2012: New dawn?
The specter of repressive regulation has been hanging over the financial industry since lawmakers set their sights on reining in market risk — and, by extension, financial freedoms — following the financial crisis of 2008 and, more recently, the MF Global collapse.
Previously, provisions of the Dodd-Frank financial reform legislation that instruct the Commodity Futures Trading Commission (CFTC) to put in place energy and metals market position limits were considered the most potentially restrictive new rules affecting ETFs.
Now, however, expectations have shifted. MF Global’s collapse has resulted in increased scrutiny of the exchange-traded futures industry. Some argue that ETFs could benefit.
“I already have heard from several retail investors who are shifting to ETFs as an alternative to commodity futures,” says John L. Roe, partner of BTR Trading Group, a futures brokerage firm in Chicago. “Commodity ETFs always have offered the advantage of simplifying access to commodities as an asset class for individual investors, and the MF Global collapse will add a perception that ETFs may be safer than trading directly in futures contracts.”
The industry itself also will have greater incentive to shift business from futures to physical markets, he says.
“Congress will demand a policy response to MF Global’s bankruptcy that will focus on shoring up protections for customers of FCMs,” he says.
Roe contends that the net effect of these changes will be increased costs for trading exchange-traded futures and, by comparison, physical markets will be more attractive for ETF managers.
“The migration began to escape position limits, and the regulatory response to MF Global will only speed that along,” he says. “The market will see more ETFs deliberately structured to avoid the regulations of the CFTC.”
Since they were introduced, commodity ETFs always have been considered a simple way for individuals to gain exposure to commodities. That impression only strengthens within the new operational landscape, Roe says.
“If the segregated fund protection is a paper tiger, small investors won’t see a benefit to trading in markets they perceive as risky and under-regulated,” he says.That, of course, makes the future quite bright for the alternatives.