News that Deutsche Bank is liquidating the PowerShares DB Crude Oil Double Long ETN (NYSE Arca: DXO) is an ominous development for commodity exchange-traded products.

It is the first commodity ETP to succumb to heightened regulatory concerns about the influence that index-based products have on the commodity marketplace. And it is unlikely to be the last.

Deutsche Bank has been tight-lipped about the exact reason it is closing down the exchange-traded note, leaving reporters and analysts to speculate. Most reports, such as this generally solid piece by Morningstar's Scott Burns, focus on the idea that Deutsche Bank was concerned about the overall size of its position in the crude oil futures market.

Burns writes:

"Deutsche Bank is a large player in the commodities sector, and the CFTC is breathing down everybody's neck about position limits. It is not improbable that Deutsche Bank looked at all the business that it conducts using oil futures--including proprietary trading, hedging for corporate entities, and other bundled commodity investment products--and realized that the best thing for itself would be to redeem this note and free up $900 million in new position availability."

The Commodity Futures Trading Commission is widely expected to enact new, strict position limits on commodities investors later this year. Some people expect this to lead to forced divestitures by large commodity players like Deutsche Bank. Burns seems to think that Deutsche Bank wanted to get ahead of the curve and cut back on its positions ahead of these forthcoming regulations.

The real story, however, is both more complicated and important than that.

Reading The Tea Leaves

DXO was designed to deliver 200% exposure to the Deutsche Bank Liquid Commodity Index - Oil Index, a managed index of crude oil futures. As of Sept. 1, it had $425 million in assets. Given its 2-for-1 exposure, that means it controlled an $850 million footprint in the crude oil futures space.

When it announced that it was closing the fund, Deutsche Bank gave the following explanation in its press release:

"Limitations imposed by the exchange on which Deutsche Bank manages the exposure of the Notes have resulted in a "regulatory event" as defined in the terms of the Notes, which has caused Deutsche Bank to redeem the Notes."

The company declined to comment beyond the press release, but it didn't have to. The key phrase is included right there: "Limitations imposed by the exchange..."

That phrase suggests that it wasn't vague concerns about CFTC position limits that led to DXO's closing; rather, it was a specific exchange-driven limitation.

The index that DXO tracks is tied to the performance of crude oil futures listed on the New York Mercantile Exchange. NYMEX, however, has not imposed any new position limits in the past few weeks or months. Meanwhile, DXO has been a large product for some time. In fact, assets are down this year, from $585 million to $425 million since Jan. 1.

If the exchange hasn't enacted new position limits, and the size of the fund has actually decreased, why was it forced to close now?

The answer, I believe, is that the NYMEX has decided to exercise a discretionary power it has always had, but has rarely used in the past.

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