WASHINGTON Two leading energy exchange-traded funds (ETFs) on Friday lashed out at efforts to apply position limits to U.S. oil and gas markets on Friday, seeking to forestall action they say would drive up costs and reduce liquidity.
Employing familiar arguments against the rationale of using position limits as a means to prevent price spikes or reduce volatility, the funds urged the Commodity Futures Trading Commission not to move forward with its proposal.
Letters from the U.S. Commodity Funds and ETF PowerShares owner Deutsche Bank -- both of which were in the spotlight over the past two years after their funds amassed vast long positions in oil and gas futures -- were among the hundreds of last-minute comments sent to the CFTC during a 90-day public comment period, which ends on Monday.
"The unintended consequences of the proposed rule may lead to even less transparency and more risk for investors in the financial energy markets," Nicholas Gerber, chief executive of the U.S. Commodity Funds LLC, wrote in the letter.
Gerber said that an estimated 3 million to 4 million individual investors held investments in commodity ETFs in 2009, and that regulators should base any limits on those underlying holders rather than the ETF provider itself.
"If the Commission does choose to move forward with the proposed rule, we strongly urge the Commission to add in provisions that would exempt passive, unleveraged investors such as the funds from any position limits that are adopted, and instead take a "look-through" approach in order to regulate the positions of individual investors in the funds," he wrote.
Regulators have sought to shift the focus of efforts to set a hard cap on the size of position that a single trader is able to hold in the futures market toward the desire to limit undue influence over prices, but the original impetus stemmed from fears that financial investment artificially inflated prices.
Although a number of studies have called that theory into question, the political will to curb financial investment into commodity markets remains strong, aided recently by signs of greater support for tough financial reform regulation.
Hans Ephraimson, CEO of DB Commodity Services LLC, listed a series of "critical problems" with the proposal: "It finds no support in empirical evidence or regulatory precedent, it's unduly onerous, will significantly limit the usefulness of the U.S. future markets to international traders, and is premature in light of pending congressional legislation."
He said passive long-only index funds should be exempted from the limits.
Last September both USCF and PowerShares restructured funds in order to avoid running afoul of position limits. At the time, the U.S. Natural Gas Fund, reduced its buying of natural gas futures and replaced up to 25 percent of its futures holdings with swaps instead.