Financial Regulatory Forum

Deutsche Bank stops exchange-traded oil note sale as U.S. mulls regulation

By Reuters Staff
August 18, 2009

By Joshua Schneyer

NEW YORK, Aug 18 (Reuters) – Deutsche Bank said on Tuesday it has stopped issuing an aggressive oil exchange-traded note as the U.S. government looks to increase regulation in commodities markets. Deutsche said it had temporarily halted issuance of PowerShares DB Crude Oil Double Long Exchange Traded Notes, which allow investors exposure to a rise in crude oil futures.

The bank gave no reason for the halt, but an industry source said it could be tied to moves by the U.S. Commodities Futures Trading Commission to clamp down on leveraged or speculative trading in some commodities, including energy contracts.

The suspension “may cause fluctuation in the trading value of the notes,” the bank said in a statement.

The so-called double long ETN is a debt note linked to the Deutsche Bank Liquid Commodity Index, and designed to offer investors long exposure to crude oil contracts such as West Texas Intermediate, the most-traded U.S. crude oil future.

The notes are leveraged and designed to pay big returns when oil prices rise.

Deutsche’s decision to halt new issuances of its note are part of a trend of cautionary steps among exchange-traded fund and note managers in response to a regulatory push on commodities trading.

Earlier this month, the massive United States Natural Gas Fund LP exchange-traded fund announced it would not
resume issuing new shares and may reduce its holdings.

U.S. Natural Gas attributed the decision to current or
potentially impending position limits on the number of futures contracts that can be held by traders or funds.

Deutsche Bank also offers exchange traded funds and other notes which give investors exposure to moves in oil and natural gas prices but the Double Long note is considered the most aggressive of the instruments.

CFTC Chairman Gary Gensler told Reuters in an interview on Monday that his agency should “seriously consider” imposing new federal position limits on commodities contract investors.

The CFTC, which has carried out recent hearings on commodities trading but hasn’t yet devised new regulations, could also limit the ability of banks and fund managers to offer high-risk commodity investment vehicles such as the Deutsche Bank note, according to some industry sources.

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