Deutsche Bank to redeem all Powershares DB Crude Oil Double Long exchange-traded notes

By Emma Trincal

New York, Sept. 1 - Regulators are making issuers of commodity exchange-traded products increasingly nervous. Deutsche Bank announced Tuesday that it will redeem all outstanding PowerShares DB Crude Oil Double Long Exchange Traded Notes due to a "regulatory event."

This unprecedented decision for an energy-focused ETN issue came two weeks after Barclays Bank plc announced that it suspended new issuance of its iPath Dow Jones-UBS Natural Gas Subindex Total Return exchange-traded notes and Deutsche stopped new issuance of the double long crude oil notes.

The Deutsche Bank notes redemption was announced in a press release saying that "limitations imposed by the exchange on which Deutsche Bank manages the exposure of the notes have resulted in a regulatory event as defined in the terms of the notes."

A spokeswoman at the bank declined to comment further.

"They have to comply with a much smaller position limit and given the popularity of these deals, it's just impossible for them to control it. So they're unwinding the positions and returning the money to the investors, "said Keith Styrcula, chairman of the Structured Products Association.

"Right now, all eyes are on Barclays," he added,

A spokeswoman at Barclays declined to comment.

'A worrisome precedent'

The redemption of an energy ETN issued by a large investment bank is unprecedented, Styrcula told Prospect News, adding that it reflects the nervousness of market participants in the face of a harsher Commodity Futures Trading Commission determined to curb positions used by traders to gain exposure to the commodity markets via the use of derivatives on the exchanges.

"The CFTC's new stance on position limit exemptions is fairly disruptive to the market and represents a worrisome precedent for financial innovation," said Styrcula.

Some believe that more redemptions could trigger selling pressures in an already volatile market.

Two weeks ago, the CFTC withdrew two no-action letters that provided relief from federal speculative position limits on agricultural options. The CFTC's decision set the tone for a more aggressive regulatory scrutiny of the booming commodity market as a whole.

"I believe that position limits should be consistently applied and vigorously enforced," CFTC chairman Gary Gensler said on that day. "Position limits promote market integrity by guarding against concentrated positions."

At around the same time, Deutsche Bank stopped issuing new shares of the PowerShares DB Crude Oil Double Long exchange-traded products, which trade under the symbol DXO on the New York Stock Exchange.

Among the various oil structured products offered by Deutsche Bank, the PowerShares DB Crude Oil Double Long exchange-traded notes are the most aggressively bullish with a two-to-one leverage.

The investment offers 200% of the daily return of the Deutsche Bank Liquid Commodity index - Optimum Yield Oil Excess Return and allows investors to take a leveraged view on the performance of crude oil.

The index is a composed of futures contracts on WTI light sweet crude oil.

None of the other notes offered by Deutsche Bank are affected by the announcement, nor are the PowerShares DB exchange-traded funds offered by DB Commodity Services LLC, according to the bank's press release.

The bank said that it will "continue to maintain and develop new commodity exchange-traded products and offer a full range of commodity trading services, in accordance with the changing regulatory environment."

Deutsche Bank said it expects to provide notice of this redemption on Sept. 9. The repurchase value of the notes will be determined as of the date notice is given. Payment will be made on the third business day following the notice. Creations of DXO will remain suspended while daily repurchases at the option of investors will be accepted as normal up to and including Sept. 9.

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