CFTC Regulations and Silver ETF’s

By Melissa Pistilli-Exclusive to Silver Investing News

Silver prices are benefitting from the recent optimism that the global economy has finally started on the path to recovery and that industrial demand will soon rise. Spot prices hit a high of $14.45 an ounce in early trading Tuesday.

So far this year, silver has risen 26 per cent compared to gold’s 6 per cent increase.

ETF Securities Offers Precious Metals ETF’s to Japan

On Monday, ETF Securities Ltd. launched Japan‘s first precious metals exchange-traded funds platform on the Tokyo Stock Exchange. Japanese investors will now have access to ETF’s linked to physical gold, silver, platinum and palladium, as well as a precious metals basket ETF that combines all four, through ordinary brokerage accounts. Shares in funds are backed by physical metal held in a London Bullion Market Association approved vault.

The London-based company’s goal is to manage $1 billion in assets in Japan by the close of 2010 and to launch more ETF products in Japan. “ETF Securities will be aggressive about launching more ETF products in Japan by the end of 2010,” said Hector McNeil, ETF Securities’ global head of sales and marketing.

In 2003, ETF Securities put forth the world’s fist listing of exchange traded commodities, issuing securities backed by physical stocks of commodities, an option that gave investors exposure to price movements without having to buy and store the actual commodities.

The company also has funds listed in Australia and the United States. Lat last month, it launched the ETF Securities Silver Trust (SIVR) on the New York Stock Exchange. The SIVR has already hit the $100 million assets mark in only its first month of trading.

“Initial inflows indicate to management that SIVR has captured the mood of American investors who are looking to gain exposure to Silver through a cost effective, transparent, physically backed product,” said William Rhind, head of sales & marketing for ETFS Marketing, LLC.

Now, ETF Securities has designs on expanding throughout Asia and is considering fund listings on bourses in Singapore and Hong Kong within the next 18 months. “Certainly, we would want to become the leading provider of ETFs in the Asian region. That’s our ultimate aim and objective,” said McNeil. The company is also planning to move into China, South Korea, Indonesia and Taiwan as well.

Silver ETF’s Immune to Latest CFTC Regulation?

In an effort to curb excessive speculation in commodity markets, the Commodity Futures Trading Commission (CFTC) is turning an eye on ETF’s in the U.S. The fear among some funds is that these regulations may scare investors away from their products.

In reaction to the CFTC’s move toward tougher regulation, some fund managers have announced significant changes to their exchange-trade products.

The Financial Times reported Monday that Barclays Global Investors has temporarily halted the creation of shares in the $1.5 billion iShares S&P GSCI Commodity-Indexed Trust, due to “uncertainty” surrounding new commodity rules. Apparently, Barclay’s iPath Dow-Jones-UBS Natural Gas ETN, Deutsche Bank’s PowerShares DB Crude Oil Double Long ETN and the United States Natural Gas Fund have also halted new share issues.

“Every day the drumbeat gets a little louder,” said Matt Hougan, director of ETF analysis at IndexUniverse.com. “I would bet they will survive in some form, but not in the way we’re used to.”

In the middle of 2007, CFTC regulators began to investigate the possibility of manipulation in the commodities futures market amongst issues in the natural gas markets. Their attention was then turned to oil in 2008 as the price surged over $140 a barrel.

This year, an investigation into rising wheat prices in 2008 drew the attention of Congress to commodity ETF’s. The fear is that commodity ETF’s lead to excessive buying that artificially inflates prices.

Now, the CFTC is looking at a number of possible measures to reign in excessive speculation. These measures may include position limits in U.S. futures markets. Its goal is to protect end users of the commodities from inflated prices.

“I don’t want to limit liquidity, but above all else, I want to ensure that prices for consumers are fair and that there is no manipulation — intentional or otherwise,” said CFTC Commissioner Bart Chilton.

However, the Wall Street Journal reports that restricting the size of ETF’s will lead to higher costs for investors due to the legal and operational costs that will have to be absorbed by a fewer number of shares.

While much of the CFTC’s focus has been on tougher regulations for energy-related commodities funds, there are rumours that metals markets may be next in line.

But precious metals fund investors having nothing to fear because the funds own the physical metals in vaults, “not the futures contracts regulated by the CFTC,” said Dow Jones News Wire columnist Ian Salisbury. “Therefore, barring some broader change in rules, they may be immune from trading limits others face.”

ETF Securities’ Hector McNeil remains confident that the CFTC’s stricter regulations on the U.S. futures markets will hardly affect the company.

“Obviously CFTC is particularly focused on futures and not on physical assets … So we feel quite confident that our products are robust from all aspects,” McNeil said. “I think they (U.S. regulators) realize that if they push too hard investors will look elsewhere. I think the last thing they want to do is to drive investment offshore.”