What CFTC’s Proposal for Commodity ETFs May Mean

January 20th at 11:00am by Tom Lydon

ETF CFTCThe Commodity Futures Trading Commission (CFTC) has been prodding and poking at commodities exchange traded funds (ETFs) for the last year, and the commission has finally made a decision and released a few proposals.

The CFTC cited United States Natural Gas (NYSEArca: UNG) and United States Oil (NYSEArca: USO) as examples for the new “Proposed Position Limit Rule,” writes Don Dion for TheStreet. The proposal covers four energy commodities: Henry Hub natural gas, light, sweet crude oil prices, New York Harbor No. 2 heating oil and New York Harbor gasoline blendstock. Additionally, the regulation will affect the New York Mercantile Exchange and the Intercontinental Exchange. [Will regulation hurt the ETF industry?]

The proposal offers up a formula that can be used to calculate the number of futures contracts any single fund can hold.

In recent months, the CFTC has been monitoring certain ETFs and their impact on the price of the underlying commodities. UNG and USO offer investors exposure to the prices of natural gas and oil, respectively, by tracking near-month futures contracts. The CFTC has called for tighter rules on energy trading and stricter definitions of traders who are exempt.

United States Commodity Funds, the provider behind the funds, has vigorously defended their funds and refuted claims that they were responsible for wild energy price swings. [CFTC and commodity ETF provider face off.]

ETF managers have begun selling off future positions and creating shares through the use of swaps in an attempt to obviate the troubles associated with position limits. However, the CFTC is asking Congress for the authority to regulate over-the-counter markets, which include bilateral swaps. [CFTC actions prompt fee hikes.]

Still, ETFs such as the United States 12-Month Natural Gas (NYSEArca: UNL) will go on as normal, since it does not rely on near-month futures contracts. UNG tracks the average prices of 12 futures contracts on natural gas that are made up of near-month contracts set to expire and the contracts for the following 11-months.

For more information on commodities, visit our commodity category.

  • United States Natural Gas (NYSEArca: UNG)

  • United States Oil (NYSEArca: USO)

  • United States 12-Month Natural Gas (NYSEArca: UNL)

ETF UNL

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.