Indiana Grain Company, LLC

Posted: 02/01/10

By: tomgrisafi

An increasingly hefty stronghold of British funds that invest in commodities (including everything from coffee to pigs) are coming under the scrutiny of regulators who fear they could be the next financial bubble to burst.

Industry insiders have warned the Bank of England that some funds may not have enough collateral to return investors' money and some of the smaller operators might be committing a form of fraud.

More than 300 Exchange Traded Funds (ETFs) and Exchange Traded Commodities (ETCs) are listed on the London Stock Exchange, with their shares owned by hundreds of retail and institutional investors.

"We can be certain ETF frauds are developing now," said Jonathan Compton, managing director at London-based Bedlam Asset Management. "Even worse, the structure of the market makes the fraud easier. Often, for tax and stamp duty reasons, as well as cost and finding the right legal framework, many ETFs are listed in one country, the management resides in a second and the commodity or securities are held in a third."

Bedlam said it found an ETF where the manager, trustee, custodian and listing were in the Indian sub-continent, the Gulf, Africa and Europe, and where "the verifiers are junior people from small firms with a limited track record," Compton said. "We started to twitch."

The Bank of England and the Financial Services Authority declined to comment to Bloomberg (which first presented this story), although the central bank has been briefed about the funds, which track a product through a financial index, or invest directly in a commodity.

Source: Bloomberg