Peregrine Financial's fraud-laden demise
-
the latest in a string of collapses of other brokerage firms
in recent months
-has brought into focus some of the risks investors may face
when they put their dollars in the hands of smaller, independent
futures brokers. Investors' confidence in markets, in would
appear, has taken another hit.
Sal Gilbertie, head of Teucrium Funds
-
an ETF provider offering futures-based commodities ETFs
-told IndexUniverse's Correspondent
Cinthia Murphy that futures-based ETFs might be the answer to
retail investors' futures-related concerns. Gilbertie, whose firm
sponsors the red-hot, $100 million Teucrium Corn Fund
(NYSEArca:CORN), argued that the transparency of the ETF
structure ensures that investors' interests are guarded
closely.
Murphy
:
Peregrine Financial's demise comes less than a year after
MF Global suffered the same fate. Refco preceded that. It's a trail
of scandal involving futures brokers that doesn't reflect well on
futures markets, or futures-based investments. What's your
view?
Gilbertie
:The futures markets themselves are not broken. They are
functioning as they should be. It would appear that the futures
industry is having some problems- particularly, perhaps, some of
the smaller futures commission merchants (FCMs). In my opinion some
entities are going to have a tough time ahead.
Murphy:What makes fund providers like Teucrium immune to
contagion from the negative publicity, or more importantly, from
the apparent risks in the system? Where does the risk lie for an
investor?
Gilbertie
:I can only speak for Teucrium and what we do. There's a lot of
transparency in the publicly traded ETP system, something you don't
always see at the FCM level, as many of them are not publicly
traded. As a NYSE listed security, any Teucrium ETP is subject to
the SEC reporting requirements of a public company, including
regular independent audits.
In the futures market, investors are protected by the clearing
mechanism that backs-up their margin. Investors that leave excess
margin in the hands of their FCM subject this excess capital to
risk. Non-public FCMs are not subject to the same level of SEC
required scrutiny and regulation that applies to publicly traded
ETPs. The Teucrium family of NYSE funds sweeps its excess capital
from our FCM on a daily basis.
Murphy:Should we assume, then, that in light of all that
has gone down with Refco and Peregrine, investors will be less
willing to leave excess capital sitting around? How would that
affect the system?
Gilbertie
:Professionals sweep their excess margin daily. Smaller investors
may find it expensive and difficult to regularly sweep excess
capital. As such, these investors may turn to professionally
managed futures accounts or to publicly listed commodity-based ETPs
that meet their investment objectives.
Murphy:I can't imagine these FCM scandals wouldn't erode
investor confidence in the system. Should we expect to see smaller
demand for futures or futures-based investments?
Gilbertie
:People who need the delivery mechanism of a futures market will
continue to trade futures no matter what. But the change in
behavior could come from the smaller investor who doesn't need that
delivery. Small investors might not be able to afford the minimum
account requirements of a larger FCM, one that has more rigorous
controls and reporting, but they might not want to take on the risk
of doing business with a smaller FCM anymore, especially not now.
Murphy:And they are going to turn to ETFs for their
commodities exposure? Are they safer there?
Gilbertie
:I think, logically, that's where they could turn for access to
futures. However, the design and benchmark of an ETP needs to match
the investment objective of the investor for the ETP to be truly
suitable as an investment or futures replacement. A publicly traded
futures-based ETF is subject to SEC reporting requirements to which
non-public FCMs are not.
Murphy:If part of the problem small speculators face
relates to their inability to pay minimum account requirements of a
top-tier broker as they look to mitigate risk, how does accessing
futures via ETFs compare in terms of cost?
Gilbertie
:Unless an investor is looking to partake in the futures-based
delivery mechanism, a properly chosen futures-based ETP may be the
way to go to get exposure and participate in one's chosen
commodity. Costs can vary from commissions to minimum account
balances, but the real key to determining what may be most cost
effective for an investor is the design and benchmark exposure of
the ETP.
Murphy:Is it fair to say, at the end of the day, that these
futures broker scandals are good for futures-based ETFs rather than
bad? Futures-based ETFs already represent about 9 percent, or more
than $106 billion, of total U.S. ETF assets and they have been
growing. These events should not sidetrack that growth trend?
Gilbertie
:In my opinion, more and more investors seem to be seeking direct
exposure to commodities. It is our mission at Teucrium to provide
publicly traded, transparent, understandable, and cost effective
commodity based ETPs as an alternative to futures investing.
Contact Cinthia Murphy at cmurphy@indexuniverse.com.
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