If the CFTC places hard position limits on energy futures markets and takes away the hedge exemption from swap dealers who help facilitate investments in long-only commodity indexes, it would not necessarily stop the long only commodity funds from operating, but it could have a large impact on them and they are looking at alternatives just in case.
“It is serious enough that we have to consider our options,” says Michael McGlone, senior director of commodity indexing for Standard & Poor’s (S&P). McGlone says that they are working on a broad commodity index made up entirely of non-U.S.
McGlone says that some of their clients are concerned about regulations that could be imposed on U.S. futures exchanges. Those clients want to get exposure to commodities to hedge against a potential spike in inflation.
And they aren’t the only ones. Jeff Saxon, director in UBS’s commodity index business, says Dow Jones and UBS have been closely watching regulatory and legislative developments, but have no specific plans to alter their index or create a non-U.S. version. “That could, of course, change in the future depending on demand from index licensees and end-users, liquidity in the relevant markets, and the regulatory and legislative environment,” Saxon says.
“It is possible that changes to the index would be required to preserve liquidity in the event that swap dealers are not able to maintain adequate hedging positions in the underlying futures; however, a lot would depend on the specifics of any changes to hedging exemptions,” Saxon says.
S&P has been working on the non-U.S. index since 2007, but that has accelerated recently based on client concerns over impending regulatory changes. McGlone says that they have been proactive about such concerns, creating the S&P GSCI enhanced index, which attempts to take away some of the negative returns due to contango.
“Any liquid futures market is subject to being included in the index,” McGlone says, adding that they are working with numerous exchanges but could not say which markets would be involved. “The markets must be defensible, replicable and tradeable,” he adds.
The key issue for index providers is finding markets with enough liquidity. Jim Rogers, creator of the Rogers International Commodity Index (RICI), has no immediate plans to create a new index but figures if regulations make it difficult to use U.S. markets, other markets will step in to fill the void. “I would suspect that the business will move offshore. Most people will continue to want commodity exposure,” Rogers says. “Someone will figure out a way to do this. If people cannot invest as they like, they will go elsewhere,” Rogers says.
Alan Konn, member of Uhlmann Price Securities, which offers a fund based on the RICI, says changes would not immediately affect them as they trade directly in futures markets and are not close to limits. “We could comfortably go to $1 billion with only minor modifications before we run into position limits (assuming any new energy limits match current accountability levels),” Konn says, adding they currently have $200 million tracking
Konn also has heard concern from clients over possible new regulation. He says, “Demand is increasing for the product as people grow concerned over inflation and are looking for intelligent ways to hedge their portfolio.”