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GAO-09-285R 1 (2009-01-30)

handle is hein.gao/gaobaanlx0001 and id is 1 raw text is: im Am'-,GA 0 T E IAccountability * Integrity * Reliability 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.' 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, '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. 2Inflation 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

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