Deutsche commodities fund loses CFTC exemption – MarketWatch

By Laura Mandaro & John Spence, MarketWatch

SAN FRANCISCO (MarketWatch) — The Commodity Futures Trading Commission said Wednesday that a Deutsche Bank commodities fund and a second, unnamed commodities investor could no longer avoid federal limits on speculating in grain futures.

The decision comes as the futures regulator, under pressure by lawmakers to reduce speculative trading in energy and other commodities, considers making it tougher for financial institutions, index funds and exchange-traded funds to build big positions in the futures markets.

The CFTC said it was withdrawing a May 2006 no-action letter issued to DB Commodity Services, a unit of Germany’s Deutsche Bank (DB)(DE:DBK ), that allowed its DB Commodity Index Tracking Master Fund (DBC) to exceed speculative limits on corn and wheat futures.

The DB Commodity Index fund and sister fund Powershares DB Agriculture Fund (DBA) each told the Securities and Exchange Commission Tuesday it would be "revising its relevant procedures accordingly" in light of the position limits, which go into effect Oct. 31.

Deutsche Bank spokeswoman Renee Calabro declined to comment further.

The CFTC said it was also withdrawing a similar no-action letter granted in September 2006 to a commodity-pool operator employing a proprietary investment strategy in corn, soybean and wheat futures.

"I believe that position limits should be consistently applied and vigorously enforced," CFTC Chairman Gary Gensler said in a statement. "Position limits promote market integrity by guarding against concentrated positions."

But the CFTC added that Wednesday’s decision was "very specific and limited and does not affect any other no-action or regulatory positions taken by the CFTC."

The threat of a regulatory clampdown on futures trading by index funds and exchange-traded funds has already prompted the U.S. Natural Gas Fund (UNG) , an ETF, to halt issuing more shares to the public. Read more on ETFs.

‘Big setback’

The DB Commodity Index fund, an exchange-traded fund, aims to provide investors with broad exposure to commodities, according to Deutsche Bank’s Web site. Its shares, which trade under the ticker ‘DBC,’ rose 0.7% as commodities rallied Wednesday.

"The CFTC announcement today is absolutely a problem for DBC in its current structure," said Bradley Kay, ETF analyst a Morningstar.

Morningstar’s Kay said the $3.5 billion DB Commodity Index Fund has been successful but may run into trouble because it is less diversified than other broad commodities ETFs. Its concentration in corn and wheat means "it may have to branch out and diversify," he said.

"Position limits would be a big setback for many commodity ETFs, especially large funds that are concentrated in certain commodities," Kay said.

The commodities trading operations of some large investment banks is also under threat.

Some lawmakers have targeted Goldman Sachs Group, Inc. (GS) and other investment banks that have received exemptions from speculative position limits. These swap dealers say they should be able to buy futures as a hedge against their own commodities exposure after they enter an arrangement with an index fund or other client that gives the client exposure to a broad range of commodities. Read more on Goldman and hedging.

Critics say dealers shouldn’t be able to use an exemption whose main purpose was to allow more flexible trading by commercial consumers and producers of commodities.

A call to the CFTC was not returned.

Laura Mandaro is a reporter for MarketWatch in San Francisco. John Spence is a reporter for MarketWatch in Boston.

Deutsche commodities fund loses CFTC exemption – MarketWatch

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