Futures position limits threaten ETC provision

By: Joanne Young

Proposed position limits for commodity futures markets would inhibit ETP managers’ ability to deliver expected returns, according to providers.

The US Commodity Futures Trading Commission is considering introducing regulations to restrict positions in certain physical commodity futures and swaps, and has been inviting comments on the move.

In a letter dated 28 March, ETF Securities chief executive officer Graham Tuckwell argues the proposals would have harmful effects on ETC investors and the wider market.

He adds: “We believe any further regulation would only hinder the ETC’s ability to meet its objectives and the market objectives.”

The regulations could have a significant impact on US ETC provision, because under the CFTC’s definitions an ETC would be required to report its holdings as a single position, despite representing thousands of individual investors.

US Commodity Funds (USCF), an issuer of nine ETCs, argues: “It is only because such investors seek to obtain their financial exposure to the commodity markets collectively, in a simpler, less risky, unlevered and economically efficient manner though the funds, that they will likely suffer from the adverse effects of position limits.”

Both providers say the rules would have significant and unintended consequences on ETP provision, restricting the size of the funds and potentially resulting in more ETCs being created solely to spread exposure.

USCF says: “Such disruption and volatility would have the greatest negative impact on the individual retail investors who rely on such funds to hedge their exposure to the commodity markets.”

UK investors, however, do not appear likely to have to deal with similar intervention.

In its 2009 paper Reforming OTC Derivatives Markets – A UK Perspective, the FSA wrote that it did not consider position limits an effective way of controlling commodity pricing.

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