Industry Updates

Major oil ETF suspends futures purchases as broker withdraws

Tom Eckett

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The world’s fifth largest oil exchange-traded product has been forced to suspend the creation of shares after its broker refused to facilitate any increase in WTI futures contracts purchases.

As of 4 May, the $497m Samsung S&P GSCI Crude Oil ER Futures ETP (3175) will no longer be able to create units meaning the ETP will only trade on the secondary market.

In a note to the Hong Kong Exchange, the firm revealed it is currently in “active” discussions with various brokers in order to replace the existing broker which is no longer facilitating any purchases of oil futures.

Samsung Asset Management said it will continue its relationship with the current broker if a replacement is not found adding “in the worst case scenario, the manager many consider terminating the fund”.

Historic turmoil in oil markets spurs ETF issuers into action

As a result, the firm has once again changed the investment strategy on 3175 by moving its futures exposure to an equal weighting in September, October and December contracts.

The move follows the firm’s decision to roll the entirety of its June contracts to September on 21 April in response to “the current unusual and extreme market circumstances”.

3175 is also purchasing put options to protect against the prospect of more negative oil prices.

Samsung AM said in a statement: “In response to the new market risks arising from the recent volatility of the crude oil market and the possibility of negative prices of WTI futures contracts, the clearing broker has adjusted its risk management controls.

“The manager is currently in active discussions with various brokers in the market with a view to replace the existing clearing broker for the fund.”

3175 is not the first oil ETP to suspend creations. The $3.4bn United States Oil Fund (USO), the world’s largest ETF, suspended the creation of new shares as investors piled into the product amid predictions of a bounce in oil prices.

Regulators on notice as ETPs exacerbate volatility in oil markets

The moves come after a historic collapse in oil prices with WTI contracts trading as low as $-40 a barrel on 21 April.

The significant pressure on short-term oil prices has led the majority of ETF issuers and index providers to roll their strategies to later months in order to avoid ETPs hitting $0 a wiping out investor returns.

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