Barclays, HSBC issue more ETNs, wrapper could be seeing recovery, distributor says

By Kenneth Lim

Boston, Aug. 18 - Interest in exchange-traded notes remains below early-2008 levels, but the wrapper could be primed for a comeback as the credit markets recover, a structured product distributor said.

Meanwhile, Deutsche Bank suspended further issuances on a double long oil-linked ETN, which sources said was a response to proposed position limits in the energy futures markets.

On Monday, Barclays Bank plc added $437.5 million to existing series of iPath ETNs. The bank priced $250 million of notes linked to the MSCI India Total Return, $125 million of notes linked to the Dow Jones-UBS Natural Gas, $50 million to the Dow Jones-UBS Platinum and $12.5 million to the Dow Jones-UBS Sugar indexes.

HSBC USA Inc. also upsized its Elements ETNs linked to the S&P Commodity Trends index to $61.5 million.

Wrenching crisis

The financial crisis that struck in 2008 hit the ETN market especially hard, the distributor said. The investment product was still relatively young but growing fast, and the industry was looking at it as a new front to reach investors, the distributor said.

"It was one of the next big things," the distributor said. "After looking at the success that the mutual funds industry had with exchange-traded funds, the exchange traded concept was a natural space for structured products to expand into, and it was all very exciting."

But the financial crisis shook up confidence in the credit markets and in the health of the ETN issuers.

"I think it really drove home the point that an ETN is at the end of the day a senior unsecured piece of debt paper," the distributor said. "The value of your investment doesn't just depend on the performance of the underlying assets, it also depends on the credit of the issuer."

Climbing back

The ETN market stalled, but did not die, and now could be showing new life, the distributor said.

"Just anecdotally, I think ETNs are starting to see signs of a recovery," the distributor said.

A big part of the recovery has to do with improving market confidence in credit markets, the distributor said.

"I think first and foremost, you need to have confidence in the credit of the issuers and confidence in the credit markets," the distributor said.

"That's where it all starts. If you don't have that, all the other stuff relating to the underlying asset classes is irrelevant. But I think we're starting to see improvements there, and that's very heartening not just for ETNs but for the rest of the structured products universe."

If investor confidence is restored, ETNs could continue to grow at a strong pace, the distributor said.

"The aspects of ETNs that were attractive before the financial crisis are still going to be attractive after the financial crisis," the distributor said. "There's no reason not to expect strong growth in that area."

Regulatory concerns

One space that may have to play by different rules is in products linked to energy markets.

Deutsche Bank said Tuesday it will temporarily suspend further issuances of its PowerShares DB Crude Oil Double Long exchange traded notes (see full story on page 1 of this issue).

Daily redemptions at the option of holders will not be affected, although the bank noted the possibility that the suspension could "cause an imbalance of supply and demand in the secondary market" for the notes and affect secondary pricing.

The suspension does not affect any other Deutsche Bank-issued ETNs.

The bank did not explain its decision, but a market source said the move was due to uncertainty surrounding possible new position limits in energy markets.

The Commodity Futures Trading Commission is currently looking into the possibility of creating position limits in energy futures markets, and current CFTC chairman Gary Gensler has said that imposing limits could help to protect the markets from distortion caused by highly concentrated positions.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.