United States Government Accountability Office

Washington, DC 20548 

January 30, 2009 

The Honorable Collin Peterson 

Chairman 

Committee on Agriculture 

House of Representatives 

Subject: 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.1

 

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.2

 

Your letter asked us to examine various issues surrounding how commodity-index 

futures trading is addressed by various laws and regulations. Futures exchange 

regulations that can affect such trading include margins, or performance bonds,

 1

A futures contract is an agreement to purchase or sell a commodity for delivery in the future. A long

futures position is one in which the holder has bought a futures contract and is obligated to take

delivery of the commodity in the future. However, few contracts actually result in delivery, because

the vast majority of contracts are offset by making an equal but opposite trade before the delivery 

date. 

2

Inflation risk is the risk associated with the return from an investment not covering the loss in

purchasing power caused by inflation. 

GAO-09-285R Commodity Indexes 
which are deposits that futures traders make with their broker to ensure that they 

can meet the financial obligations associated with their futures positions. 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 

• whether the federal law governing futures trading prohibits investors from 

using the futures markets to gain an exposure to commodity indexes, 

• whether the federal law governing pension plans prohibits them from

investing in commodities through the futures markets, 

• how margins have affected the ability of investors to obtain exposures to 

commodity indexes, and 

• how position limits have affected the ability of investors to obtain exposures 

to commodity indexes. 

In addition, we agreed with your office to review recent studies analyzing the effect 

of commodity index futures trading on commodity prices. 

On December 16, 2008, we briefed your office on the results of this work. This 

letter summarizes the briefing. The enclosures contain the full briefing, including 

our scope and methodology, and a bibliography of the studies we reviewed. In 

response to questions asked during the briefing, we have added information to the 

enclosed briefing slides to provide additional details on the percentage of total 

outstanding futures positions accounted for by index traders, the scope and nature 

of contract position limit exemptions, and the scope of the federal law covering 

pension funds. 

We conducted this performance audit from September 2008 through January 2009 

in accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and conclusions 

based on our audit objectives. We believe that the evidence obtained provides a 

reasonable basis for our findings and conclusions based on our audit objectives. 

Background

Since around mid-2000s, institutional and retail investment in commodities has 

grown significantly. However, determining the actual amount of such investment is 

difficult, in part because no comprehensive data are available on all such 

investments. Based on recently collected data, CFTC estimated that the aggregate 

net amount of all commodity index trading (combined over-the-counter (OTC) and 

exchange-traded derivatives) was $200 billion as of June 30, 2008, of which $161 

Page 2 GAO-09-285R Commodity Indexes 
billion was tied to commodities traded on U.S. futures markets and the remainder 

was tied to commodities traded on foreign futures markets. 

To gain exposure to a commodity index, investors can take a direct approach by 

taking long positions in the individual futures contracts making up the index. 

Investors also can take long positions in futures contracts linked to a commodity 

index, such as futures on the S&P GCSI or DJ-AIGCI. Some investors may find the 

direct approach to be difficult, however, because of the need to roll over their 

futures positions periodically.3

 As an alternative, investors can gain exposure to a 

commodity index by using a swap dealer (e.g., large bank) to enter into an over-thecounter (OTC) swap linked to an index.4

 In addition, investors can gain exposure 

to a commodity index by investing in other vehicles that track a commodity index, 

such as a commodity pool, mutual fund, or exchange-traded fund or note. 

To regulate commodity futures and option markets in the United States, Congress 

created CFTC as an independent agency in 1974. Under the Commodity Exchange 

Act (CEA), the primary mission of CFTC includes fostering open, competitive, and 

financially sound futures markets and protecting market users and the public from 

fraud, manipulation, and abusive practices related to the sale of commodity futures 

and options.5

 This mission is achieved through a regulatory scheme that is based 

on federal oversight of industry self-regulation. Prompted partly by the growth of 

the OTC derivatives markets, the Commodity Futures Modernization Act of 2000 

amended CEA to provide, among other things, for regulated markets and markets 

largely exempt from regulation. The regulated markets include futures exchanges 

that have self-regulatory surveillance and monitoring responsibilities as selfregulatory organizations and also are subject to oversight by CFTC. 

Summary

Although the use of the futures markets by institutional investors to gain long-term 

exposure to commodities represents a new type of speculation, the CEA—the law 

governing futures trading—does not prohibit this activity. Futures markets 

historically have been used by commercial firms to manage price risk and 

speculators to profit from price movements. In a regulatory response to some 

funds that sought approval to conduct investing in commodity indexes, CFTC staff 

noted that the use of the futures markets by funds to provide their investors with a 

commodity-index exposure represented a legitimate and potentially useful 

investment strategy. 

 3

Unlike a passive portfolio of stocks, a passive futures portfolio requires regular transactions

because futures contracts expire. For example, in the case of the S&P GSCI, futures contracts near 

to expiration are rolled forward (i.e., exchanged for futures contracts with the next applicable

expiration date) at the beginning of their expiration months. 

4

For example, under a typical commodity index swap, the investor agrees to pay the Treasury bill 

rate, plus a management fee, to a swap dealer, and the dealer agrees to pay the total return of a 

specified commodity index, such as the S&P GSCI or DJ-AIGCI, to the investor.

5

See section 3 of the Commodity Exchange Act, 7 U.S.C. § 5 (2004).

Page 3 GAO-09-285R Commodity Indexes 
Under the federal law governing private pension plans—the Employee Retirement 

Income Security Act (ERISA)—such plans may invest in commodity indexes using 

futures contracts or other derivatives but must determine that such investments 

are, among other things, prudent. Although ERISA does not prohibit pension plans 

from investing in futures, it sets certain minimum standards for pension plans 

sponsored by private employers.6

 A 1996 opinion issued by the Department of 

Labor recognized that derivatives might be a useful tool for managing a variety of 

risks and broadening investment alternatives in a plan’s portfolio. But the opinion 

also noted that investments in certain derivatives might require a higher degree of 

sophistication and understanding on the part of plan fiduciaries than other 

investments. 

Commodity index investors generally have not been directly subject to futures 

margins (or performance bonds), because they primarily have used OTC swaps, not 

futures contracts, to obtain their exposure. Instead, the swap dealers that provide 

commodity index exposures to investors through swaps are subject to futures 

margins if they use exchange-traded futures to hedge their risk exposure from 

these swaps. Moreover, such dealers may have entered into other OTC 

transactions that offset their index exposures and, as a result, may not use futures 

to hedge their index exposures in full. Futures exchanges, not CFTC, generally set 

margins, which are based on the price volatility of the underlying commodity of a 

futures contract and typically are small relative to a contract’s market value. Both 

the buyer and seller of a futures contract post margin, which serves to ensure that 

they can meet their contractual obligations; moreover, futures margin is not an 

extension of credit. If margin requirements on index-related futures were 

increased, two of the largest swap dealers told us that the cost of providing 

investors with commodity index exposures using OTC swaps would increase and 

might lead investors to use alternatives to OTC swaps, such as commodity index 

funds. They also said that once institutional investors have decided to allocate a 

portion of their portfolios to commodities, they will choose the most efficient way 

to do so. According to the market participants we spoke with, imposing higher 

margins on index-related futures positions also could raise challenges. For 

example, swap dealers use futures to hedge their net exposure—the residual risk 

remaining after a dealer internally nets OTC swaps with offsetting exposures—and 

may not be able to untangle and identify the futures positions that are attributable 

specifically to commodity index swaps. 

Similarly, index investors largely have not been restricted by contract position 

limits that are used to prevent excessive speculation in the futures markets. Such 

investors primarily have obtained their index exposures through OTC swaps that 

are not subject to futures speculative position limits. Further, swap dealers have 

 6

Among other things, ERISA (1) requires plans to provide information to participants and the federal 

government about the plan, (2) sets minimum standards regarding who may participate and when

they may participate, (3) sets responsibility standards and requires accountability for people who 

run or provide investment advice to plans, (4) guarantees payment of certain benefits if a defined 

benefit plan is terminated without sufficient assets to pay accumulated benefits, and (5) gives the 

Secretary of Labor the authority to bring legal actions to enforce title I of ERISA. 

Page 4 GAO-09-285R Commodity Indexes 
received exemptions from CFTC that allow them to hold index-related futures 

positions in excess of speculative position limits.7

 Position limits prohibit traders 

from holding a futures position above a specified limit, unless the traders have 

received an exemption. With an exemption, a swap dealer can enable an investor 

to use an OTC swap to take a position that is greater than the level the investor 

would be permitted to take if the position were held solely in the futures market. 

The swap dealer can, then, take a futures position in excess of a position limit to 

hedge its exposure from the OTC swap. In a September 2008 report, CFTC noted 

that the mix of commercial and noncommercial activity by swap dealers called into 

question whether the swap dealers should receive hedge exemptions from position 

limits for some of their activity. In that regard, the CFTC Commission instructed 

the agency’s staff to develop a proposed rulemaking that would address whether 

the swap dealers should receive a more limited exemption. CFTC staff told us that 

the Commission has not set a time frame for issuing the proposal. 

Although not included in the enclosed briefing slides, we also are providing 

information on the results of our review of studies analyzing the impact that index 

traders and other futures speculators have had on commodity prices. Through our 

literature search, we identified eight empirical studies and three qualitative studies. 

(See the bibliography for a list of the studies we reviewed.) Unlike the empirical 

studies, the qualitative studies do not use experimental or statistical controls to 

evaluate the causal relationship between speculative trading and commodity prices 

and, thus, do not provide a systematic way to assess the empirical veracity of the 

causal relationship. Importantly, the eight empirical studies we reviewed generally 

found limited statistical evidence of a causal relationship between speculation in 

the futures markets and changes in commodity prices—regardless of whether the 

studies focused on index traders, specifically, or speculators, generally. Four of the 

studies used CFTC’s publicly available Commitments of Traders (COT) data in their 

analysis, and their findings should not be viewed as definitive because of 

limitations in that data. For example, the public COT data are issued weekly, and 

analyses using such data could miss the effect of daily or intraday changes in 

futures positions on prices. Also, these data generally aggregate positions held by 

different groups of traders and, thus, do not allow the effect of individual trader 

group positions on prices to be assessed. Two of the studies we reviewed involved 

CFTC staff and used non-public COT data that included positions reported more 

frequently and separated positions held by different trader groups.8

 However, 

similar to the studies that used the public COT data, the studies using the nonpublic data also found limited evidence that speculation was affecting commodity 

prices. In addition, all of the empirical studies we reviewed generally employed 

statistical techniques that were designed to detect a very weak or even spurious 

 7

CFTC speculative position limits apply only to certain “designated” agricultural commodities listed

in CFTC Regulation 150.2. CFTC regulations list certain types of positions that may be exempted 

from (and thus may exceed) these speculative position limits. The exemptions include bona fide 

hedging transactions or positions. 

8

These studies, while not addressing all the data limitations, provide for a better evaluation of the 

causal relationship between positions and commodity prices. 

Page 5 GAO-09-285R Commodity Indexes 
causal relationship between futures speculators and commodity prices. As result, 

the fact that the studies generally did not find statistical evidence of such a 

relationship appears to suggest that such trading is not significantly affecting 

commodity prices at the weekly or daily frequency. 

Agency Comments 

We provided a draft of this letter and the attached briefing to CFTC for comment. 

CFTC provided technical comments, which we incorporated as appropriate. 

- - - - - 

As we agreed with your office, unless you publicly announce the contents of this 

report earlier, we plan no further distribution of it until 30 days from the date of 

this letter. At that time, we will provide copies of this report to interested 

congressional committees. We also are sending a copy of this report to the Acting 

Chairman of CFTC. In addition, this report will be available at no charge on the 

GAO Web site at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me at (202) 

512- 8678 or williamso@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. GAO staff 

who made major contributions to this report are listed in enclosure II. 

Sincerely yours, 

Orice M. Williams 

Director, Financial Markets and Community Investment

Page 6 GAO-09-285R Commodity Indexes 
Enclosure I 

Briefing to the Staff of the House Committee on Agriculture 

1

Briefing to Staff of the 

House Committee on Agriculture

Issues Involving the Use of the Futures 

Markets to Invest in Commodity Indexes 

December 16, 2008

(with subsequent additions after that date)

Page 7 GAO-09-285R Commodity Indexes 
Enclosure I 

2

Briefing Outline

• Objectives, scope, and methodology

• Background

• Summary

• Investments in Commodity Indexes under The Commodity 

Exchange Act (CEA)

• Investment in Commodity Indexes under The Employee 

Retirement Income Security Act (ERISA)

• Margins and index investors

• Position limits and index investors

• Appendix I: Position limits and accountability levels 

• Appendix 2: Net long positions held by index traders

Page 8 GAO-09-285R Commodity Indexes 
Enclosure I 

3

Objectives, Scope, and 

Methodology

• Our objectives were to examine

• whether the CEA prohibits investors from using the futures markets 

to gain an exposure to commodity indexes,

• whether ERISA prohibits pension plans from investing in

commodities through the futures markets,

• how margins have affected the ability of investors to obtain

exposures to commodity indexes, and 

• how position limits have affected the ability of investors to obtain 

exposures to commodity indexes.

• To accomplish our objectives, we 

• reviewed sections of the CEA and CFTC regulations, including 

proposed rules and comment letters; exchange rules on position 

limits and margins (performance bonds); and congressional

testimonies, studies, and other material by CFTC, academics, GAO,

and others about the futures markets;

Page 9 GAO-09-285R Commodity Indexes 
Enclosure I 

4

Objectives, Scope, and

Methodology

• Reviewed sections of ERISA; an opinion of the Department of 

Labor’s (DOL) Employee Benefits Security Administration, which is

responsible for enforcing certain ERISA provisions, on the use of 

derivatives by pension plans; and congressional testimonies, GAO

reports, and other material on investment in commodity indexes by 

pension funds;

• interviewed CFTC staff, as well as officials representing two swap

dealers, an asset management firm, three futures exchanges, and 

an industry trade association;

• analyzed CFTC’s Commitments of Traders (COT) and supplemental

reports to develop summary information about the futures positions, 

or contracts, held by index traders,

• assessed the reliability of the CFTC data and determined the data 

were sufficient for our purposes; and

• reviewed and analyzed data on publicly traded index funds, 

including their public filings, and the investment policies and 

holdings of three pension plans.

Page 10 GAO-09-285R Commodity Indexes 
Enclosure I 

4

Objectives, Scope, and

Methodology

• Reviewed sections of ERISA; an opinion of the Department of 

Labor’s (DOL) Employee Benefits Security Administration, which is

responsible for enforcing certain ERISA provisions, on the use of 

derivatives by pension plans; and congressional testimonies, GAO

reports, and other material on investment in commodity indexes by 

pension funds;

• interviewed CFTC staff, as well as officials representing two swap

dealers, an asset management firm, three futures exchanges, and 

an industry trade association;

• analyzed CFTC’s Commitments of Traders (COT) and supplemental

reports to develop summary information about the futures positions, 

or contracts, held by index traders,

• assessed the reliability of the CFTC data and determined the data 

were sufficient for our purposes; and

• reviewed and analyzed data on publicly traded index funds, 

including their public filings, and the investment policies and 

holdings of three pension plans.

5

Background

• Investing in commodities by institutions has become more popular since 

the mid-2000s but has been common since the 1970s. 

• Pension plans, endowments, foundations, and other institutional

investors generally have invested in commodities to diversify their 

portfolios and hedge inflation risk. 

• Investors have gained commodity exposure through commodity indexes, which measure the returns on a basket of various

commodity futures contracts.

• Two common commodity indexes are the S&P Goldman Sachs

Commodity Index (S&P GSCI) and Dow Jones-AIG Commodity Index (DJ-AIGCI).

• Investors can invest in commodity indexes by

• taking long positions in individual futures contracts that make up an

index or futures contracts linked to an index,

• entering into an over-the-counter (OTC) swap linked to an index, or

• investing in a vehicle that tracks an index, such as a commodity

pool, mutual fund, or exchange-traded fund or note.

Page 11 GAO-09-285R Commodity Indexes 
Enclosure I 

6

Background

• CFTC recently estimated that the net notional value of the portion of 

commodity index trading tied to the U.S. futures markets was $161 

billion as of June 30, 2008.

• The U.S. futures markets are regulated under the CEA by CFTC.

• The CEA’s primary objectives include preventing manipulation, 

abusive trading practices, and fraud.

• The CEA authorizes CFTC to oversee futures exchanges (called 

designated contract markets) and other entities. Our discussion 

focuses solely on futures contracts traded on designated contract

markets.

Page 12 GAO-09-285R Commodity Indexes 
Enclosure I 

7

Summary

• Using futures markets to make long-term investments in commodity indexes 

represents a new type of speculation but is not prohibited under the CEA.

• Under ERISA, pension plans may invest in commodity indexes using futures

contracts or other derivatives but must determine that such investments are,

among other things, prudent.

• Index investors generally have not been directly subject to margins, because 

they have used primarily OTC swaps, not futures contracts, to obtain their 

exposure. Two swap dealers told us that increasing margins on index-related

futures positions would increase the cost of swaps but might not cause investors 

to significantly reduce their index exposure.

• Index investors generally have not been restricted by position limits, because (1)

they have obtained their index exposures primarily through OTC swaps not 

subject to position limits, and (2) swap dealers have received exemptions from

CFTC that allow them to hold index-related futures positions in excess of the 

position limits. CFTC is currently deciding whether it should limit the exemptions.

Page 13 GAO-09-285R Commodity Indexes 
Enclosure I 

8

The CEA Does Not Prohibit the Use of

the Futures Markets for Index Investing

• Futures markets historically have been used by commercial firms to 

manage price risk and speculators to profit from price movements.

• Futures markets serve a public interest by providing price discovery and risk-shifting. 

• The proper and efficient functioning of the futures markets requires participation by speculators and hedgers. 

• CFTC has adopted regulations designed to prevent excessive 

speculation and operates various programs to monitor the markets

for manipulation and protect the economic functions of the markets.

• However, the use of the futures markets by pension funds and other 

institutional investors to gain long-term exposure to commodity indexes

as an asset class represents a new type of speculation.

• CFTC staff told us that the use of the futures markets for index

trading does not violate any provisions of the CEA or CFTC 

regulations.

• In two regulatory letters issued in 2006, CFTC staff stated that the 

use of the futures markets by funds to provide their investors with a 

commodity-index exposure represented a legitimate and potentially 

useful investment strategy.

Page 14 GAO-09-285R Commodity Indexes 
Enclosure I 

9

ERISA Does Not Prohibit Pension Plans 

from Investing in the Futures Markets

• Investment decisions of private sector pension plans must comply with

ERISA. 

• Under ERISA, a fiduciary must observe a prudent man standard of care 

and, among other things,

• act solely in the interest of the plan participants and beneficiaries

and in accordance with plan documents; 

• invest and administer the plan with the care, skill, and diligence of a 

prudent man with knowledge of such matters; and

• diversify plan investments to minimize the risk of large losses.

• Under ERISA, the prudence of any investment is considered in the

context of the total plan portfolio. Thus, a relatively risky investment may 

be considered prudent if it is part of a broader strategy to balance the 

risk and expected return to the portfolio. 

• Public sector pension plans must follow requirements established for

them under applicable state law. While states generally have adopted

standards similar to the ERISA prudent man standard, specific

provisions of law and regulation vary from state to state. 

Page 15 GAO-09-285R Commodity Indexes 
Enclosure I 

10

ERISA Does Not Prohibit Pension Plans

from Investing in the Futures Markets

• In 1996, a DOL official issued an opinion on the use of derivatives by

pension plans under ERISA. 

• Under the DOL opinion, derivatives were defined to include futures

contracts and OTC swaps. The opinion also covered plan

investments in pooled funds that used derivatives.

• According to the DOL opinion, derivative investments are subject to 

the fiduciary responsibility rules in the same manner as are any

other plan investments. Thus, plan fiduciaries must determine that a 

derivatives investment is, among other things, prudent and made 

solely in the interest of the plan’s participants and beneficiaries. 

• The DOL opinion recognized that derivatives may be a useful tool for

managing a variety of risks and for broadening investment alternatives in

a plan’s portfolio but noted that investments in certain derivatives may

require a higher degree of sophistication and understanding on the part

of plan fiduciaries than other investments.

• Under ERISA, a plan participant or beneficiary may bring civil action in

court to get, among other things, appropriate relief from a breach of

fiduciary duty.

Page 16 GAO-09-285R Commodity Indexes 
Enclosure I 

11

Margins Generally Have Not Limited 

Investors’ Ability to Gain Index Exposure

• CEA generally does not grant CFTC authority to establish margins (also called

performance bonds) for futures contracts.

• Futures exchanges set margins for their futures contracts.

• To enter into a futures contract, both traders (buyer and seller) must post a 

margin deposit with their broker, which is intended to serve as a 

performance bond and ensure that they can meet the financial obligations 

associated with their positions. Unlike securities margins, futures margins 

are not extensions of credit.

• Futures margins typically are based on the price volatility of the underlying 

commodity of a futures contract and vary across contracts. 

• Each futures exchange has a clearing house that is the counterparty to

every futures trade.

• The margining system and clearing house help to protect and maintain the 

financial integrity of futures markets.

• CFTC data and other evidence indicate that index investors have gained their

index exposure primarily through OTC swaps and index funds and, as a result, have not been directly subject to margins.

Page 17 GAO-09-285R Commodity Indexes 
Enclosure I 

12

Margins Generally Have Not Limited 

Investors’ Ability to Gain Index Exposure

• Some index investors obtain their

exposure through index funds, such

as commodity pools, exchange- traded funds, or mutual funds. In turn, such funds may use futures, OTC

swaps, or other products to obtain 

their exposure.

• Our analysis of two periods of

CFTC’s COT data shows that swap 

dealers generally hold the majority of 

the index-related futures positions, indicating that index investors 

primarily use OTC swaps to obtain

their exposure. Dealers then use 

futures to hedge their exposure.

• For example, in 10 of the 12 futures 

covered by CFTC’s September 23, 

2008 data, swap dealers accounted

for 80 percent or more of the total net 

long futures positions, or contracts, held by index traders.

Source: GAO analysis of CFTC data.

22

18

46

47

37

28

45

31

27

24%

Percent of

total long

positions

held by

index 

traders

CBOT – corn 82 18 261,364 56,563

ICE US – 82 18 17,965 3,845

cocoa

CME – live 83 17 109,285 23,137

cattle

CBOT – 83 17 137,699 27,985

wheat

ICE US – 84 16 257,587 49,844

sugar

CBOT – 84 16 113,065 21,543

soybeans

CME – lean 85 15 83,465 14,209

hogs

ICE US – 90 10 46,913 4,998

coffee

ICE US – 92 8 82,328 7,030

cotton

CBOT – 97% 3% 66,374 2,127

soybean oil

Dealers Funds Dealers Funds

Number of net

long indexrelated positions,

or contracts,

held by

Percent of total

net long indexrelated positions, 

or contracts, Exchange held by and contract

Page 18 GAO-09-285R Commodity Indexes 
Enclosure I 

13

Margins Generally Have Not Limited 

Investors’ Ability to Gain Index Exposure

• Increasing margins would increase the costs of trading futures for swap 

dealers and other index traders. But it might not cause institutional

investors to significantly reduce their index exposures and lead to a 

reduction in the number of index-related futures positions.

• Officials at two swap dealers told us that higher margins would 

increase their hedging cost and thus the cost of swaps. They said 

investors might use alternatives to swaps, depending on the costimpact of higher margins. If institutional investors decided to allocate 

a portion of their portfolios to commodities, they would find the most

efficient way to do so. 

• Officials at an asset management firm told us they created funds

that use futures contracts to track indexes for institutional investors

and that the funds held collateral equal to the notional value of their 

futures positions. Thus, an increase in margins would not have a

significant effect on the cost for the funds.

• An exchange official said that index funds generally were not 

leveraged and were in the best position to meet a margin increase. 

A margin increase would impose no cost on such funds, because 

they hold fully collateralized accounts on behalf of their clients.

Page 19 GAO-09-285R Commodity Indexes 
Enclosure I 

14

Margins Generally Have Not Limited 

Investors’ Ability to Gain Index Exposure

• Imposing higher margins on index-related futures positions could raise 

challenges.

• Swap dealers use futures contracts to hedge their net exposure and 

may not be able to untangle and identify the futures positions that 

are attributable specifically to commodity index swaps.

• Officials from a swap dealer told us that imposing separate margins 

on index-related futures positions could prevent dealers from 

internally netting transactions, potentially reducing market liquidity

and increasing costs for other market participants.

• Officials from another dealer told us that using margins by

exchanges as a tool to moderate participation in the futures markets,

instead of solely to protect the markets’ financial integrity, could be

problematic. If market liquidity was low, an exchange could have an 

incentive to lower margins to increase market liquidity at the 

expense of protecting the market’s financial integrity.

Page 20 GAO-09-285R Commodity Indexes 
Enclosure I 

15

Position Limits Generally Have Not Limited 

Investors’ Ability to Gain Index Exposure

• Limiting the size of positions that traders may hold in the futures markets

is one method regulators use to prevent excessive speculation that 

could cause unwarranted changes in futures prices.

• CFTC is authorized to fix limits on trading that may be done or 

positions that may be held on any exchange as necessary to 

diminish, eliminate, or prevent excessive speculation.

• Position limits prohibit a trader from holding a futures position above 

a specified level, unless the trader has received an exemption. 

Exceeding a position limit without an exemption is a violation.

• CFTC has set federal speculative position limits on nine agricultural

commodities. 

• Exchanges have adopted position limits or position accountability

rules for other commodities subject to CFTC oversight.

• A position accountability rule sets a position level that triggers

additional attention by an exchange. When a trader’s position 

reaches or exceeds the accountability level, the trader is required to provide information to the exchange at its request. 

Page 21 GAO-09-285R Commodity Indexes 
Enclosure I 

16

Position Limits Generally Have Not Limited 

Investors’ Ability to Gain Index Exposure

• Holding a position that exceeds a position accountability level is 

not a violation. But the exchange may direct a trader to limit or 

reduce a position, and the trader’s refusal to do so would be a 

violation. 

• Exchanges may use accountability levels in lieu of position limits

for contracts on financial instruments, intangible commodities, or 

certain tangible commodities that have large open interest, high

daily trading volumes, and liquid cash markets.

• CFTC and exchanges may grant exemptions to parties who can show 

that their futures positions are bona fide hedges.

• Before 1974, the hedging definition applied only to agricultural

commodities. When CFTC was created and the definition of “commodity” under the CEA was expanded, Congress was 

concerned that the definition would fail to address developing risk- shifting needs. It repealed the definition and gave CFTC the 

authority to define bona fide hedging.

• Under CFTC regulations, no transactions or positions will be 

classified as bona fide hedging unless their purpose is to offset price 

risks incidental to commercial cash or spot operations and they are 

established and liquidated in an orderly manner.

Page 22 GAO-09-285R Commodity Indexes 
Enclosure I 

17

Position Limits Generally Have Not Limited 

Investors’ Ability to Gain Index Exposure

• Position limits generally have not 

limited the level of commodity 

exposure that index investors 

may add to their portfolios.

• The S&P GSCI and DJAIGCI collectively include 26

futures contracts, which are

traded on six U.S. and two 

U.K. futures exchanges.

• None of the contracts traded 

on the U.K. exchanges are 

subject to position limits or

accountability levels.

• All of the contracts traded on

the U.S. exchanges are 

subject to position limits or

accountability levels that 

apply to a single month or all

months combined. (See app. I for additional information.)

• Examples of position limits or

accountability levels include the 

following.

NYMEX – heating oil 5,000 7,000

KCBOT – wheat 5,000 6,500

ICE US – cotton 3,500 5,000

COMEX – copper 5,000 5,000

CME – feeder cattle 1,500 none

CBOT – corn 13,500 22,000

Single month All months Exchange and 

contract

Position limit or accountability level

Source: Exchange rules.

Page 23 GAO-09-285R Commodity Indexes 
Enclosure I 

18

Position Limits Generally Have Not Limited 

Investors’ Ability to Gain Index Exposure

• The level of exposure to the S&P GSCI or DJ-AIGCI that an index

investor could take on using futures contracts would be limited by the applicable position limits if the investor could not qualify for a 

hedge exemption.

• However, index investors can use OTC swaps, which are not 

subject to position limits, to take on a commodity exposure greater than the level permitted for futures contracts.

• CFTC staff recently reported that 18 index traders appeared to have 

an aggregate position in futures contracts and OTC derivatives that 

would have been above a position limit or exchange accountability level if all the positions were on-exchange. 

• Swap dealers have qualified for hedge exemptions from position limits, helping them to provide index exposures to investors through swaps.

• In 1991, CFTC granted a hedge exemption to a swap dealer that 

planned to provide a pension fund with an index exposure through

an OTC swap and then use futures contracts to hedge its exposure. Because the futures positions the dealer would have to establish

would have been greater than the position limits, it needed a hedge 

exemption.

Page 24 GAO-09-285R Commodity Indexes 
Enclosure I 

1

The exemptions were granted by CFTC staff pursant to delegated authority under CFTC regulations and bind the Commission and its staff 

with respect to the specific fact situation and persons addressed by the letter.

19

Position Limits Generally Have Not Limited 

Investors’ Ability to Gain Index Exposure

• CFTC has granted hedge exemptions to 13 swap dealers for corn, 

cotton, soybeans, wheat, soybean oil, and soybean meal.1 In its

September 2008 report, CFTC staff identified 16 dealers as having 

significant commodity index swap business and 13 dealers that held

sizeable futures positions but were not known to be engaged in

significant commodity index swaps.

• The exemptions apply to a specific firm and set the maximum

level of futures positions that the firm may hold with respect to 

one or more specified commodities.

• Firms receiving a hedge exemption are not required to make 

additional filings, unless requested by CFTC or they exceed their 

specified levels.

• CFTC has subjected the exemptions to conditions to protect the 

marketplace from potential ill effects, including that

• the futures positions must offset specific price risk; 

• the futures positions passively track a commodity index;

• the notional value of the futures positions cannot exceed the 

dollar value of the underlying risk; and 

• the futures positions cannot be carried into the spot month.

Page 25 GAO-09-285R Commodity Indexes 
Enclosure I 

20

Position Limits Generally Have Not Limited 

Investors’ Ability to Gain Index Exposure

• To help two index funds use the futures markets to provide investors with an 

index exposure, CFTC staff provided the funds with relief from certain position

limits under no-action letters issued in 2006. 

• Unlike the swap dealers, the index funds sought to use futures contracts to 

track a commodity index for their investors, not to hedge risk from a swap. As a result, CFTC staff did not believe that the index funds qualified for a 

hedge exemption. 

• Because the index fund futures positions represented a legitimate and

potentially useful investment strategy, CFTC staff granted the funds no- action relief from position limits, subject to conditions similar to the ones

imposed in the swap dealer exemptions.

• Like CFTC, the exchanges have provided hedge exemptions or other relief from

exchange-set position limits.

• The Chicago Board of Trade has issued index-hedge exemptions to 15 

dealers and 5 risk-management exemptions to 2 index funds.

• The Chicago Mercantile Exchange has issued index-hedge or riskmanagement exemptions to 13 entities.

• The Commodity Exchange has issued 6 exemptions to 4 dealers.

Page 26 GAO-09-285R Commodity Indexes 
Enclosure I 

21

Position Limits Generally Have Not Limited 

Investors’ Ability to Gain Index Exposure

• Our analysis of two periods of

CFTC’s COT data indicates that 

swap dealers, on average, held

positions in several agricultural

futures markets in excess of position 

limits or accountability levels but that

index funds, on average, did not. (See app. II for additional

information.)

• Because CFTC has granted 

hedge exemptions to swap dealers to manage price risk, the 

dealers are allowed to hold 

positions in excess of position 

limits.

• We analyzed CFTC data 

covering January 26, 2006, and 

September 23, 2008.

• The average sizes of net long

positions, or contracts, held by index

traders on September 23, 2008, were 

as follows.

KCBOT – wheat 1,133 1,092 5,000 6,500

ICE US – sugar 4,984 18,399 10,000 15,000

ICE US – cotton 703 5,881 3,500 5,000

ICE US – cocoa 481 1,283 6,000 6,000

ICE US – coffee 417 3,351 5,000 5,000

CME – live cattle 2,103 7,286 5,400 None

CME – lean hogs 1,421 5,564 4,100 None

CME – feeder cattle 585 138 1,500 None

CBOT – wheat 2,544 9,836 5,000 6,500

CBOT – soybean oil 452 4,741 5,000 6,500

CBOT – soybeans 1,958 8,076 6,500 10,000

CBOT – corn 4,714 18,669 13,500 22,000

All

months

Single

month

Dealers 

(contracts)

Funds

(contracts)

Position limit or

accountability level

Average size of net

long index-related 

position held by

Exchange and 

contract

Source: GAO analysis of CFTC data and exchange rules

Page 27 GAO-09-285R Commodity Indexes 
Enclosure I 

22

Position Limits Generally Have Not Limited 

Investors’ Ability to Gain Index Exposure

• Without their hedge exemptions, swap dealers would have been 

prevented from holding positions in excess of the position limits, as

some currently do.

• According to officials from a swap dealer, position limits can restrict

the extent to which the firm can meet the needs of its clients and 

grow its business by limiting the level of futures positions it can hold

at a particular time. 

• Officials from another dealer told us position limits can make it more 

challenging for the firm to hedge its exposures but have not 

prevented it from growing its business. They said that the firm would 

use OTC derivatives or other options to hedge whenever it could not 

use futures because of position limits.

Page 28 GAO-09-285R Commodity Indexes 
Enclosure I 

23

Position Limits Generally Have Not Limited 

Investors’ Ability to Gain Index Exposure

• CFTC recently has issued several proposals to change hedge 

exemptions for index traders.

• In November 2007, CFTC proposed rules to create a new 

exemption from position limits for index funds and investors using futures to diversify risk. In June 2008, CFTC withdrew the proposal, in part to determine whether further consensus among the affected 

parties should be sought. 

• In a September 2008 report, CFTC noted that the mix of activity by

swap dealers called into question whether they should receive 

hedge exemptions for some of their activity. CFTC recommended, as a matter of regulatory consistency and fairness, that its staff 

consider replacing the hedge exemption with a limited risk- management exemption.

• CFTC staff told us that the agency plans to issue an advanced 

notice of proposed rulemaking on the hedge exemptions but has not 

set a time frame for doing so.

• Officials from a swap dealer told us that if dealers were required to 

hold fewer futures positions, the flow of swap business would be

redistributed but the related futures positions would not be reduced. 

Page 29 GAO-09-285R Commodity Indexes 
Enclosure I 

24

Appendix I: Position Limits and Accountability

Levels for U.S. Futures Contracts Included in the 

S&P GSCI and DJ-AIGCI

New York Mercantile Exchange WTI crude oil None None 10,000 20,000

New York Mercantile Exchange RBOB oil None None 5,000 7,000

New York Mercantile Exchange Natural gas None None 6,000 12,000

New York Mercantile Exchange Heating oil None None 5,000 7,000

Kansas City Board of Trade Wheat 5,000 6,500 None None

ICE-US Sugar None None 10,000 15,000

ICE-US Cotton 3,500 5,000 None None

ICE-US Coffee None None 5,000 5,000

ICE-US Cocoa None None 6,000 6,000

Commodity Exchange Silver None None 6,000 6,000

Commodity Exchange Gold None None 6,000 6,000

Commodity Exchange Copper None None 5,000 5,000

Chicago Mercantile Exchange Live cattle 5,400 None None None

Chicago Mercantile Exchange Lean hogs 4,100 None None None

Chicago Mercantile Exchange Feeder cattle 1,500 None None None

Chicago Board of Trade Wheat 5,000 6,500 None None

Chicago Board of Trade Soybeans 6,500 10,000 None None

Chicago Board of Trade Soybean oil 5,000 6,500 None None

Chicago Board of Trade Corn 13,500 22,000 None None

Single Month All Months Single Month All Months

Position Limits Accountability Levels

Exchange Commodity

Source: Exchange rules.

Note: All of the above U.S. futures exchanges have position limits for the spot month, but these limits are not included in the table because index

traders generally do not hold such positions.

Page 30 GAO-09-285R Commodity Indexes 
Enclosure I 

25

Appendix II: Net Long Positions Held by

Index Traders

Kansas City Board of Trade Wheat 7,930 15,293 7 14 1,133 1,092 5,000 6,500

ICE US Sugar 49,844 257,587 10 14 4,984 18,399 10,000 15,000

ICE US Cotton 7,030 82,328 10 14 703 5,881 3,500 5,000

ICE US Cocoa 3,845 17,965 8 14 481 1,283 6,000 6,000

ICE US Coffee 4,998 46,913 12 14 417 3,351 5,000 5,000

Chicago Mercantile Exchange Live cattle 23,137 109,285 11 15 2,103 7,286 5,400 None

Chicago Mercantile Exchange Lean hogs 14,209 83,465 10 15 1,421 5,564 4,100 None

Chicago Mercantile Exchange Feeder cattle 4,097 1,791 7 13 585 138 1,500 None

Chicago Board of Trade Wheat 27,985 137,699 11 14 2,544 9,836 5,000 6,500

Chicago Board of Trade Soybean oil 1,807 66,374 4 14 452 4,741 5,000 6,500

Chicago Board of Trade Soybeans 21,543 113,065 11 14 1,958 8,076 6,500 10,000

Chicago Board of Trade Corn 56,563 261,364 12 14 4,714 18,669 13,500 22,000

All Months

Single

Funds Dealers Funds Dealers Month

Position limits or

Accountability Level

Average size of the 

net long

position held 

by

Number of

Dealers

Number of

funds

Net long index-related 

futures contracts 

held by

Exchange Commodity

Net Long Positions Held by Index Traders on September 23, 2008

Source: GAO analysis of CFTC data and exchange rules.

Page 31 GAO-09-285R Commodity Indexes 
Enclosure I 

26

Appendix II: Net Long Positions Held by

Index Traders

Kansas City Board of Trade Wheat 3,955 26,404 3 10 1,318 2,640 5,000 6,500

ICE US Sugar 20,068 133,588 7 13 2,867 10,276 10,000 15,000

ICE US Cotton 7,079 74,446 9 13 787 5,727 3,500 5,000

ICE US Cocoa 4,708 8,020 6 12 785 668 6,000 6,000

ICE US Coffee 4,178 32,097 10 13 418 2,469 5,000 5,000

Chicago Mercantile Exchange Lean hogs 10,309 72,036 10 13 1,031 5,541 4,100 None

Chicago Mercantile Exchange Live cattle 14,981 79,112 12 13 1,248 6,086 5,400 None

Chicago Mercantile Exchange Feeder cattle 2,922 4,457 6 10 487 446 1,500 None

Chicago Board of Trade Wheat 19,706 179,093 13 13 1,516 13,776 5,000 6,500

Chicago Board of Trade Soybean oil 4,045 63,260 4 13 1,011 4,866 5,000 6,500

Chicago Board of Trade Soybeans 11,893 115,151 11 13 1,081 8,858 6,500 10,000

Chicago Board of Trade Corn 32,847 387,631 13 13 2,527 29,818 13,500 22,000

All Months

Single

Funds Dealers Funds Dealers Month

Position limits or

Accountability Level

Average size of the net

long position held by

Number of

Dealers

Number of

funds

Net long index-related 

futures contracts held

by

Exchange Commodity

Net Long Positions Held by Index Traders on January 26, 2006

Source: GAO analysis of CFTC data and exchange rules.

Page 32 GAO-09-285R Commodity Indexes 
Enclosure II 

GAO Contact and Staff Acknowledgments 

GAO Contact

Orice Williams (202) 512-8678 or williamso@gao.gov 

Staff Acknowledgments

In addition to the individual named above, Cody Goebel (Assistant Director), Kevin 

Averyt, Lawrance Evans, David Lehrer, Carl Ramirez, Roger Thomas, Paul 

Thompson, and Richard Tsuhara made key contributions to this report. 

Page 33 GAO-09-285R Commodity Indexes 
Selected Bibliography

Our review of the recent literature focused on empirical studies analyzing the 

causal relationship between speculative futures trader positions and commodity 

prices in the United States. Because we were interested primarily in commodity 

index trader positions, we focused on studies completed after 2003, given that 

commodity index investment began to increase around mid-2000s and data on 

commodity index futures positions only became publicly available in early 2007. We 

also list qualitative studies, which did not evaluate causal claims in a systematic 

way (i.e., through the use of experimental or statistical controls). 

Empirical Studies

Ahn, Daniel. Lehman Brothers Commodities Special Report: Index Inflows and 

Commodity Price Behavior (July 31, 2008). 

Antoshin, Sergei, Elie Canetti, and Ken Miyajima. “Annex 1.2. Financial Investment 

in Commodities Markets” in Global Financial Stability Report: Financial Stress 

and Deleveraging, Macrofinancial Implications and Policy, International 

Monetary Fund (Washington, D.C.: October 2008). 

Haigh, Michael S., Jana Hranaiova, and James A. Overdahl, Office of the Chief 

Economist, U.S. Commodity Futures Trading Commission. “Price Dynamics, Price 

Discovery and Large Futures Trader Interactions in the Energy Complex.” Staff 

Research Report (Washington, D.C.: April 2005). 

Interagency Task Force on Commodity Markets. Interim Report on Crude Oil

(Washington, D.C: July 2008). 

Plato, Gerald and Linwood Hoffman. “Measuring the Influence of Commodity Fund 

Trading on Soybean Price Discovery.” Proceedings of the NCCC-134 Conference 

on Applied Commodity Price Analysis, Forecasting, and Market Risk Management 

(Chicago, Ill.: 2007). 

Sanders, Dwight R., Scott H. Irwin, and Robert P. Merrin. “The Adequacy of 

Speculation in Agricultural Futures Markets: Too Much of a Good Thing?” 

Marketing and Outlook Research Report 2008-02, Department of Agricultural and 

Consumer Economics, University of Illinois at Urbana-Champaign (June 2008). 

Sanders, Dwight R., Scott H. Irwin, and Robert P. Merrin. “Smart Money? The 

Forecasting Ability of CFTC Large Traders.” Proceedings of the NCCC-134 

Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk 

Management (Chicago, Ill.: 2007).

Sommer, Martin. “The Boom in Nonfuel Commodity Prices: Can It Last?” in World 

Economic Outlook, International Monetary Fund (Washington, D.C.: September 

2006). 

Page 34 GAO-09-285R Commodity Indexes 
Qualitative Studies

Eckaus, R. S. “The Oil Price Is a Speculative Bubble.” Working paper 08-007, Center 

for Energy and Environmental Policy Research, Massachusetts Institute of 

Technology (June 2008). 

Masters, Michael W. and Adam K. White. “The Accidental Hunt Brothers: How 

Institutional Investors Are Driving Up Food and Energy Prices.” The Accidental 

Hunt Brothers Blog, Special Report (July 31, 2008). 

U.S. Commodity Futures Trading Commission. Staff Report on Commodity Swap 

Dealers & Index Traders with Commission Recommendations (Washington, D.C.: 

September 2008). 

(250417)

Page 35 GAO-09-285R Commodity Indexes 
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