Ban index funds, ETFs to rein in oil prices-groups

Thu Apr 5, 2012 4:35pm EDT

* Senator Cantwell drafting ban on some classes of investors

* More pressure on funds as gasoline prices rise-Greenberger

By Roberta Rampton

WASHINGTON, April 5 (Reuters) - U.S. lawmakers should ban commodity index funds and exchange-traded funds, a coalition of consumer and public interest groups said on Thursday, blaming the speculative investment vehicles for surging oil and gasoline prices.

Gasoline prices have hit a record for this time of year, renewing concerns about the flood of investment into commodities first highlighted during the 2008 run-up in oil and food prices to all-time highs.

Senator Maria Cantwell, known for urging crackdowns on excessive speculation and energy price manipulation, is drafting legislation that would ban passive investors from the market, a spokesman confirmed. Details are not yet available.

Other Democratic lawmakers also are taking a close look at whether and how the funds could be banned, said Michael Greenberger, a law professor at the University of Maryland.

"You're not banning money that goes into production, you're not banning money that creates market liquidity," said Greenberger, a former official at the Commodity Futures Trading Commission, which regulates futures markets.

"You're banning gambling that has no productive value whatsoever. When that argument becomes clear, there is every chance that there will be bipartisan enthusiasm to stop the casino-like atmosphere here," Greenberger told reporters on a conference call organized by Americans for Financial Reform.

Greenberger made his arguments before House Democratic Leader Nancy Pelosi and other top House Democrats at a policy hearing on Wednesday.

Academics and analysts have long sparred over whether the $300 billion in institutional investment poured into commodity markets during the past decade has been responsible for price spikes.

After prices surged in 2008, lawmakers pushed the CFTC to craft limits on the total number of speculative positions traders can hold in commodities. The sweeping Dodd-Frank banking regulations ultimately required those limits, but they have not yet been implemented, as the CFTC continues to collect data and finalize related regulations.

The financial industry has also challenged the Dodd-Frank limits in court, seeking a preliminary injunction to block them.

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Comments (1)
EvoShandor wrote:
When proposing laws that will have a significant effect it is always good to ask “and then what?”
In this case let’s assume the Sen. Cantwell’s legislation passes and investors are prohibited from participating in commodity prices via ETFs. (Let’s forget for a moment that investors have been repeatedly been told to do precisely this for 60 years by investment counselors beginning in 1952 with Nobel Prize winning economist, Harry Markowitz.) So commodity ETFs are banned. And then what? Well, then all those investors can open futures accounts at Futures Commission Merchants (e.g. Citi, JPM, GS, Newedge, etc.) and continue to do precisely what the ETFs were doing for them. Further, unlike the ETFs that require the investor to pay the full notional value of the commodity, the FCMs only require a small “good faith deposit” (9.68% as of 8:44 a.m. on Friay, April 6, 2012). By prohibiting investors from using ETFs Senator Cantwell will, as a mathematical certainty, increase the amount of leverage in these markets – making them far more volatile and dangerous. Why would you pass a law that prohibits someone from paying the full price of a barrel of crude when a vast industry awaits that will allow them to gain the same price exposure for one tenth the investment?

Apr 06, 2012 8:54am EDT  --  Report as abuse
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