RBC Capital Markets is limiting its trading relationship with a wildly popular U.S.-based oil exchange traded fund, after unprecedented price volatility forced the bank to reassess its exposure to oil futures contracts.
United States Oil Fund LP, the world’s largest oil exchange traded fund, disclosed on Thursday that RBC is no longer buying new oil futures contracts on behalf of the ETF. Because RBC is the sole futures commission merchant for USO, the move could significantly affect the fund’s ability to track the price of oil, the fund said in a regulatory filing.
RBC has bought and sold futures contracts on behalf of USO since 2013, acting as a counterparty in derivative arrangements that give the fund exposure to the oil market. Extreme oil price swings over the past two months, however, have made it difficult for counterparties such as RBC to hedge their exposure to oil price moves.
“RBC has indicated that such limitation on USO is a result of RBC’s own internal risk management requirements and directions it has received from other regulators in the United States, Canada and the United Kingdom," USO said in a regulatory filing.
RBC declined to comment, and California-based United States Commodity Funds LLC, which runs USO, did not respond to a request for comment.
RBC will still allow USO to roll its existing contracts forward each month. But the bank has “expressly informed" USO that it will not help the fund add to its position by buying additional oil futures contracts. USO is now looking for other futures commission merchants to conduct trades on its behalf, according to the filing.
Oil ETFs have attracted controversy in recent months, as they’ve grown rapidly in size because of retail investor interest, creating concerns they are distorting the oil futures market. At one point in April, USO owned 30 per cent of all open West Texas Intermediate futures contracts for June delivery.
Funds buy and sell massive numbers of contracts every month as they roll their exposure forward, creating buying and selling pressure at the front-end of the futures market. In April, U.S. regulators limited the number of near-month futures contracts USO could own in an attempt to reduce its impact on an already volatile market.
The rapid growth of these funds, combined with whipsawing oil prices, has created a challenging environment for the financial institutions that provide ETFs with exposure to futures contracts and trade on their behalf. In Canada, two leveraged oil funds run by Horizons ETFs Management Inc., had to stop creating new units for several weeks after the fund’s derivative counterparties refused to give them additional exposure to near-month futures contracts.
This prompted Horizons to issue a press release warning that their derivative counterparties could terminate their contracts at any time, which would force the funds to liquidate. The two funds, BetaPro Crude Oil Daily Bull ETF and Betapro Crude Oil Daily Bear ETF, have since resumed selling new units.
When asked about the situation at USO on Thursday, Horizons chief executive Steve Hawkins said that he is not aware of any directions from regulators that would limit the ability of futures commission merchants to trade oil futures on behalf of ETFs.
He added that USO should be able to find another futures commission merchant willing to pick up where RBC has left off.