An interesting read…..
This was forwarded to me by a client: Originally Posted by FT Alphaville on Sep 02 12:30.
Market regulators might not yet realise it, but it seems even the whiff of more regulation gets results these days. In the field of energy price speculation, nothing speaks as eloquently about the likelihood of impending new rules as the move by Deutsche Bank this week to scrap a product that lets investors bet on oil prices.
As the FT reported [ http://www.ft.com/cms/s/0/b32bd5d0-9744-11de-83c5-00144feabdc0.html?nclick_check=1 ] on Wednesday, Deutsche said it would redeem all its memorably-named PowerShares DB Crude Oil Double Long exchange-traded notes, which use leverage to double returns from price moves in crude oil. This makes it the first exchange-traded commodity product to go completely under –others so far have only suspended new share issues — as Wall Street braces for a potential regulatory crackdown on energy speculation.
As of Tuesday, there were $425m of such notes. Deutsche’s move will effectively see it buy-out shares from existing investors before selling the oil assets on September 9. The action, as the FT notes, “could set a precedent for similar actions by other investment managers”.
Oil impact
The big question, of course, is what footprint might the fund’s liquidation leave on underlying futures prices, and to what degree the wider market might take advantage of a semi-distressed seller coming its way next week.
Olivier Jakob of Petromatrix, forsees a number of scenarios. As he noted on Wednesday (our emphasis):
Two weeks ago, Deutsche Bank decided to stop issuing new shares on its WTI Double-Long ETN. Yesterday it announced that it is taking the decision to shut-down the ETN next Wednesday (Sep 9th).
The WTI positions held by the DXO are in July 2010, therefore they will have to sell about 11’000 July WTI contracts (a third of the July2010 Open Interest). While this will have a flat price impact next Wednesday we think it is too early to already pre-emptily sell in front of it. We would rather buy the WTI spreads to July 2010 as we would imagine that Deutsche will buy the spreads to bring the flat price length closer to the front to find enough liquidity for the liquidation of the Fund.
If Deutsche Bank does not buy the spreads in front of the liquidation then the risk will be for a strong strengthening of the spreads to July when the holdings of the Funds are sold next week. If holding a bullspread front to back does not fit in the book, the alternative would be to sell the July/Aug or July-to-back spread or sell the July WTI to Brent spread, buy the Jul 2010 cracks.
One way or another, WTI July 2010 should find some specific pressure next week, according to Jakob.
As for what all this means for commodity ETFs generally, Matt Hougan, director of exchange-traded fund analysis at IndexUniverse.com, told the FT: “It’s ominous… it’s the first shoe to drop, and won’t be the last.”
This entry was posted by FT Alphaville on Wednesday, September 2nd, 2009 at 12:30