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Deutsche Bank AG is closing a popular exchange-traded oil product amid a clampdown by regulators on holdings of leveraged funds.
The bank said Tuesday it plans to redeem all shares of the $425 million PowerShares DB Crude Oil Double Long exchange-traded notes on Sept. 9.
The closure marks the first casualty of the increased regulatory scrutiny of exchange-traded investment funds that use leverage to invest in commodities markets.
In a statement, Deutsche Bank cited "limitations imposed" by the New York Mercantile Exchange for its decision.
At the orders of commodities regulators, the Nymex recently imposed restrictions on oil holdings for certain funds, limits the Deutsche Bank product has exceeded.
Regulators are seeking to curtail the expansion of exchange-traded products, which are popular vehicles for small investors seeking access to futures contracts of oil, metals and grains. Holdings of exchange-traded-fund products have ballooned to $59.3 billion as of July, an inflow of $22.1 billion since the beginning of this year, according to the National Stock Exchange. Deutsche Bank has a raft of products in the form of exchange-traded notes that are linked to the price of oil. The double-long ETN promised to generate two times the return of oil prices and attracted aggressive investors betting oil prices would rise.
The ETN was launched in June 2008 and has since grown into one of the largest leveraged commodity products in the U.S.
The ETN is entirely invested in the futures contract for delivery in July 2010 on the Nymex. As it grew, the product hit position limits set up by the exchange, according to people familiar with the firm's operation.
Nymex declined to comment on the business of individual firms.
Once the limits were hit, managers were restricted from buying more oil contracts, making it harder to track the promised return going forward. Despite the troubles with the ETN, Deutsche Bank said it will continue to roll out commodity-linked products for retail investors within the new regulatory guidelines.
Deutsche Bank stopped issuing new shares in the ETN two weeks ago. Since the suspension, the ETN has been trading at a premium to its net asset value. That premium is currently about 3%.
Deutsche Bank said in the announcement that it will determine the "repurchase value" on Sept. 9.
The closure could place a temporary dampener on oil prices as the managers sell off the oil contracts.
"This is an example of how actions by regulators can lead to a reduction of investment choices by retail investors, without necessarily producing a benefit to the marketplace at all," said John Hyland, chief investment officer of U.S. Commodity Funds LLC, which runs the largest oil and natural-gas ETFs in the U.S.
The Commodity Futures Trading Commission is on track to set position limits, including those held by exchange-traded products.
In August, the commission revoked exemptions to two big ETFs run by Deutsche Bank and a New York-based investment fund, which had been allowed to go beyond the existing limits on agricultural products.
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