Thanks to commodity exchange traded funds (ETFs), access to this asset class has been greatly simplified for investors. So much so, that the Commodity Futures Trading Commission (CFTC) is examining the funds with a fine-toothed comb. This has already had implications, one of which is that United States Natural Gas Fund (NYSEArca: UNG) stopped issuing shares.
On Monday, however, the fund is going to start issuing new shares after three months. The Securities and Exchange Commission (SEC) gave UNG the go-ahead to issue new shares after two months of deliberation, but the fund held off issuing them for fear of position limits.
In mid-September, UNG filed with the SEC to reopen the fund for creations. Matt Hougan of Index Universe states that the new creation process is unique in that in the past, Authorized Participants could create new shares of UNG simply by buying up the front-month futures contract and delivering it to the fund company in a one-for-one swap. Now those investors must deliver privately negotiated swap contracts to enact the creations.
For UNG, this process will make things easier, as it transfers all the work involved with finding privately negotiated swap contracts to the AP. As soon as this was announced, the premium on UNG began to collapse because the APs were able to arbitrage the difference between the cost of negotiating private swap contracts for natural gas futures and the premium on UNG shares.