The London Stock Exchange uses cookies to improve its website. The cookies for analytical purposes have already been set. For more details and how to manage cookies, please see our privacy and cookies policy.

How do ETCs work?


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.

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.

Collateralisation
ETCs that track DJ-AIG indices issued by ETF Securities are 100 per cent collateralised. This collateralisation means that the counterparty risk has effectively been removed. The collateral is held in a trust on behalf of the investors in a segregated account at the Bank of New York Mellon. The collateral in this account is managed on a daily mark to market basis by the Bank of New York Mellon. The collateral does not form part of the balance sheets of the Bank of New York Mellon or AIG.

For more information you can email etcs@londonstockexchange.com or speak to your broker.


.

The Exchange accepts no responsibility for the content of the website you are now accessing or for any reliance placed by you or any person on the information contained on it.

By allowing this link the Exchange does not intend in any country, directly or indirectly, to solicit business or offer any securities to any person.

You will be redirected in five seconds.

You are accessing the London Stock Exchange Annual Report Service powered by PrecisionIR.

The Exchange accepts no responsibility for the content of the reports you are now accessing or for any reliance placed by you or any person on the information contained therein.

By allowing this link the Exchange does not intend in any country, directly or indirectly, to solicit business or offer any securities to any person.

You will be redirected in five seconds