Here's the transcript of Hyland's presentation with charts and data.
[Editor's note: The following is the full transcript of John Hyland's prepared presentation before the CFTC on Wednesday. Due to its significance and data presented, we're running the full body of his presentation below, unedited. IndexUniverse.com takes no editorial stance in favor or against anything presented in the below document, and publishes it as part of our Research section as it pertains to helping investors stay informed about commodities and related exchange-traded products.]
Before the Commodity Futures Trading Commission
Concerning Energy Position Limits and Hedge Exemptions
August 5, 2009
Good morning Chairman Gensler and Commissioners.
I appreciate the opportunity to speak with you today on behalf of United States Commodity Funds LLC (“USCF”), a commodity pool operator registered with the Commodity Futures Trading Commission (“CFTC”), that manages several exchange traded commodity pools, including the United States Oil Fund, LP (“USO”) and the United States Natural Gas Fund, LP (“UNG”) (together with USCF’s other commodity pools, the “Funds”).
In recent months a great deal of discussion has taken place with respect to the role and effect of various participants in the energy markets. Many of the reports on this topic have cited the activities of large, unleveraged and passive index and single commodity tracking funds, such as USO and UNG, in an attempt to explain recent volatility in energy markets. We believe many published reports concerning USO and UNG have mischaracterized the impact of passive index funds on energy markets.
As price takers—merely tracking the price movement of their respective commodities—the Funds’ investment strategies preclude them from acting in a way that could lead to the manipulation of prices or cornering of the futures market. Empirical data shows that the Funds’ activities in the futures market have resulted in little or no price disruption even as the overall size of the Funds’ positions have increased dramatically. Instead of disrupting the futures market, the Funds provide a steadying force by adding significant liquidity to the market. In 2008, nearly 325,000 individual investors gained access to the futures market through investments in the Funds. These investors were able to enter the futures market without the traditional settlement risk attendant to futures contracts acquired on a leveraged basis, due to the unleveraged nature of the Funds’ investments. For 2009, the total number of shareholders using this method is likely in excess of 600,000 investors.
Rather than acting as a source of risk, the Funds provide investors with a transparent, highly regulated, and unleveraged vehicle through which to hedge their pre-existing price risk in commodities. Whether this risk arises from direct economic interests in commodities, or from broader inflationary or other investment risks, the Funds provide an important hedging alternative to individual investors, without increasing market risk or otherwise adversely affecting the futures market. Although the futures positions held by the Funds may appear to be large in relation to each Fund as the legal holder of such positions, these investments represent the aggregation of demand from tens of thousands of individual investors seeking to reduce their financial risk through hedging in the commodity futures market.
We welcome this chance to both clarify the role that these funds play in energy markets and to discuss the appropriate regulation of these widely-used investment vehicles.
I. Overview of USCF Funds
As a registered commodity pool operator, USCF is general partner of and manages the United States Oil Fund, LP, the United States Natural Gas Fund, LP, the United States 12 Month Oil Fund, LP, the United States Gasoline Fund, LP, the United States Heating Oil Fund, LP, and the United States Short Oil Fund, LP. Each of the Funds is an exchange-traded commodity pool that invests in futures contracts for energy commodities with the investment objective of having the net asset value (“NAV”) of the units of each Fund reflect changes in percentage terms of the price of a given commodity futures contract. The specific commodity focus and investment strategy of each Fund varies; however, the structure and method of investing in all of USCF’s Funds is identical. Units of each of the Funds are listed on the NYSE Arca, Inc. (“NYSE Arca”).
The Funds are Highly Regulated. The structure of the Funds places them in a multi-tiered regulatory structure. In addition to regulation of USCF as a commodity pool operator by the CFTC and National Futures Association, the sale of Fund securities on the NYSE Arca subjects each Fund to comprehensive federal securities regulation by the U.S. Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”) and NYSE Arca. These regulatory organizations review the offering documents of each Fund and provide ongoing regulatory oversight of the Funds’ operations.