An update on ETF Securities

published 19 September 2008

Latest news (22/9/08): ETF Securities reports that 88 of the affected ETCs the Leveraged Commodity securities (which all have 'Leveraged' in the name of the security), ETFS Short Commodity securities (which all have 'Short' in the name), ETFS Forward Commodity securities (which all have 'Forward' in the name) and several of the Classic Commodity securities are now trading on the LSE again.

There are still 25 ETCs which remain suspended from trading, but it's hoped that they'll all be "back up and running by the end of the day". See here for more.

ETF Securities

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Many MoneyWeek readers use exchange-traded commodities (ETCs) from ETF Securities to trade products such as soft commodities, metals etc. As you'll no doubt be aware, trading in a large number of these products was affected by AIG's near-collapse last week. Here are the products which have NOT been affected as they are not AIG backed:

Metal Securities:

ETFS Physical Platinum (PHPT)

ETFS Physical Palladium (PHPD)

ETFS Physical Silver (PHAG)

ETFS Physical Silver £ (PHSP)

ETFS Physical Gold (PHAU)

ETFS Physical Gold £ (PHGP)

ETFS Physical PM Basket (PHPM)

ETFS Physical PM Basket £ (PHPP)

Oil Securities:

ETFS Brent 1mth (OILB)

ETFS Brent 1mth £ (OLBP)

ETFS Brent 1yr (OSB1)

ETFS Brent 2yr (OSB2)

ETFS Brent 3yr (OSB3)

ETFS WTI 2mth (OILW)

ETFS WTI 2mth £ (OLWP)

ETFS WTI 1yr (OSW1)

ETFS WTI 2yr (OSW2)

ETFS WTI 3yr (OSW3)

However, the rest of the ETCs, which are backed by contracts with insurance giant AIG, have been suspended from trading for now.

What now?

ETF Securities has been putting out regular updates (see here for the latest news), but I spoke to Nik Bienkowski, chief operating officer at ETF Securities earlier this afternoon (Thursday 18/9/08) to get some clarity on the situation. The upshot is that they are trying to restore trading this may take a little while. But it does seem that investors are NOT in danger of losing all their money.

What's the worst case scenario?

The worst-case scenario for investors would have been if AIG had gone bust and would therefore have been unable to honour its commitments to ETF Securities. However, AIG has been bailed out by the Federal Reserve, to the tune of $85bn, and has also continued to meet its obligations to ETF Securities at all times. And in fact, since the bail-out, its short-term credit rating has been raised by credit ratings agency Standard & Poors.

So from an ETC point of view, AIG should be fine. The key problem is that market makers have been unwilling to trade in the securities, because of the earlier concern that AIG would go bust. Although this threat seems to have been removed by the Fed, the upheaval in the rest of the financial system means it's taking some time to get trading going again.

As part of a way to resolve this, and to avoid it happening again, ETF Securities is working with AIG to try to secure 100% collateral for the contracts underlying the ETCs in future. Effectively, that would mean that every security would be fully backed by cash, rather than credit, which would remove any credit risk from the ETCs.

However, if such an agreement cannot be reached within the next few weeks, AIG has agreed that ETF Securities would be able to compulsorily redeem all outstanding securities, if needs be. This would take 15 days from the time of the request. According to Mr Bienkowski, in this case, the value that investors get back would reflect the price of the underlying commodity being tracked by the ETC.

So to cut a long story short, with AIG saved by the Fed, it seems that at the absolute worst, investors may have to wait for a month or so to get at their money. But even if trading cannot be resumed, they will get it back at a price reflecting the underlying investment.

We'll have more detail on the background to all this in next week's issue (out next Friday), but in the meantime, this should hopefully provide some clarity, and perhaps some reassurance on the situation.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.