Deutsche Bank is expected to temporarily stop issuing new structured notes, sources say

By Emma Trincal

New York, March 15 - Deutsche Bank AG's temporary suspension of issuance of 26 of its exchange-traded notes is likely to lead the issuer to halt the issuance of regular structured notes as well during the temporary halt period, sources said.

The reason for that would be the factors that led to the temporary suspension in the first place - Deutsche Bank's postponement of its annual report, they said.

The bank in a news release Thursday said that it will temporarily suspend further issuances of 26 ETNs, effective after the close of trading on March 29, due to the postponement of the publication of its 2012 annual report and 20-F filing. The bank expects to resume issuances of these ETNs following the publication of the report and 20-F filing in mid-April, according to the release.

Deutsche Bank typically files its report around the second half of March.

Late filing halt

Temporary suspensions of new issuances are not uncommon in the ETN space. But this case is different, said a source, because the late filing will impact the issuance of other securities.

"If the form 20-F is late, you can't use the registration statement," he said.

"They can't create new shares during that period. And it would not just be the ETNs; it would be new shares of any security off the shelf if there is a late filing.

"Any time an issuer is late in the filing of their 10-K, 10-Q or 20-F, any time they pass their required deadline, the shelf registration statement has to be suspended."

Deutsche Bank filed its last annual report in December 2011. According to form 20-F rules, the last year of audited financial statements may not be older than 15 months. That makes the filing deadline March 31, this source said, adding that it's why the suspension will not begin before March 29.

"Past that date, their shelf registration documents would be stale and they could not go out and issue," he said.

The halt affects any type of securities except those that do not come directly from the bank's shelf, a sellsider said.

"If the shelf is not up to date, they can't issue anything new," this sellsider said.

"It would be true for structured notes as well.

"But it shouldn't affect their ETF business because they're not part of Deutsche Bank's shelf. These are issued by separate and distinct entities."

A Deutsche Bank spokesperson did not comment on the potential suspension of issuances relative to non-ETN debt securities.

"They could use the 12 B-25 extension form, but I didn't see an extension filed," the source said.

An SEC spokesperson said in an email that issuers that are not "current or timely in their filings" will not be eligible to file new registration statements.

Market value impact

The temporary suspension can have an impact on prices if it creates "imbalance of supply and demand," according to the press release.

"It's not going to be good," the source said.

The press release stated that changes in liquidity and supply/demand may cause the ETNs to trade at a premium or discount in relation to their intraday indicative value. But this source said that it's more likely that the ETNs would trade at a premium as supply could weaken in relation to demand.

"People constantly redeem their shares, and they will continue to be able to do that. If you are in an existing ETN and you want to redeem your shares, the issuer will buy it back," he said.

"But if you want to buy new shares of an ETN, you won't be able to do it because the issuer cannot create new shares," he said.

"If it breaks liquidity, the suspension could eventually push up share prices if there is more demand and less supply."

The sellsider predicted price moves but said that the impact may be limited due to the short period of suspension.

"It will upset investors, that's for sure," he said.

"The best thing that can happen: you currently own the shares and you enjoy the rising share price.

"The worst thing: you end up buying it at a premium without knowing about the suspension and two weeks later, when the issuance resumes and the price drops all of a sudden, you get hit."

Yet, this sellsider said that he did not expect those extreme scenarios to occur.

"I don't think it will go to a premium," he said.

"If people know it's a temporary suspension, they're not going to buy at a premium knowing that the price will fall two weeks later.

"It's not going to be another TVIX. TVIX was a special circumstance. They stopped issuing it one day and nobody knew for how long. There were a lot of active traders in that fund. It wasn't good."

In February 2012, Credit Suisse AG, Nassau Branch suspended the creation of new shares of its VelocityShares Daily 2X VIX Short-Term ETN, listed on the NYSE Arca. As a result, the premium to its indicative value surged. When the bank announced later that it would resume issuance, the price collapsed, causing uproar among investors and negative headlines.

"I don't think the Deutsche Bank ETNs will be a repeat of that. Other ETNs have suspended issuance of new shares, like JPMorgan Alerian, and you didn't get into this huge premium," he said.

In June 2012, JPMorgan Chase & Co. announced a cap on the issuances of its Alerian MLP index ETNs due to size limitations on the market capitalization of the notes.

"The problem with TVIX was that nobody knew how long the suspension would be."

It happened before

"This could happen with any bank. In fact it happened with a few banks before. They had to shut their shelf down for a couple of weeks. It happens," the source said.

Regulatory pressures or compliance requirements often trigger share suspension announcements, market sources said.

For instance, several issuers of ETNs in the past have suspended issuance of commodity-linked ETNs due to rule changes over position limits by the Commodity Futures Trading Commission even though the reason was not always mentioned in news releases directly.

In February 2012, Deutsche Bank stopped issuing new shares of seven commodity-based ETNs. It did the same thing for its PowerShares DB Agriculture Double Long ETNs a year before and for the PowerShares DB Crude Oil Double Long ETNs in August 2009.

Also in the commodities space, UBS AG suspended further issuance of its Exchange Traded Access Securities (E-TRACS) Long Platinum ETNs in November 2009.

The CFTC's rule limiting positions in commodities futures and options contracts as part of the Dodd-Frank Act was often cited by market sources as a direct cause for those temporary or permanent halts.

But Thursday's announcement by Deutsche Bank is due to another factor - the postponement of an annual report - and may have a much broader scope as a result.

"Definitely, there have been other times when trading has been suspended for a number of reasons. I'm not sure if we've had that particular case before," the source said.

For issuers of traditional structured notes, the late filing is good news.

"They'll definitely be out of the structured products market for a month. That'll be good," the sellsider said.

The following ETNs will be affected, according to Deutsche Bank's news release:

• PowerShares DB Base Metals Double Short ETNs (NYSE Arca: BOM);

• PowerShares DB Base Metals Double Long ETNs (NYSE Arca: BDD);

• PowerShares DB Base Metals Short ETNs (NYSE Arca: BOS);

• PowerShares DB Base Metals Long ETNs (NYSE Arca: BDG);

• PowerShares DB Crude Oil Double Short ETNs (NYSE Arca: DTO, TSX: DOE);

• PowerShares DB Crude Oil Short ETNs (NYSE Arca: SZO);

• PowerShares DB Crude Oil Long ETNs (NYSE Arca: OLO);

• PowerShares DB Gold Double Short ETNs (NYSE Arca: DZZ, Toronto: DGJ);

• PowerShares DB Gold Double Long ETNs (NYSE Arca: DGP, Toronto: DGU);

• PowerShares DB Gold Short ETNs (NYSE Arca: DGZ);

• PowerShares DB US Inflation ETNs (NYSE Arca: INFL);

• PowerShares DB US Deflation ETNs (NYSE Arca: DEFL);

• PowerShares DB 3x Short 25+ Year Treasury Bond ETNs (NYSE Arca: SBND);

• PowerShares DB 3x Long 25+ Year Treasury Bond ETNs (NYSE Arca: LBND);

• PowerShares DB 3x Short US Dollar Index Futures ETNs (NYSE Arca: UDNT);

• PowerShares DB 3x Long US Dollar Index Futures ETNs (NYSE Arca: UUPT);

• PowerShares DB 3x Italian Treasury Bond Futures ETNs (NYSE Arca: ITLT);

• PowerShares DB Italian Treasury Bond Futures ETNs (NYSE Arca: ITLY);

• PowerShares DB 3x German Bund Futures ETNs (NYSE Arca: BUNT);

• PowerShares DB German Bund Futures ETNs (NYSE Arca: BUNL);

• PowerShares DB 3x Japanese Govt Bond Futures ETNs (NYSE Arca: JGBT);

• PowerShares DB Japanese Govt Bond Futures ETNs (NYSE Arca: JGBL);

• PowerShares DB 3x Inverse Japanese Govt Bond Futures ETNs (NYSE Arca: JGBD);

• PowerShares DB Inverse Japanese Govt Bond Futures ETNs (NYSE Arca: JGBS);

• Elements - "Dogs of the Dow" linked to the Dow Jones High Yield Select 10 Total Return index (NYSE Arca: DOD); and

• Elements linked to the Morningstar Wide Moat Focus Total Return index (NYSE Arca: WMW).

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