Comment Text:
10-002
COMMENT
CL-08352
From:
Sent:
To:
Subject:
Attach:
Felesky, Adam - HETFs
Monday, April 26, 2010 4:35 PM
secretary
Industry Filings: Comments on Industry Submissions
CFTC Letter - dated April 26 Final.pdf
Adam Felesky
Chief Executive Officer
Horizons Exchange Traded Funds Inc.
Direct: 416-933-5739
Email: afelesky @HorizonsETF s.com
www.HorizonsETFs.com
Bloomberg: HETF April 26, 2010
Mr. David Stawick
Secretary
Commodity Futures Trading Commission
1155 21
st
Street, NW
Washington, DC 20581
Re:
Proposed Federal Speculative Position Limits for Referenced Energy
Contracts and Associated regulations; 75 Fed. Re~. 4144 (January 26~ 2010)
My name is Adam Felesky. I am the Chief Executive Officer of BetaPro
Management Inc ("BPM"), the Manager of the 43 Horizons BetaPro Exchange Traded
Funds ("HBP"). I am pleased to provide comments on the Commodity Futures
Commission's Notice of Proposed Rulemaking entitled "Federal Speculative Position
Limits for Referenced Contracts and Associated Regulations." While BPM is not
domiciled in, nor are its funds listed in, the United States, our involvement and
experience as manager to commodity exchange traded funds in Canada, we believe,
provides an important additional perspective (and limited one) as the Commission
considers implementing speculative energy position limits in the United States. Our
comments will primarily focus on the role of the passive commodity exchange traded
funds, their footprint in the market place and the potential consequences of the proposed
position limits as contemplated. This discussion will also address many of the questions
posed under Section VIII, #15 of the above notice.
First and foremost we believe that, should the Commission impose the proposed
speculative position limits on energy, a special exemption should be considered and
implemented for passive commodity exchange traded funds ("PCETF"). In such funds,
the underlyin~ investors are actin~ independently from one another and drive the
overall investment of the Fund
-
not the manager.
PCETF are simply a microcosm of
an exchange - facilitating a wide array of buyers and sellers, with their ne~t position and
activity being the aggregate expression of the underlying independent investors'
sentiment and investment decisions. As such, the manager of a PCETF is adjusting the
portfolio exposure to the underlying commodity only in accordance with the aggregate
supply and demand of its unit holders. The manager of a PCETF does NOT have any
discretion to impose its view on the portfolio given the passive nature of the mandate and
is only measured by how closely it tracks its underlying benchmark.However, we do not believe this exemption should extend to the individual unit
holders of a PCETF nor to the funds whose commodity positions can be directed by a
single decision maker, regardless whether it is a passive investment or not. This limited
exemption, therefore, would ensure that individuals could not aggregate positions across
multiple vehicles or venues in order to circumvent imposed limits and ensure no passive
commodity investment under the direction of a single decision maker (e.g. portfolio
manager of a pension fund) could amass a position in excess of the limit; thereby limiting
their activities to the equivalent of an active participant.
The Commission is keenly aware of the necessity of the speculator in order to
facilitate a balanced market place for hedgers. PCETFs provide a unique essential source.
We believe there are several reasons why they are now the preferred investment choice
for the general public seeking commodity exposure rather than trading directly on the
commodity futures exchanges:
i)
ii)
iii)
iv)
the recognition of the diversification benefit commodities can provide to
an individual portfolio,
increased appetite to hedge individual exposure to higher commodity
prices and inflation,
the limitation of risk to the capital invested - unlike that of a derivative via
commodity exchange (i.e. future), and
the ease of access - can be purchased similar to an equity security and in
small denominations as they are listed on an exchange.
As such, we believe the PCETF delivers the marketplace the ideal speculator citizen:
i)
ii)
iii)
individually they have small positions relative to underline open interest
(eg. as at 03/11/10 the HBP Natural Gas Bull+ETFs held 0.6
contracts/unitholder),
they are fully collateralized investments - no credit risk, and
investments are on an exchange and are transparent.
Despite these obvious benefits PCETFs provide to the market place, there have been
concerns raised that their increased presence has resulted in higher prices, market
dislocations during roll periods and a generally significant footprint in the market place.
On behalf of PCETFs only, we would like to address these assertions and encourage you
to read similar findings published by our largest competitor.
Per our previous written and oral testimony, our fund flow activity has clearly
demonstrated, and continues to demonstrate, that as prices decrease our funds exposure to
a given commodity tends to increase in size while conversely (and most importantly)
when prices increase our funds exposure to a given commodity decreases in size.
2I
Crude Oil Futures Price vs. HBP Net Notional Crude Oil ETF°s I
$160.00
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$0.00
................................................................. ': ¯ " .....................
::. .................................................................... Increase in ETF Shorts
~rice Declines =
::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::
............................................................................................................................................................................................................
:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::
~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:~:
Date
.................
CL1 Futures ~Net HBP Crude Oil
Price
Swap Notional Amount
$1,000,000,000.00
$800,000,000.00
$600,000,000.00 ~
$400,000,000.00 ~
$200,000,000.00 =~
$0.00
z
0
($200,000,000.00) ~
O
($400,000,000.00)
~
z
($600,000,000.00)
($800,000,000.00)
$14.000
I
Natural Gas Futures Price vs. HBP Net Notional Natural Gas ETF's I
$12.000
.= $10.000
,,= $8.000
.o
$6.000
$4.000
$2.000
Date
.'.'.'.'.'.'.'.'NG 1 Futures ~Net HBP Natural Gas
Price
Swap Notional Amount
$1,600,000,000.00
$1,400,000,000.00
$1,200,000,000.00
$1,000,000,000.00
$800,000,000.00
$600,000,000.00
$400,000,000.00
$200,000,000.00
$0.00As a result, our market impact has clearly demonstrated to have been one of price
stability not volatility.
The market impact of a PCETF as it rolls from one future contract to the next and the
opportunity for market dislocation as investors pre-position for such activity has also
been much debated. However as an example, as shown below (see Table 1 & 2) in the
history of our natural gas ETFs (our largest ETF) the volatility of price has proven to
actually be lower when we are rolling, than when we are not rolling, which clearly
indicates that the roll process is not driving inter-month spreads consistently wider as has
been asserted.
iiiiiiiiiiiiiiiAVERAGEiiiAiBSOLUTEiiDAILYiPmCEiiiiiiiiiiiiiiiii
Feb/08 -
Apr/10
Jan/09 -
Apr/10
May/09 -
Apr/10
ALL
DAYS
(EX-
ALL
LAST
DAYS
DAY)
$0.015
$0.013
$0.015
$0.014
$0.017
$0.016
ROLL
DAYS
$0.012
$0.014
$0.015
Feb/08 -
Apr/10
Jan/09 -
Apr/10
May/09 -
Apr/10
ALL
DAYS
$0.024
$0.025
$0.028
ALL
DAYS
(EX-
LAST
DAY)
$0.021
$0.024
$0.026
ROLL
DAYS
$0.018
$0.021
$0.021
We believe the market transparency of the rolls is the key reason why there has been
limited opportunity for a consistent market arbitrage.
Finally, in terms of market footprint we believe that their market impact has been
overstated. Again taking our largest ETF - the Horizons BetaPro Natural Gas Bull+ETF,
we note that there is very little correlation between the price change in natural gas and the
ETF's trading activity itself. If the ETF was an influence as argued by some
commentators one would expect the regression line to move from lower left to upper
right which is clearly not the case.
4$0.800
ING Daily Change vs. NBFG
Volume
i
$0.600
$0.400
$0.200
$0.000
($O.2OO)
($O.4OO)
Given all of the empirical evidence demonstrated above, we believe it is clear that
PCETFs are not a source of market manipulation or excessive speculation in these
markets. Moreover they provide an ideal and necessary source of speculative liquidity.
We also believe these observed results of the limited, if any, impact of the PCETF in the
market place are reflective of the size of their exposure relative to the entire energy
complex which includes the physical and over-the-counter ("OTC") markets. We would
welcome further transparency of these markets via clearing or reporting which we believe
would further demonstrate the limited foot print PCETFs have relative to the entire
energy market place.
However, should Congress not provide the Commission with the authority to regulate all
markets within the energy complex, we share the view of many that the implementation
of such limits would be premature, lead to less transparency and possible international
regulatory arbitrage. Moreover should the Commission move forward with proposed
energy limits without the authority and oversight of the OTC markets (as well as their
inclusion for purposes of the open interest calculation) and absent a passive exemption
for PCETFs, we believe the consequences on investors and the market as a whole would
be as follows:
i)
Less transparency; as PCETFs would seek more exposure in OTC
markets.ii)
iii)
iv)
v)
Lower ultimate liquidity in underlying commodity futures; as
fractualization of large PCETFs in to multiple funds will not equate to
the same overall liquidity.
Potential regulatory arbitrage if other jurisdictions do not adopt the same
limits and methodology.
Higher costs to end investors as the scarcity value of limits will be
exploited by counterparties.
Degradation of the credit worthiness of OTC counterparties as larger
players will hold their own limit capacity for their own internal asset
management purposes.
As stated in previous testimony, we strongly believe that PCETFs are an essential and
ideal participant in these markets. Their aggregate contribution of liquidity, stability and
access for individual investors are all aligned with key tenants of the Commission.
Regards,
Adam Felesky
Chief Executive Officer
/mp
