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November 01, 2009 at 02:00 AM
The U.S. Commodity Futures Trading Commission (CFTC) has been waging war against commodity index funds, and visible evidence they are winning that war has already begun to manifest itself.
On September 9, Deutsche Bank redeemed outstanding shares in its PowerShares DB Crude Oil Double Long Exchange Traded Notes (DXO), effectively liquidating the note. DXO attempted to double the monthly performance of the Deutsche Bank Liquid Commodity Index – Optimum Yield Oil Excess Return Index. At the end of August, DXO had $425 million in assets.
Faced with restrictions by commodity regulators, DXO’s managers were unable to obtain adequate exposure to crude oil for the note’s normal operation. As a result, Deutsche Bank chose to redeem the notes.
Other commodity exchange-traded products have faced similar difficulties amid an increasingly restrictive regulatory environment impacting investments that use commodity futures.
How can advisors and their clients deal with the regulatory mess affecting commodity ETFs?
No Help from Regulators
Even though it has yet to produce any credible evidence, the CFTC claims that commodity index funds and other investors taking large positions in futures contracts tied to various commodities are distorting prices. These alleged distortions are far-fetched though, because commodity prices are largely driven by supply and demand.
For example, commodity ETFs that use futures contracts generally take no physical delivery of the commodities in which they invest. Expiring futures contracts are rolled into new contracts, which does little to disrupt the supply and demand metrics of the physical commodities. How is it possible to distort commodity prices without distorting their physical supply? No one at the CFTC has answered this fundamental question. Instead, commodity regulators remain stubbornly committed to disrupting the normal operation of commodity funds.
“I believe that position limits should be consistently applied and vigorously enforced,” CFTC Chairman Gary Gensler said. “Position limits promote market integrity by guarding against concentrated positions.”
By now, one would think the CFTC would actually come out and distinguish the difference between a legitimate commodity investor versus an illegitimate commodity speculator, besides its flawed attempt to set arbitrary limits on futures positions. Instead of protecting the integrity of commodities markets, regulators seem to be trying to appease politicians and the public. Blaming commodity investors for distorting commodity prices is a convenient alibi.
Commodity Funds Scramble
In response to the CFTC’s contention that commodity index funds are distorting the price of commodity futures, fund managers have been scrambling to comply with the agency’s guidelines.
Deutsche Bank expanded the number of commodities tracked by two of its commodity ETFs.
The PowerShares DB Commodity Index Tracking Fund (DBC) and the PowerShares DB Agriculture Fund (DBA) now contain additional commodities among their respective holdings to comply with position limits mandated by the CFTC.
