NEW YORK, Aug 12 (Reuters) - United States Natural Gas Fund LP (UNG.P), a giant exchange traded fund in the natural gas market, said on Wednesday that despite regulatory approval, it would not resume issuing new shares and may even reduce its holdings due to recently enacted federal and exchange position limits.
UNG said its June 5 filing requesting approval to issue 1 billion new shares was declared “effective” by the U.S. Securities and Exchange Commission. However, UNG’s management determined it would not resume issuing units or offering “creation baskets” - a block of 100,000 units - at this time.
UNG’s management said it determined to suspend offerings of creation baskets since it could not invest the proceeds from such offerings in investments that would “permit it to meet its investment objective due to current and anticipated new regulatory restrictions and limitations that have been and may be imposed by the Commodity Futures Trading Commission, the New York Mercantile Exchange (CME.O) and the Intercontinental Exchange (ICE.N),” the company said in a filing.
In late July, UNG said it was reducing its position in the natural gas futures market, where it has been rumored at times to hold as much as 80 percent of open interest in the front-month contract, to adhere to federal limits, and added it may need to seek alternative investments to compensate.
“We are working on adding other natural gas investments that would allow us to reduce our listed futures holdings to at or below whatever new limits are imposed by regulators. We have already begun the process and have in fact arranged the first alternative investment within the last few weeks,” said Katie Rooney, spokeswoman for United States Commodity Funds, LLC, which runs UNG.
“That said, due to concerns about both potential higher expenses or potential counter-party credit risk, we will not rush into alternatives unless management believes the arrangements are prudent and make sense over both the short-term and long-term,” Rooney added.
New regulatory restrictions and limitations will include accountability and other limits by ICE on the Henry Financial LD1 Fixed Price Contract and may include the imposition of fixed position limits on all energy-based commodity futures contracts, extension of position and accountability limits to futures contracts on non-U.S. exchanges previously exempt from such limits such as ICE, or the forced use of clearinghouse mechanisms for all over-the-counter transactions.
As a result, UNG said it could be required to reduce or liquidate its current level of holdings in investments or may become subject to restrictions on the types and level of investments that it may make in the future.
“While it cannot be predicted at this time what regulatory restrictions and limitations will eventually be imposed or how they will impact UNG, if any of the aforementioned items are implemented, UNG’s ability to meet its investment objective may be negatively impacted and investors could be adversely affected,” the company said in the filing.
UNG said it continues to pursue available investment alternatives that both meet its investment objective and comply with applicable legal and regulatory requirements, including in investing in futures contracts for natural gas, crude oil, heating oil, gasoline, and other petroleum-based fuels that are traded on the NYMEX, ICE or other U.S. and foreign exchanges and other natural gas-related investments.
As of Tuesday, the fund held more than 28,000 NYMEX front-month natural gas futures contracts, nearly 52,000 NYMEX front-month natural gas swaps contracts, which are one-quarter the size of the futures contract, and more than 287,000 ICE natural gas cleared swap contracts. (Reporting by Eileen Moustakis; Editing by Marguerita Choy)