DXO Becomes First Victim of CFTC Activity

PowerShares DB Crude Oil Double Long ETN (DXO) became the first apparent victim of the recent CFTC activity surrounding exchange traded products. Deutsche Bank (DB) announced today (9/1/09 press release) that it will redeem all outstanding shares of DXO after the market close on September 9.

Unlike many other ETF and ETN closures that result from the failure of the products to gain traction in the market, DXO has attracted more than $600 million in assets since its launch in June 2008. In fact, it may have become too successful.

Deutsche Bank did not directly mention the CFTC in its announcement but said this redemption is the result of “limitations imposed by the exchange” causing a “regulatory event” as defined in the terms of the Notes. Exchange-traded notes (ETNs) are different than typical ETFs, but that does not appear to be a root-cause of this closure. See our open letter to ETN sponsors and our article on ETN risk for additional information.

Daily share creations of DXO have been suspended, and it closed today at a 4.5% premium to its underlying value. Additional information can be found on the PowerShares ETN website, including the prospectus for the DXO Notes.

No other DB ETNs are affected at this time, including PowerShares DB Crude Oil Long ETN (OLO), PowerShares DB Crude Oil Short ETN (SZO), and PowerShares DB Crude Oil Double Short ETN (DTO). DTO was the best new exchange-traded product of 2008.

Disclosure: No positions

Comments

[rick flair:]

too bad. i really liked that thing. just another commie filth brick in the wall type move ........back in the USSA......

Sep 02 10:44 AM

[Ron Rowland:]

Before this is all over, I think we are going to see a huge step backwards regarding investor access to commodities.

ETFs and ETNs have provided easy access to commodities for many investors for the very first time. Revolutionary!

The old school commodity players don't like the idea of of these new instruments in their sandbox. It appears they are going to try to shut it down one way or the other.

Sep 02 11:09 AM

[Living4Divi...:]

In this cowboy capitalist society many bad products are allowed to go on and on doing damage until the damage gets so great that they get outlawed.

I have witnessed the long downward slide in the leveraged commodities funds.

1st: articles were published indicating that they don't perform as advertised. I wrote one of these articles, but I was among many voices deriding these ETFs.
2nd: Many of the wire houses (Brokers) banned trading in them
3rd: FINRA delists them (your article)

Nice article.

Sep 02 01:21 PM

[Old Rick:]

I wonder why SA can't (or won't) put a filter in place to screen out this iamned jerk!

Sep 02 01:52 PM

[Gangy:]

Commodities markets are places to bring together buyers and sellers to facilitate commodity transactions. In this world there is only so much wheat, onions or crude for that matter.

Is it OK for a large trader to corner all the wheat in the US. Once in possession of most of the wheat; is it OK for the trader to sell it at his/her price. The obvious answer is NO. No it is not OK to have concentrated positions by traders because that brings volatility to the market. (Remember one of the foundations of the market is to reduce volatility).

And that's the reason markets have position limits. The idea being to limit market influence by large companies. There is plenty money out there that can easily influence the price movement of any commodity.

Add money from small investors in the form of ETN's and ETF's and you have lots of liquidity in the markets. Remove the brakes by not having position limits and guess what ..... the price of any commodity will only go up. (Because more individuals/investors want a share of the pie).

Once again markets are places for buyers and sellers to facilitate easy transactions. My question; should third parties (investors) be allowed to influence decisions of genuine buyers-sellers? If yes then how much? And who is to be a referee/judge in the decision making. Don't expect much from NYMEX or ICE because it is not in their interest to enforce position limits.

One might call them communists or whatever; but the fact remains, government is in the best position to protect the interests of the nation and the common man.

Sep 02 03:10 PM

[Ron Rowland:]

Gangy,

A couple of questions regarding limits:

1) Why doesn't your argument for limits also apply to stocks? Is it simply because no one would starve if I were to buy up all the IBM shares and then sell at "my price" or is it because there are alternatives such as HPQ?

2) If ETFs and ETNs are actually owned by thousands of individual investors, then does DB (or other sponsor) truly have a controlling interest? Unless those thousands of shareholders decide to act in unison, then the commodities are not being controlled by any single entity.

I will grant you the fact that it is hard to police the actual "individual" control when an individual tries to circumvent the limits by using multiple vehicles, but the regulators seem to be taking the easy way out and/or just protecting the (prior to ETFs/ETNs) status quo.

Sep 02 03:51 PM

[SA Editor J...:]

Gangy,

We should soon have a solution to this problem. In the meantime please report abuse and we'll handle it promptly.

Best,
Jonathan Liss
Seeking Alpha

Sep 02 03:52 PM

[rick flair:]

what problem?

Sep 02 05:16 PM

[Ron Rowland:]

I believe that Jonathan's note below was intended as a reply to Old Rick's comment regarding iamned (not a reply to the Gangy comment)

On Sep 02 03:52 PM Jonathan Liss wrote:

> Gangy,
>
> We should soon have a solution to this problem. In the meantime please
> report abuse and we'll handle it promptly.
>
> Best,
> Jonathan Liss
> Seeking Alpha

Sep 02 05:21 PM

[Bill S. Friend:]

Commodity values are historically determined via supply and demand. These ETFs do not neccessarily hold the physical asset. Prices are then based on speculation rather than supply and demand.

Sep 02 06:21 PM

[Moon Kil Woong:]

These ETFs create dark pools which who ever makes them can short or long them arbitrarily. Oftentimes, they do not need to and do not hold even the commodities contracts to back the position letting the creator short the market without disclosure. Likewise, they can take a long position and then load up the ETF with commodities futures pumping up the price and volume.

No ETF should be allowed unless they take use 100% (after trading and fees) to actually purchase the commodity or its future. Otherwise, you are just asking for Goldman Sacs like abuses. Please read the terms and conditions on any ETF before you buy it. Most likely, you will not like the legalese.

Sep 02 06:35 PM