Barclays' suspension of ETN+ Short D Leveraged ETNs attributed to market rally, leverage reset

By Emma Trincal

New York, Feb. 9 - Barclays Bank plc's temporary suspension of its Barclays ETN+ Short D Leveraged exchange-traded notes due Nov. 20, 2014 linked to the S&P 500 Total Return index is the result of current market conditions as well as the lack of a daily reset mechanism, sources said.

"It's the first time I see an ETN suspended for performance reasons," a New York sellsider said.

Barclays announced the suspension of any further sales of its ETN in a FWP filing with the Securities and Exchange Commission on Wednesday.

The notes were first sold on Nov. 17, 2009. The S&P 500 index has increased by 19% since then, and the S&P 500 Total Return index has risen more than 21% since the end of 2009. Many see the market rally as the main reason for the ETN's negative performance.

"You have to be careful with these leveraged ETNs. They've been hammered," said a structurer.

Barclays said in its filing that it believes the intraday indicative value of the notes may fall to $10, or 20% of par.

A stop-loss event occurs when the note value is less than 20% of par on any given day, according to the prospectus. It then triggers redemption.

"It's not a stop loss. It's a temporary suspension. But it's likely that the stop loss will occur as stated in the filing, in which case the notes will be redeemed," a source said.

Market up, notes down

"I know they had high hopes for this, and one of the questions was the ability to raise assets under management," an asset manager said.

"But I'm not surprised. It's been a very healthy run up in the S&P 500, first starting in March 2009 and then with a second surge since September 2010.

"From conversations I've had with Barclays in the past, those leveraged reverse ETNs on the S&P 500 have been a tough sale."

The market capitalization of the ETN is $3.65 million, according to Barclays' website.

"They stopped selling it because they're probably very close to putting a stop loss on it. What's the point of taking on new money if you have to redeem a week later? They would lose credibility."

For this money manager, the inclusion of the stop-loss mechanism in the structure was perhaps an attempt to "provide some comfort to the regulators," who have on their radar screen the sale of leveraged exchange-traded funds and ETNs.

Daily reset

Other market participants said that the suspension had perhaps more to do with the way the product was designed or sold rather than with market conditions.

"I don't think the equity rally explains why they had a hard time raising capital. There are billions of dollars short the S&P at any given time," a market participant said.

"The main issue is what vehicle you're using. I don't know the reason for the small size of this ETN. Is it because of the rebalancing period or is it a branding issue, since they're not using the iPath name? I don't know."

Unlike many leveraged ETNs, Barclays' ETN+ Short D Leveraged ETN does not include a daily reset mechanism or the calculation of leverage on a daily basis. The market participant explained how the elimination of the daily reset could increase the odds of a stop-loss event.

"With a daily reset, your triggering event is 20% of yesterday's price. When you don't have the daily reset, it's 20% of the starting price. So they run into that 80% barrier sooner. It's almost like a fixed barrier," he said.

"What matters is the period of time you're using to reference this decline of 80%. Is it 80% from inception? Is it 80% from last year or last month? Or is it 80% from yesterday? The shorter the period, the lower the chance you'll breach your barrier and trigger the stop loss."

The daily rebalancing is generally attractive for traders but not for long-term investors, this market participant noted.

"By eliminating the daily reset, Barclays wanted to attract long-term holders. But this made the stop-loss event more likely to happen," he added.

The New York sellsider agreed.

"The suspension would have not happened if the daily reset was in place," he said.

He concluded that the suspension of sales for this ETN will probably remain an isolated case.

"I don't think we're going to see this spreading to other ETNs. I think it's a one-time event that happened because the product was poorly designed.

"But a suspension kills the product forever, even if you bring it back. It hurts the platform."

Barclays has other ETNs offering leveraged and reverse exposure to the S&P 500 Total Return index, including the iPath Short Extended S&P 500 Total Return Index ETN. It launched in November and is listed on the NYSE Arca under the symbol "SFSA."

A spokesperson at Barclays declined to comment.

The Barclays ETN+ Short D Leveraged ETN is listed on the NYSE Arca under the symbol "BXDD." Its price rose by 1.90% to close at $16.62 on Wednesday.

The S&P 500 Total Return index closed down 0.27% at 2,224.64 on Wednesday.

© 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.