UPDATE 2-Firms ceased trade in AIG-linked securities Mon -ETF

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By David Brough

LONDON, Sept 16 (Reuters) - Some banks and brokerages ceased making markets in commodity securities backed by matching contracts from troubled insurer American International Group Inc (AIG.N) on Monday afternoon, ETF Securities said on Tuesday.

The affected securities are known as exchange traded commodities (ETCs).

ETF Securities said on its website it was "actively working on possible ways of providing investors with liquidity" -- including arranging suitable collateral for market-makers.

"However, we can give no assurance as to whether these or other alternatives can be implemented at this stage," it added.

The agreements with AIG allow the issuer to call for collateral, or redeem all the contracts with AIG, but only once the credit rating of AIG falls below BBB+ from Standard & Poor's and Baa1 from Moody's, ETF Securities said.

The issuer also may redeem all of the contracts with AIG but only if the issuer compulsorily redeems all of the commodity securities on issue. In either case, 30 days' notice is required.

Late on Monday, Standard & Poor's cut AIG's long-term credit rating three notches to "A-minus" from "AA-minus", citing "reduced flexibility in meeting additional collateral needs and concerns over increasing residential mortgage-related losses".

Moody's Investors Service on Monday cut AIG's rating two notches to "A2" from "Aa3," while Fitch Ratings cut its rating two notches to "A" from "AA-minus."

The downgrades mean that AIG's trading partners can require the insurer to post an additional $14.5 billion of collateral, according to an Aug. 6 regulatory filing. They could also result in the early termination of some contracts, requiring an additional $5.4 billion of payments, the filing shows.

Moody's have assigned AIG Financial Products Corp. a rating of Aa2.

Standard & Poor's do not publish a separate rating for AIG Financial Products Corp., a spokeswoman said.

AIG shares plummeted after the insurer's credit ratings were cut, jeopardising its efforts to raise cash to survive.

The U.S. Federal Reserve declined comment on a CNBC report saying government money is on the table in discussions on the situation of AIG.[nOSL008211] (With additional reporting by David Sheppard) (Reporting by David Brough; editing by Michael Roddy)