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Barclays temporarily suspends further sales, issuance of iPath Dow Jones – UBS Platinum ETNs
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Written by Emma Trincal, The Prospect News
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October 16, 2009 4:55 pm EDT |
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New York, Oct. 15 – Barclays Bank plc temporarily suspended any further sales from inventory and any further issuance of its iPath Dow Jones – UBS Platinum Subindex Total Return exchange-traded notes, according to a news release from the bank.
The put option granted to holders and Barclays’ lending activities from inventory with respect to the notes are not affected by the suspension.
The notes trade on the NYSE Arca under the symbol “PGM.” The bank warned that the suspension may cause fluctuations in the trading value of the notes.
Regulatory uncertainty
Barclays said that in light of current market dynamics and an ongoing regulatory review, the factors underlying the temporary suspension of the notes may impact other commodity-linked iPath ETNs in the future.
“This tells you that people are reacting to the announced position limits,” said Brad Zigler, managing editor at Hard Assets Investor, referring to a new set of regulatory measures being examined in Congress in order to crack down on speculation in the commodity market.
In particular, the Commodity Futures Trading Commission has asked legislators for the power to impose sweeping trading limits on most major commodity futures contracts.
The imposition of position limits on commodities has already a prompted a series of actions from banks that issue exchange-traded funds or notes linked to this asset class to react as Barclays did on Thursday, said Zigler.
Last month, Deutsche Bank redeemed all the outstanding PowerShares DB Crude Oil Double Long Exchange Traded Notes.
“Barclays Bank plc believes that the limitations on issuance and sale implemented may cause an imbalance of supply and demand in the secondary market for the notes, which may cause the notes to trade at a premium or discount in relation to their indicative value,” the bank said in the
announcement. “Therefore, any purchase of the notes in the secondary market may be at a purchase price significantly different from their indicative value.”
Last month, when Deutsche Bank announced the redemption of its shares, Keith Styrcula, chairman of the Structured Products Association, had predicted that Barclays would be next.
“In the current market uncertainty, and until the CFTC clarifies its position, it’s prudent for ETF and ETN sponsors and issuers to be conservative,” said Styrcula commenting Thursday on the Barclays’ announcement.
Heavy-handed
“The regulators are anxious to take action against what they conceive to be aggressive peculation and markets distortion. But I’m not sure that’s necessarily well handled,” said Zigler.
Zigler said that long-only index funds or index-based products are “tempting targets” for the regulators. But he added that the speculative impact of such investments remains to be demonstrated. “Index-traded funds constantly roll the futures positions forward. So you really
can’t say that they’re taking supply off the marketplace since they are not taking delivery.”
CFTC versus swap dealers
In the case of exchange-traded notes, such as the Barclays’ iPath Dow Jones-UBS Platinum Subindex, dealers have a strong incentive to enter into futures contracts from time to time in order to hedge risk even though they are not directly exposed to commodities.
“ETNs don’t hold the positions but they engage swap dealers to obtain the exposure that they need. If the swap dealer can’t find another party in his swap book, he’s going to have to go to the futures marketplace. That’s where your residual risk ought to be hedged,” Zigler said.
“The current regulatory ire extends not only to index funds but to swap dealers that facilitate ETN exposure,” said Zigler.
Swap dealers, along with money managers, represent the two largest groups of financial players in the metal markets as measured by the number of net open interests, he said.
Trade dilutions
Zigler predicted that banks or products the most vulnerable to the new imposed trading limits would be those where trading concentration is the greatest, in particular commodity indexes with a limited number of components and funds tracking subindexes as the iPath Dow Jones-UBS
Platinum Subindex notes suspended Thursday.
Earlier this month, Deutsche Bank expanded the number of commodities tracked by two of its commodity ETFs – the PowerShares DB Commodity Index Tracking Fund and the PowerShares DB Agriculture Fund –in order to dilute the size of the positions and better comply with the
CFTC.
A spokeswoman at Barclays declined to comment.
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