The impact of the credit crunch on ETN-like securities continues.

ETF Securities, the leading provider of exchange-traded commodities (ETC) in Europe, is feeling the impact of the troubles facing the insurance company AIG.

ETF Securities offers more than 100 ETCs listed in the U.K., Germany, France and other European markets. As of September 12, 2008, it had $7.65 billion in assets under management, making it one of the largest suppliers of exchange-traded commodities in the world.

Many—but not all—of the products issued by ETF Securities are backed by credit agreements with AIG. They carry a credit risk similar to the one facing exchange-traded notes; i.e., if the party backing the ETCs goes bankrupt, shareholders become creditors of the firm.

AIG is currently under strain and is asking the federal government for a loan package to help it meet its obligations. These concerns are impacting ETF Securities' AIG-backed products.

According to a press release issued by the company, "a number of firms who were making markets in the [AIG-backed] Commodity Securities stopped doing so yesterday afternoon."

As a result, many of the ETCs did not track their underlying indexes during trading on September 16. Some products appeared to have stopped trading altogether, and there is no fully liquid market in the shares.

The company is working on alternate ways to provide investors with liquidity. For instance, it is trying to permit holders of the securities to redeem them directly from the issuer; typically, only large-scale authorized participants are allowed to do this. It is also trying to arrange suitable collateral to entice market-makers back into the market. 

It notes that, "we can give no assurance as to whether these or other alternatives can be implemented at this stage."

Not All Products Impacted

It is important to understand that ETF Securities' products fall into three major buckets, and the credit risk from one group does not and cannot bleed over into the others. There are two groups of funds that are not affected.

• Precious metals funds, which are backed by physical bullion and carry no credit risk.
• Oil funds, which are backed by Shell Oil and carry little credit risk.

It is the other products which are backed by AIG and are impacted by the issue.