Natural Gas, Oil ETFs Feel CFTC Heat

New proposals set forth by the Commodities Futures Trading Commission (CFTC) could curb both the United States Natural Gas ETF(UNG) and the United States Oil ETF(USO).

The long-awaited commodities proposals were released Thursday, and the ramifications of these rule changes could single out certain futures-based commodity ETFs while allowing others to operate normally.

In the "Proposed Position Limit Rule," CFTC officials cited both UNG and USO as examples to illustrate their ideas of position limits. Over the past year, the CFTC has been examining the ways in which futures-based commodity funds like UNG and USO impact the price of the commodities that they track.

UNG and USO are designed to offer investors exposure to the spot price of natural gas and oil, respectively. The funds accomplish this strategy by tracking a basket of near-month futures contracts traded on the New York Mercantile Exchange.

The new CFTC proposals cover four energy commodities: Henry Hub natural gas, light, sweet crude oil prices, New York Harbor No. 2 heating oil and New York Harbor gasoline blendstock. The regulations would impact the two exchanges on which these contracts are traded: the New York Mercantile Exchange and the IntercontinentalExchange (ICE).

CFTC Chairman Gary Gensler asked for tighter rules on energy trading and stricter definitions of traders who are exempt. The proposal sets forth a formula to calculate the number of futures contracts that any single entity can hold.

The new regulations seem aimed at ETFs like UNG and USO, whose tremendous size and open interest may have impacted the price of futures contracts in 2009. These single-commodity, front-month ETFs would be curbed by the CFTC's position limits.

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