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United States Natural Gas Message Board

  • lowriskincome lowriskincome Aug 23, 2009 7:46 PM Flag

    UNG slowly taking action

    UNG Takes Baby Steps Toward Reopening
    By IndexUniverse Staff
    On Friday August 21, 2009, 6:01 pm EDT
    Buzz up! 0 Print.Companies:United States Natural Gas
    Sponsors of the United States Natural Gas Fund (NYSEArca:UNG - News) took baby steps toward restoring the fund’s ability to issue new shares yesterday.

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    UNG 11.35 -0.16


    {"s" : "ung","k" : "c10,l10,p20,t10","o" : "","j" : ""} UNG is an exchange-traded fund that invests in the natural gas futures market. The fund stopped issuing new shares on Aug. 12, citing regulatory uncertainty in the commodities marketplace. The Commodity Futures Trading Commission is investigating the role of ETFs in the commodities market and is expected to announce strict position limits for such funds. Many expect the $4 billion UNG ETF to exceed the allowable limits, as it controls a significant portion of the front-month natural gas futures market.

    Since halting the issuance of new shares, UNG has traded at a sharp premium to its underlying net asset value, as demand for the fund has outstripped supply. As of 2:32 p.m. ET, Aug. 21, it was trading at a 16% premium to NAV.

    The sponsors of UNG have been looking for ways to maintain exposure to the natural gas market while reducing the number of futures contracts they hold. Yesterday, UNG secured a $500 million total return swap that could help.

    Total return swaps are privately negotiated agreements between two parties to exchange cash flows based on the performance of a target index. In this case, UNG entered into an agreement with a bank to exchange cash flows based on the performance of a front-month natural gas futures contract. Because swap contracts are privately negotiated and not linked to any underlying holding, they should not count toward any new CFTC limits.

    The $500 million agreement is the second natural gas swap contract negotiated by UNG, joining an earlier deal for $200 million. The deals allow UNG to reduce its positions in natural gas futures while still tracking the performance of the natural gas market.

    “We indicated in a recent filing that we are seeking to obtain natural gas-based total return swaps as part of our strategy to reduce our holdings in listed futures contracts,” said John Hyland, manager of UNG. “This is an attempt by UNG to deal with whatever new regulations may be introduced by the CFTC and to allow us to permit creations of new units. Our actions today, and the natural gas-based swap we entered into a few weeks ago, are not enough by themselves to yet allow us to either meet what we think such potential CFTC levels might be, or to permit us to prudently allow new creations. Still, we are making very good progress.”

    If UNG can cobble together enough swaps, it could potentially start issuing new shares of the fund again. If that happens, the premium on UNG should collapse back toward zero.

    -- This report was submitted by IndexUniverse.com's Matt Hougan.

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UNG
8.18+0.25(+3.15%)Jul 22 4:00 PMEDT