CFTC Should Have Acted Sooner on Oil Fund Trades, Chilton Says

By Alexander Kwiatkowski and Chanyaporn Chanjaroen

March 13 (Bloomberg) -- The Commodity Futures Trading Commission should have acted sooner to investigate trades done to profit at the expense of the U.S. Oil Fund, the world’s largest exchange-traded fund, Commissioner Bart Chilton said.

The CFTC is investigating “multiple market participants,” including the U.S. Oil Fund, which is managed by Alameda, California-based U.S. Commodity Funds LLC. The review, part of the CFTC’s national oil market probe announced last year, is focused on an increase in the price difference between March and April futures contracts on the New York Mercantile Exchange on Feb. 6.

“I am not so sure that regulators shouldn’t have taken a more pre-emptive action earlier on,” Chilton, a Democrat serving as one of the regulator’s five commissioners, said in a March 10 phone interview. “I was disappointed that we hadn’t worked with Nymex earlier to try and provide greater caution.”

The U.S. Oil Fund holds West Texas Intermediate crude, the grade traded on Nymex since 1983. Last month it owned more than 20 percent of all March contracts, according to data from the exchange and the fund’s Web site.

To maintain its position, the fund sells, or “rolls” its front-month contracts starting from two weeks before they expire and buys second-month futures on specific days. Until this month, the fund rolled its position in one day. It now spreads the transactions over four days.

When the fund was rolling its March holdings on Feb. 6, the contract on Nymex fell as much as 6.2 percent, outpacing the April price, which fell as much as 4.8 percent. March futures closed that day down 2.4 percent, in contrast to the second- month contract, which rose 0.9 percent.

‘Raised Concerns’

“We are looking at all the trades surrounding the roll” on Feb. 6, Chilton said. “There was a spike we saw that day. It raised concerns for us as to what was going on in the market.”

John Hyland, chief investment officer of U.S. Commodity Funds, confirmed the CFTC has inquired about trades surrounding the oil fund’s roll as part of its investigation. The fund is “fully cooperating,” he said.

“The CFTC has not informed the fund or its manager that either were responsible for any wrongdoing,” he said in an e- mailed statement. “The fund’s trading activities are, by design, transparent, and the fund and its manager are unaware of their violation of law or regulations in connection with the roll or its other trading activities.”

The CFTC’s Chilton said he is “not suggesting there was a direct, causal relationship” between the actions of the fund and the movement in prices. “But it is certainly something that is anomalous and curious, and enough for us to want to take a good hard look at what was going on.”

Position Limits

“It raises the question to me whether or not we do need some hard position limits on commodities like oil,” he said. “I think we do.”

The House Agriculture Committee approved legislation last month that would place limits on positions a trader can hold in commodity markets as the government seeks more control over derivatives. Such limits on speculative positions exist now only in agricultural products.

The bill, which would also enhance the CFTC oversight of credit-default swaps, now goes for vetting by other panels. Chilton said he expects it to become law this year, he said.

“There is not a commodity that I can think of right now that we shouldn’t consider putting a hard and fast position limit on,” Chilton said. “I want to make sure regulators have flexibility to assure markets are functioning properly, and that means any hard and fast position limits that we set have to make sense to that market.”

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To contact the reporters on this story: Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.netChanyaporn Chanjaroen in London at cchanjaroen@bloomberg.net