WASHINGTON (Reuters) - A U.S. futures regulator proposal that would place position limits in the commodities markets may not prevent manipulation or speculation, and would hurt the operators of commodity funds from meeting their investment goals, an exchange-traded fund manager said.
The U.S. Commodity Funds, a manager of leading ETFs U.S. Oil Fund and U.S. Natural Gas Fund, said on Friday that position limits, instead of meeting their goal of preventing excessive speculation, would adversely affect the value of the exchange-traded pools managed by it and others.
“Position limits will hamper the ability of USCF and other managers of publicly traded, unlevered, passive commodity funds to prudently meet the investment objectives of the commodity pools that they manage,” USCF said in a comment letter to the U.S. Commodity Futures Trading Commission.
The plan to limit the number of speculative positions that any one trader can hold mainly targets the big financial players that have plowed hundreds of billions of dollars into commodities via index swaps or exchange-traded funds (ETFs). They will not be eligible for any exemptions under the proposal and have little hope of winning any significant reprieve.
ETFs and other investment entities have argued position limits should be imposed based on the individual investors in the fund, rather than by requiring the fund itself to report its holdings as a single position.
Without the ability to assign ownership to their investors, the fund would reach the position limit level far more quickly, impeding its ability to grow and making it harder be managed.
“To the extent that such position limits are not imposed at the individual investor level, USCF agrees that such limits should not be imposed on passive managers who do not enter into transactions for their own account and do not own or even control the investment decisions of the exchange-traded funds that they manage,” USCF said.
The Dodd-Frank law passed last July gives the CFTC the power to set position limits to curb excessive speculation in 28 commodities, including energy, metals and agricultural markets, “as appropriate.
Commissioners at the CFTC voted 4-1 to open up the position limit measure to a 60-day public comment in January, but it was clear even those who supported the release, including Michael Dunn and Scott O’Malia, were skeptical the limits would prevent a larger run-up in prices.
The comment period, which ends on March 28, so far has generated close to 4,000 comments. CFTC must vote again to finalize the rule.
The USCF said in order to prevent regulatory arbitrage, the CFTC should work closely with foreign regulators on the form, timing and implementation of position limits.
It pointed to a report from the Financial Services Authority, the CFTC’s sister agency in the United Kingdom, that expressed concerns over the effectiveness of position limits as a regulatory tool.
“USCF believes that other foreign regulators will similarly find that a regulatory regime involving position limits is either unnecessary or unworkable and thus reject such a regime,” it said in its 21-page letter.
Traders argue there is no evidence speculators inflate prices, and say curbs could make prices more volatile.
But as commodity prices soar to their highest levels since 2008 when many commodities hit record highs — the momentum is growing for the CFTC to limit positions investors can hold in commodity markets, with the aim of preventing large players from controlling the market.
Editing by Alden Bentley and Lisa Shumaker