Despite a greenlight to grow from the SEC, concerns about other regulatory actions prompted US Commodity Funds to keep its $4.2 billion US Natural Gas ETF (UNG) at its current size. Although the SEC on August 12 gave the necessary approval for the creation of 1 billion additional units of the fund, US Commodity Funds' management remains concerned that the Commodities and Futures Trading Commission will soon impose new limits on trading and positions in the energy markets that will affect the fund.

In an SEC filing on August 12, US Commodity Funds said the SEC has approved UNG's request to create 1 billion new units. UNG had put the request in June 5th, but stated on August 12 that it would not resume issuing units and offerings creation baskets to its APs at this time due to current and anticipated regulations from the CFTC, New York Mercantile Exchange and Intercontinental Exchange.

Regulations of concern include current accountability limits the ICE on fixed price contracts, and anticipated limits on all energy commodity futures contracts. Thus, UNG fears that it would be required to liquidate or reduce its current level of holdings in investments.

"While it cannot be predicted at this time what regulator restrictions and limitations will eventually be imposed or hoe they will impact UNG, if any of the aforementioned items are implemented, UNG's ability to meet its investment objective may be negatively impacted and investors could be adversely affected," according to the filing.

The filing also indicated that UNG has and will continue to reply on OTC swap contracts as well as futures contracts other than the benchmark futures. UNG acknowledges that these investments may have the effect of increasing transaction-related expenses and tracking error.

John Hyland, CIO of the US Commodity Funds, told the Wall Street Journal that it made little sense to pursue new creations in the face of near certain mandates from the CFTC.

"We just don't feel it's prudent to accept [new unit] creations and then attempt to use the money to purchase more natural-gas products when we have a strong belief that the CFTC is going to mandate limits that would either cap us or force us to reduce our holdings," Hyland said.

Hyland also testified before the CFTC at an August 5 hearing. In his prepared statement, Hyland addressed several specific concerns regarding the natural gas ETF.

"We think it is reasonable to assume that, as a group, there is no evidence that crude oil ETFs or natural gas ETFs can possibly be the cause of the increases in crude oil prices in 2008 and 2009, or the increase in natural gas prices in 2008, or the drops in such prices," Hyland noted. 

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