DB Halts Issuing Notes For Leveraged Oil ETN

August 18, 2009

Deutsche Bank temporarily closes DXO.


In a curt two-paragraph statement on Tuesday, Deutsche Bank said it has temporarily halted issuing notes underlying the PowerShares DB Crude Oil Double Long Exchange-Trade Note (NYSE Arca: DXO).

"This suspension may cause fluctuations in the trading value of the notes," the company said. No reference was made for the reasoning behind the decision. But numerous industry sources are pointing the finger at rising heat from regulators. Earlier in the day, the SEC and FINRA issued a joint warning against leveraged ETFs to investors. (See more here.)

Desipite avoiding publicly stating its reason for the move,  DB did point out out that DXO could now start acting like a closed-end fund—without bringing up that specific term. "Deutsche Bank believes that the limitations on issuance and sale implemented may cause an imbalance of supply and demand in the secondary market for the PowerShares DB Crude Oil ETNs," the statement said, "which may cause PowerShares DB Crude Oil ETNs to trade at a premium or discount in relation to its indicative value."

It added: "Therefore, any purchase of PowerShares DB Crude Oil ETNs in the secondary market may be at a purchase price significantly different from their indicative value."

Entering the day, DXO was trading at a slight discount. But it wasn't much. Its investors now face a dilemma similar to that of the U.S. Natural Gas Fund (NYSE Arca: UNG), another exchange-traded product that has suspended issuing new units.

DXO had $470 million in assets heading into August. But it has net outflows of nearly $380 million so far this year, according to data compiled by the National Stock Exchange. Some $141 million of that outflow came last month alone.


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