ETF Securities has announced that it will fully collateralize its Commodity Securities products, which suspended trading during last month's near-collapse of American International Group, Inc. "AIG" (reported by Index Universe here and here).

AIG was rescued by an $85 billion credit facility from the U.S. Federal Reserve on Sept. 16. On Wednesday, Oct. 8, this facility was increased to $122.8 billion, as AIG again met funding pressure.

Commodity securities are one of three types of exchange-traded commodities (ETCs) offered by ETF Securities. They cover the majority of the company's 100+ funds, including all commodities futures funds outside the Energy and Precious Metals sectors. 

The collateralization should largely eliminate the credit risk that was inherent in the old structure, whereby the value of the ETFs were backed by a credit agreement with AIG. 

The collateralization involves the appointment of Bank of New York Mellon (BNY Mellon) as collateral manager, and a requirement for AIG to post collateral daily at not less than 100% of the mark-to-market value of all commodity securities. The collateral to be posted is at the discretion of AIG, and may include cash, certain government debt obligations and other debt obligations rated not lower than AA by Standard & Poor's (or an equivalent rating by another generally recognized ratings service). The mix of collateral is subject to a number of concentration limits.

The appointment of BNY Mellon to this role will take place within three business days of the opening of accounts in the applicable local markets for the receipt of collateral.

At the time of writing it was unclear whether the new structure for the commodity securities would involve any change in the securities' total expense ratio (TER). Current TERs are 0.49% per annum for spot and forward ETCs, and 0.98% per annum for inverse and leveraged ETCs.