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UNG Seeks Removal of Trading Limits

Since the United States Natural Gas Fund (UNG) is a passively managed commodity index fund with a "neutral" investment strategy, the Commodity Futures Exchange Commission (CFTC) should free it and other exchange-traded commodity index funds from position limits and grant them "no-action" status with respect to their activities, the fund manager said in a CFTC filing recently.

The filing was by the United States Commodity Funds LLC (USCF), the operator of UNG, which has steadily been increasing its holdings and taking major positions in front-month natural gas futures contracts over the last few months. It pointed out that the CFTC has granted no action status to two agricultural index funds. That status should be extended to other single commodity index funds, the commodity pool operator said. USCF also operates crude oil, heating oil and gasoline commodity index funds.

Besides the fact that UNG's trading activity "passively tracks a widely recognized commodity index," it is unleveraged, with all futures positions fully collateralized with short-term Treasury bonds, the filing said. None of its funds take delivery of the commodity, selling out of the front-month contracts over a one- to four- day period starting two weeks before the contract's expiration. The early staggered rollout "protect the futures market from any unexpected price fluctuations that could occur if such trades were performed during the final days of the contract month when the risk of price distortion is particularly high," the USCF filing said.

The requests were addressed to the CFTC as part of comments on the agency's Concept Release on whether to eliminate the bona fide hedge exemption for certain swap dealers and create a new limited-risk management exemption from speculative positions limits [74 FR 12282]. The fund group said its products were fully transparent as it provides information regarding its trades on its website every day. In addition, the fund is regulated by the National Futures Association and the Securities and Exchange Commission.

As UNG's presence in the natural gas futures market has grown, questions have increasingly been asked as to whether it influences the price of physical natural gas, a basic energy source for the nation (see NGI, June 22). At the close of business on June 22, UNG held a total of 11,176 front-month futures contracts on Nymex valued at $468,609,680, and 229,890 August swaps contracts on IntercontinentalExchange (ICE) valued at $2,409,821,925. UNG held 97,746 Nymex August swaps contracts valued at $1,024,622,445. The nearly $4 billion total is considerably above the $2.6 billion interest in the front-month contract that the fund held in early June.

It is interesting to note that the number of Nymex contracts held by UNG has diminished considerably from the 18,746 front-month contracts it held on that exchange at the beginning of the month, while its holdings on ICE and in swaps contracts have increased (see NGI, June 8). In early June UNG's open interest on Nymex represented 13% of the front-month open interest, and a fund spokesman told NGI that Nymex had encouraged the fund to diversify out of the Nymex contract into ICE and swaps. As a fully regulated exchange, Nymex posts open interest in its contracts publicly. While ICE has been making data available to the CFTC, it has not been publicly posting its open interest totals, so it is not known what percent of the ICE market UNG holds.

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