Will The USO ETF Be Forced to Liquidate?? | The US Oil Fund

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Will The US Oil Fund Be Shut Down By Their Broker?
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The situation with USO, the US Oil ETF just gets weirder and weirder. In todays video we will discuss whether USO will have to liquidate their holdings after running into issues with their brokers.

The situation with USO, the US Oil ETF just gets weirder and weirder. In todays video we will discuss whether USO will have to liquidate their holdings after running into issues with their brokers.

Some history on this topic.

Oil prices went negative for a few hours the day before the expiration of the may oil futures contract last April. I posted a video explaining that issue. Here is the link
The USO is an ETF that invests in oil futures. They had rolled their futures, so were uninvolved with the negative price issue, but…

People realized the USO could possibly go negative and there were no systems in place to deal with an ETF having a negative price, in addition the fund AUM ballooned and USO no longer had sufficient authorized shares allowing its price to drift from NAV. I made a video on that topic too.

The make up of the ETF was then changed, so it was then tracking longer dated contracts, minimizing the impact of the roll and reducing the risk that the ETF could have a negative NAV.

This is not great for hedgers, many of whom short the ETF to hedge a position and need it to accurately track its underlying.

In today’s news we are now learning that brokers (known as FCM’s in the world of futures trading) might now be unwilling to deal with the USO ETF for risk management reasons.
RBC Capital is the USO ETF’s only clearing broker and RBC has informed the ETF that they are longer prepared to clear USO’s portfolio. Specifically, in the benchmark front month but also, rather surprisingly, in any other expirations. RBC has indicated that this limitation on USO is a result of RBC’s own internal risk management requirements and directions it has received from other regulators in the United States, Canada and the United Kingdom. Ugh… Brokers.

USO just filed an update to the SEC today explaining:
RBC, currently USO’s only FCM, has expressly informed USO that, until further notice, USO may not hold positions in the Benchmark Futures Oil Futures Contract and that it may not purchase any other Oil Futures Contracts for USO’s portfolio through RBC whether or not such purchases would be within the limits permitted by the exchanges.

RBC and other market participants , including other FCMs, have taken risk mitigation measures that constrain USO’s ability to invest in the Benchmark Futures Contract and other Oil Futures Contracts.

USO has been engaging in efforts to enter into additional FCM agreements for the purpose of the purchase and sale of Benchmark Oil Futures Contracts as well as other Oil Futures Contracts.

To date, USO has not entered into an agreement with any FCM other than RBC and it cannot predict with any certainty when it will do so.

Some more History:
USO’s sister product, the United States Natural Gas Fund (UNG), experienced similar, but lesser stresses in the Summer of 2009.
First its AUM exploded, then it started experimenting with exotic instruments, next its registered shares got depleted, then its creations were suspended, then it continued to trade at a premium despite creations being suspended, then the SEC failed to grant it permission for the issuance of new shares. So far this is the same as the USO. For UNG, the SEC ended up changing its mind after regulators got involved with position limits, and finally, the fund reopened.

This situation is different, as the problem is with brokers, their willingness to take risk combined with their regulators possibly advising them on their risks in the background.

What this means for the oil market at this point is unclear. In the strictest literal interpretation of the filing, it could mean that unless it finds an alternative clearer right away, the USO will be forced to liquidate all its holdings before the next roll period. A looser interpretation might be that it is allowed to hold onto existing positions but not be allowed to add new ones. In a continuing contango market this would see it run down its overall position over time.

RBC is not just a broker, but also an Authorized Participant creating and breaking up ETP Units. Authorizedparticipants tend to become the counterparts of the derivatives the USO acquires. So the long positions the fund holds are offset by short positions taken on by the fund’s authorized participants.

It remains to be seen what will happen with the USO ETF and for us to discover what RBC Capital’s exposures to the USO are at this point.