Trading platform
ETCs trade on SETS which combines the benefits of order-book trading with market maker support.
Creation/redemption
ETCs are notes which provide the owner of the security with exposure to the actual underlying commodity future or spot price.
As described in the diagram below, Exchange Traded Commodities are created through an authorised participant. The issuer then enters into a contract with the ‘commodity exposure provider’, the fulfilment of which results in the price of the security tracking the relevant commodity/ies.
This means the monthly roll, custodianship, and management are effectively ‘outsourced’ to the issuer and ‘commodity exposure provider’, in return for the annual management fee. However, because these are passive investments, the management fee is typically very low.
Creation
- a) The authorised participant (often the market maker)pays cash to the commodity exposure provider – the amount paid is based on the current creation price,set by the issuer.
b) The commodity exposure provider then invests the money in the appropriate underlying
commodity market/s.
- The commodity exposure provider notifies the issuer
that cash has been received and confirms correct amount.
- The issuer asks CREST to create securities and transfer them into the account of the authorised participant. These securities are then available for the authorised participant to trade in the secondary market.
Redemption
Redemption is the process of creation in reverse.
The authorised participant transfers securities
to the issuer, who cancels them and notifies the commodity exposure provider to pay in cash the relevant amount to the authorised participant.
For more information you can email etcs@londonstockexchange.com, visit the issuer website at http://www.etfsecurities.com/en/welcome.asp or speak to your broker.