebalancing exercise scheduled for tomorrow. 78 securities will be added and 99 will be deleted from the MSCI Global Standard Indices.

From the Washington Post: "Senior administration officials are considering the creation of a single agency to regulate the banking industry, replacing a patchwork of agencies that failed to prevent banks from falling into the worst financial crisis since the Great Depression, sources said. The agency would be a key element in the administration's sweeping overhaul of financial regulation, which officials hope to unveil in coming weeks, including the creation of a new authority to police risks to the financial system as well as a new agency to protect consumers, according to three people familiar with the matter. Most of the proposals would require legislation. The powers would include oversight of previously unregulated markets, such as the derivatives trade, and of market participants such as hedge funds. "

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A regulated CDS market

Did you read it too?

The Obama administration on Wednesday unveiled a sweeping plan to regulate OTC derivatives in a move to increase transparency and reduce risk in a largely unregulated market worth more than $680,000bn. The new rules would force “standardised” OTC derivatives to be cleared through central clearinghouses to reduce the risk of investors being over-exposed to a single counterparty. The plan could force banks and other big corporate users of derivatives to set aside more capital to cover potential losses.

680.000 billion USD is 680 trln USD. That’s notional value. Real market value of the derivatives contracts is estimated around 13 to 15 trln USD. However: you’re never sure these days. Another thing with these contracts is that it is a zero sum game. For every buyer, there’s a seller. What these contracts actually do is transferring wealth between parties. And they can destroy the market for particular bonds or sectors, because sometimes CDS amounts are a multiple of the underlying bond issue they covering.
So yes indeed, if this market is regulated in an intelligent way, it will clean one of the biggest threats of the financial crisis.
Aaargggh – finance and intelligence don’t work well together. Greed, theft, GS on the contrary ….

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No evidence - part 1

Consider this headline:
GERMAN FINANCIAL WATCHDOG BAFIN SAYS HAS ENDED SHORT-SQUEEZE PROBE INTO VOLKSWAGEN SHARES NO EVIDENCE OF WRONG DOING.

They are all the same, now aren’t they, those watchdogs.
Porsche made a 6.8 bln EUR profit from its options in Volkswagen, lifting its pretax profit to more than twice its revenue. As long no Germans were screwed in this process, Bafin can not discover anything irregular in one of the most amazing trades of the last decennium.

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