UBS has today launched a platform of exchange-traded commodities (ETCs) on the London Stock Exchange.

The 69 new ETCs are the bank’s first to be listed outside of Switzerland. They track the performance of UBS Bloomberg constant maturity commodity index (CMCI) total return indices. These indices track the collateralised return from a broadly diversified basket of commodity futures contracts, designed to be representative of the entire liquid forward curve of each commodity.

The ETC range comprises seven commodity composite/sector indices (composite, energy, industrial metals, precious metals, agriculture, livestock and food), 12 individual commodity indices (crude oil, Brent crude oil, natural gas, copper, aluminium, platinum, gold, silver, corn, wheat, sugar and cocoa) and four strategy indices (CMCI active, DJ-UBS constant maturity composite, SPGSCI constant maturity composite and CMCI essence).

In each case the ETCs are listed in three currencies: US dollar, euro and pounds sterling. The euro and sterling listings are currency-hedged. Reflecting the cost of hedging, these currency classes’ fees are higher than those for the base, US dollar versions.

According to the ETC prospectus, “the CMCI Composite Index, which is rebalanced monthly, represents a basket of 26 commodity components with a series of up to five different investment maturities for each individual commodity. All indices in the CMCI Index Family use the calculation methodology of ‘constant maturity’. Traditional commodity indices tend to focus on futures contracts with short tenors (time to maturity) whereas the CMCI is based on commodity futures contracts with tenors ranging out to 3 years. The CMCI also offers a continuous roll mechanism for each constant maturity with respect to each Component Contract, which, in contrast to the monthly rolling of short term futures contracts offered in traditional commodity indices, offers the potential to mitigate negative roll yield.”

According to a representative of the bank, the roll mechanism ensures that the CMCI indices are less exposed to arbitrage from other market participants than those ETCs which roll their futures positions on a fixed monthly schedule. With around US$140 billion in passive investment products tracking commodities, investors are open to arbitrage opportunities when futures positions have to be rolled forward, typically each month. The CMCI indices roll positions on a daily basis, maintaining five constant maturities across the commodities curve, in an attempt to mitigate these potential costs, the spokesman said.

The ETCs are undated and uncollateralised and rank as senior, unsecured obligations of the issuer, UBS AG. According to the UBS spokesman, the bank chose not to collateralise its ETCs due to cost considerations and because inflows into its Swiss-listed products, which have the same fundamental structure, have remained strong. The ETCs’ fees are all-in whereas collateralised ETCs bear associated costs that are reflected in increased tracking differences, he added.

Investors who are financial and/or credit institutions have the right to redeem their ETCs annually on a predetermined redemption date. For deals above US$1 million in size, the bank’s market-making arm will offer investors the facility to trade at the daily closing price, in addition to quoting two-way prices throughout the day on the London Stock Exchange, the UBS representative said.