Sovereign Funds Become Big Speculators
Tuesday, August 12, 2008
Sovereign wealth funds, the massive investment pools run by foreign governments, are now among the biggest speculators in the trading of oil and other vital goods like corn and cotton in the United States, according to interviews with brokers who handle their investments at leading Wall Street banks, veteran traders and congressional investigators.
Some lawmakers say the unregulated activity of sovereign wealth funds and other speculators such as hedge funds has contributed to the dramatic swing in oil prices in recent months.
The agency regulating the market said it had not picked up on this activity by sovereign wealth funds. In a June letter, the Commodity Futures Trading Commission told lawmakers that its monitoring showed that these funds were not a significant factor in commodity trading.
But the CFTC is not detecting the growing influence of foreign funds because they invest through Wall Street brokers known as "swap dealers" who often operate on unregulated markets, sources familiar with the transactions said.
Several Democrats said the Republican-led CFTC won't use its authority to clamp down on such unregulated activity because it doesn't want to hurt the influential Wall Street firms it favors.
"It took prodding from Congress to persuade the CFTC to finally request information from swap dealers about the participation of sovereign wealth funds in the commodity markets," said Rep. John D. Dingell (D-Mich.), chairman of the Committee on Energy and Commerce. "The regulatory body in charge of policing our futures markets has been remarkably incurious about the role sovereign wealth funds play in commodity markets."
CFTC officials say their data show that fundamental factors of supply and demand, not financial actors, are the best explanation for the run-up in oil prices and their precipitous fall.
The officials have ordered swap dealers to open their books and reveal to the agency more information about the unregulated activities of sovereign wealth funds and other financial actors, CFTC spokeswoman Ianthe Zabel said. The findings will be published in a report in mid-September, she said.
Like most speculators, sovereign wealth funds have moved into U.S. commodity exchanges for profit, not to accumulate goods. In general, they make these investments through index funds, a kind of mutual fund composed of commodity futures contracts, which bet on the price the goods will fetch at a future date.
The index allows investors to enjoy the returns of a commodity investment without actually buying futures contracts on an exchange. For this reason, the extent of their activities may be known only to the swap dealers at investment banks such as Goldman Sachs, Lehman Brothers and Morgan Stanley, which handle such transactions.
The foreign funds involved in commodity trading are not those from oil-producing nations from the Middle East, according to a large swap dealer. Instead they are mainly from countries, such as those in Asia, that do not already make money from producing oil.
While it is difficult to quantify how large foreign funds have become, they now represent 12 percent or more of the overall commodity business for some of the largest investment banks, said an industry veteran who spoke on condition of anonymity because he had proprietary data about those firms.