Barclays latest to suspend energy ETN; RBC's lower-leverage note more balanced, analyst says

By Kenneth Lim

Boston, Aug. 21 - Yet another energy-linked exchange traded products became a de facto closed-end instrument as Barclays Bank plc said it will stop issuing new exchange-traded notes linked to a natural gas index.

Meanwhile, a Royal Bank of Canada accelerated note linked to the S&P 500 index could be a better product than one with higher leverage but no downside protection, said structured products analyst Suzi Hampson.

Barclays said Friday it will temporarily suspend any further issuance of the iPath Dow Jones-UBS Natural Gas Subindex Total Return ETNs. Daily redemptions by existing holders will not be affected.

"The factors underlying the temporary suspension of the notes may impact other commodity-linked iPath ETNs in the future," the bank said in a press release.

The move comes after Deutsche Bank AG also stopped issuing new PowerShares DB Crude Oil Double Long ETNs and an exchange-traded fund, United States Natural Gas Fund, LP, said it will not issue new units.

Deutsche and Barclays did not specify the reasons for their suspensions, but U.S. Natural Gas said proposed new regulatory restrictions and limitations on fixed positions in all energy-based commodity futures contracts could force the fund "to reduce or liquidate its current level of holdings in investments or may become subject to restrictions on the types and level of investments that it may make in the future."

"While it cannot be predicted at this time what regulatory restrictions and limitations will eventually be imposed or how they will impact UNG, if any of the aforementioned items are implemented, UNG's ability to meet its investment objective may be negatively impacted and investors could be adversely affected," the fund said in a statement.

The U.S. Commodity Futures Trading Commission is currently considering imposing speculative position limits in the energy markets. The CFTC has held three hearings on the issue, and has not reached a decision.

With its sights currently focused on the issue of position limits, the CFTC on Aug. 19 also withdrew exemptions on agricultural speculative position limits that had been granted to DB Commodity Services LLC.

AB Svensk Eksportkredit, which issues Elements ETNs linked to the Rogers International Commodity Index - Energy Total Return, has not yet announced any changes.

Unintended consequences

The suspension of new issuances in the energy-linked exchange traded products will likely change the way that they work, a structurer said.

"I think it's a legitimate concern that they might not track their underlying index as accurately now because of the fact that they're essentially closed-end, so the availability of the particular ETN or ETF also affects its price," the structurer said. "This is no longer the same product that the investors bought a year ago."

Exchange-traded products significantly opened up channels that allowed investors to access the commodities market, and the recent suspensions may not be what the CFTC is targeting with proposed position limits, the structurer said.

"I can't speak for the CFTC, but I don't think they really wanted to push this market back to the stone ages," the structurer said. "Trying to limit the impact of speculation on commodity prices is a very commendable cause, but I hope they don't burn down the house trying to kill the rat. Hopefully they'll be able provide more clarity on this issue, maybe exempt ETNs and ETFs or impose the limits at the end user level rather than at the issuer level."

Balanced structure

A planned RBC accelerated note linked to the S&P 500 offers a better risk-return profile than a similar product with higher leverage, said Future Value's Hampson.

RBC plans to price zero-coupon buffered bullish enhanced return notes due Feb. 28, 2011 linked to the S&P 500.

At maturity, investors will receive par plus 200% of any gain in the index, subject to a maximum total payout of 117% of the principal. Investors will lose 1% for every 1% that the index declines beyond a buffer of 15%.

RBC is also planning similar notes due on the same date also linked to the S&P 500. But the upside participation rate on these notes is 500%, with a payout capped at 123% of the principal. There is also no buffer - investors will be fully exposed to any decline in the index.

All else being equal, an accelerated growth note with a higher participation rate would usually have a lower cap, but in the case of the two RBC notes, investors in the 200% participation product give up some of the upside in exchange for the buffer, Hampson said.

"The 200% has a lower cap, and this is made up for with the buffer," she said.

In terms of risk, potential returns and value, the less leveraged note scored better than the other product, based on Future Value's assessment.

"Although the 500% product has a higher chance of a big payout, there's also a higher chance of losing capital," Hampson said.

The investor needs the S&P 500 to go up by 8.5% to get the highest return for the notes with lower leverage, and about 4.6% for the ones with a higher participation rate, Hampson noted.

"It's only a year and a half," she said. "You only need the index to rise by 8.5% over a year and a half, which, for any investor who's looking for accelerated growth at the moment, 8.5% isn't huge in a year and a half."

All or nothing

On the extreme end of the risk scale, Deutsche Bank AG, London Branch, sold $2.75 million of zero-coupon leveraged securities due Aug. 25, 2014 linked to the 30-year Constant Maturity Swap rate.

The notes priced at par of $50,000.

If the 30-year CMS rate is greater than the strike of 5.9% on Aug. 18, 2014, the payout at maturity will be $5,263,157.89 multiplied by the difference between the 30-year CMS rate and the strike.

If the 30-year CMS rate is less than or equal to 5.9%, investors will receive nothing.

Deutsche Bank Securities Inc. and Deutsche Bank Trust Co. Americas are the agents.

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