By Matt Hougan
The regulators are ratcheting up the pressure on commodity ETFs. Will they survive in the long run?
In case you missed it, Deutsche Bank (NYSE:DB) has “temporarily halted” issuing shares in the PowerShares DB Crude Oil Double Long Exchange-Traded Note (NYSEArca: DXO). The ETN is designed to provide 200% of the monthly return of the DB Optimum Yield Crude Oil Index, an index of crude oil futures. The story is covered here by Murray Coleman.
That means DXO has joined the United States Natural Gas ETF (NYSEArca: UNG) as pseudo-closed-end-funds, either unable or unwilling to issue new shares.
Deutsche Bank hasn’t said why it is halting issuance of new shares, but it likely has something to do with concerns on Wall Street that the CFTC is about to crack down on the size of commodity positions. That could make it hard for DXO to find swap counterparties to hedge its exposure.
It’s just one of many signs that regulators are seriously ratcheting up the pressure on commodity products.
Yesterday, the CFTC revoked previously issued exemptions that allowed the PowerShares DB commodity ETFs to take large positions in CBOT-traded corn, wheat and wheat futures. The ruling, which reverses three years of precedent, means that the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) and PowerShares DB Agriculture Funds (NYSEArca: DBA) will likely have to sell parts of their agricultural positions and replace them with alternate holdings.
Meanwhile, the FT reports that the CFTC is considering taking control of position limits away from the exchanges and replacing “accountability levels” with federal position limits. For instance, the New York Mercantile Exchange monitors traders’ holding periods when they reach approximately 20 million barrels, but it is not illegal to hold more than that.
“Federal limits set by us, rather than the looser ‘accountability levels’ set by exchanges, may give us a better tool to address any uneconomic activity. This would be a firmer, clearer standard than the system we currently have in place,” CFTC commissioner Bart Chilton told the Financial Times.
A 20-million-barrel position limit would put funds like USO outside the edges.