Position limits could limit access to commodity indexes

July 12, 2011 07:00 PM

John Prestbo, editor and executive director of Dow Jones Indexes says that proposed rules by the Commodity Futures Trading Commission (CFTC) on position limits and changes to who qualifies as a “bona fide” hedger could limit customer participation in the Dow Jones–UBS Commodity Index as well as other long-only commodity indexes.

Prestbo, in Chicago for the 10th annual Dow Jones Indexes Mid-year commodity outlook, says that they won’t know the impact of CFTC rule changes until they become final.

Assets in the Dow Jones UBS Commodity Index (DJ-UBSCI) have grown to $76.9 billion as of the end of the first quarter. That figure includes the 19-commodity benchmark index as well as numerous sub-indexes and represents a 24% increase from the end of 2010.

In addition to the benchmark, Dow Jones offers sub-sectors of its index, the index priced in different currencies and individual commodity indexes. They also are offering the index products where the components commodities are based on further out contracts to offset the affect of contango.

Prestbo says there has been greater institutional demand for the index. “This is the first time in my career commodities have been viewed as a legitimate asset class,” Prestbo says. He adds that position limits could threaten the product.

“Commodities really are driven by the laws of supply and demand ,” says Prestbo, but he acknowledges that like the stock market, commodities do tend to overshoot. He points out that every market has this tendency because it is based on human nature. He adds that if regulators are trying to change that, “they are doomed to fail.”

The DJ-UBSCI is down 2.62% through June. The best sector through the first half of the year has been precious metals, up 6.82%, while grains have underperformed, -9.72%, in the first half of 2011.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.