AIG’s woes reverberated through commodity markets on Wednesday, triggering a wave of selling and forcing two exchanges to make an extraordinary intervention in the markets.
The insurer acts as a counterparty to a substantial portion of the $30bn invested in the Dow Jones AIG Commodity Index, the second most popular benchmark for investing in commodities.
The insurer provides derivatives to investors that offer exposure to the index and commodity markets were beset by worries about potential risks on these deals.
The London Stock Exchange suspended trading for a range of exchange traded commodities issued by ETF Securities, which are backed by matching products from AIG, after a number of marketmakers stopped trading them.
ETF Securities said 113 of its 129 ETC products were affected, involving about $3bn, or one-third, of its total assets under management. The company stressed that AIG had continued to honour its obligations and normal trading was expected to resume in the next 48 hours.
An emergency sale of AIG’s agricultural commodity positions also was staged by CME Group, the world’s largest futures exchange, after it received approval from US regulators for an unusual block-trading session.
In a block trade, two counterparties privately agree an off-exchange transaction, but the deal goes through the exchange’s clearing house. It allows the exchange to facilitate large trades without disrupting the market. Although block trading is a common part of business in some financial futures, such as the CME’s Eurodollar market, it is unheard-of in agricultural markets.
CME Group said it took the action to protect the orderly functioning of the market. It said: “The agreed-upon order permits the limited execution of block trades by AIG in certain . . . commodity futures products, including soybeans, soybean oil, corn, wheat, live cattle and lean hogs, for the purpose of liquidating a portion of AIG’s open positions.”
“It’s a prudent measure,” said Mike Manning, chief executive of Chicago-based Rand Financial Services, a clearing member at the CME. “The markets are crazy as it is without that type of disruption.”
