Issues Involving the Use of the Futures Markets to Invest in Commodity Indexes

Until mid-2008, prices for a broad range of physical commodities, from crude oil to crops such as wheat, had increased dramatically for several years--raising concerns and leading to a debate over the possible causes. Some market participants and observers have attributed the price increases to fundamental economic factors related to supply and demand. Others have suggested that the price increases resulted from speculation in the futures contracts by hedge funds and investors in commodity indexes. Like stock indexes, commodity indexes track the composite price of a basket of long futures positions in physical commodities. The indexes' investment strategy is passive, remaining the same regardless of whether prices are falling, rising, or flat. Two commonly referenced commodity indexes are the Standard & Poor's Goldman Sachs Commodity Index (S&P GSCI) and Dow Jones-American International Group Commodity Index (DJ-AIGCI), which are based on a broad range of physical commodities, including energy products, agricultural products, and metals. Since around the mid-2000s, pension plans, endowments, and other institutional investors increasingly have used investments in commodity indexes to obtain exposure to commodity prices as an asset class, typically to diversify their portfolios or hedge inflation risk. To prevent excessive speculation that could cause unwarranted changes in futures prices, the Commodity Futures Trading Commission (CFTC) and futures exchanges place limits on the size of futures positions--the number of contracts--that a trader may hold. In agreement with your office, this report addresses (1) whether the federal law governing futures trading prohibits investors from using the futures markets to gain an exposure to commodity indexes, (2) whether the federal law governing pension plans prohibits them from investing in commodities through the futures markets, (3) how margins have affected the ability of investors to obtain exposures to commodity indexes, and (4)how position limits have affected the ability of investors to obtain exposures to commodity indexes.