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If you sell what you don't have....

AIG fears halt exchange-traded commodities

By Rosie Murray-West
The Telegraph, London
Tuesday, September 16, 2008

Shareholders were left unable to trade popular commodity securities yesterday, due to fears over the future of their backer, AIG.

Banks and brokerages stopped making markets in the Exchange Traded Commodities (ETCs) backed by the troubled insurer and sold by ETF Securities (ETFS). The price of the stocks also plummeted due to the worries over AIG.

ETFS said it was working on providing its customers with liquidity, and added that its other products, which are physically backed rather than backed by futures contracts, were unaffected. These include Metal Securities and Gold Bullion Securities. Shell-backed Oil Securities, is also unaffected by AIG's problems, with ETFS reporting active markets in all of these products.

"The ETFS group is actively working on possible ways of providing investors with liquidity, including arranging suitable collateral for market-makers," the company said in a statement. "However, we can give no assurance as to whether these or other alternatives can be implemented at this stage."

ETCs have become popular as a way of gaining exposure to rising commodity prices without trading in futures. They allow customers to invest in the price of commodities from lean hog to grain. Traditionally they are seen as risky investments suitable only for sophisticated investors. However, investors trying to beat inflation, or who are wary of equity markets, have become interested in ETCs, which can be sold and bought like ordinary shares.

ETFS said in a statement that AIG has continued to honour all its obligations under its agreement, including processing all creations and redemptions in the usual manner and paying all redemptions due on time. Nicholas Brooks, head of research and investment strategy, said he hoped things would be back to normal as soon as possible -- adding the bulk of the firm's assets were not exposed to AIG


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