Two Barclays ETNs mature after strong gains over five years; three short notes already called

By Emma Trincal

New York, Nov. 14 – Barclays Bank plc announced the upcoming maturity of two exchange-traded notes tied to the S&P 500 Total Return index, which has posted strong performance since the notes’ inception on Nov. 17, 2009.

With a five-year tenor, the ETNs were exceptionally short in duration, sources said. Data compiled from Prospect News since 2006 showed they are indeed the first ETNs to ever mature.

The ETNs mentioned in the press release will mature Nov. 20.

Those are the following:

∙ Barclays ETN+ Long B Leveraged Exchange Traded Notes Linked to the S&P 500 Total Return index, which are listed on the NYSE Arca under the symbol “BXUB.”

∙ Barclays ETN+ Long C Leveraged Exchange Traded Notes Linked to the S&P 500 Total Return index, which trade on the NYSE Arca under the symbol “BXUC.”

Very short

“Five years only! Usually people do longer maturities,” an industry source said. “It’s interesting. An issuer doesn’t have any contractual obligations to announce the upcoming maturity of an ETN.

“If it was called it would be different. They would have the contractual obligation. If you call it you have to announce it,” he said.

Three bears behind

Barclays made prior announcement when the rest of the series of five – three bearish notes on the same index – were redeemed as a result of the occurrence of a stop-loss termination event.

The long notes outperformed the S&P 500 index significantly with the strong bull market five-year cycle.

Over the past five years, the Long B Leveraged ETN with a multiple of three gained 323%, outperforming the benchmark by more than 200%.The Long Leveraged ETN, with a two-times leverage factor delivered a 200% gain.

But investors making bearish bets on the index saw their notes called earlier in 2011, 2013 and in April, according to filings with the Securities and Exchange Commission.

“I guess they made an announcement on the good ones. Maybe they want to highlight the good performance. The ones that did well, they want to get the publicity for but that’s just a guess,” he said.

The three short ETNs were the following:

Short B Leveraged ETNs linked to the Inverse Performance of the S&P 500 Total Return, with the “BXDB” symbol offered a 100% participation in the inverse performance of the underlying index. The prospectus provided an automatic redemption clause if the intraday value of the notes was less than or equal to 10% of the principal amount. Barclays announced in a press release that the automatic redemption feature had been triggered in April 4. This product, which had the least leverage, lasted the longest.

The Short C Leveraged exchange-traded notes (symbol “BXDC”) offered a two times inverse exposure to the S&P 500 Total Return index. The termination event occurred on Jan. 11, 2013, according to the bank. The trigger was an intraday price of 15% or less of the principal amount.

Finally the Short D Leveraged ETNs linked to the inverse return of the S&P 500 Total Return index on a three-times leverage basis was the first to be delisted in May 2011 due to its own trigger event condition, in this case dropping to or below 20% of the principal amount.

“Those three shorts have not been replaced. They were relatively small parts of a suite. Obviously in this bull market, these are not going to do well. But there are many other products out there,” said a market participant.

“They all got knocked out. But this is not a special event. These triggers exist with most ETNs. The reason why they are there in the first place depends a lot on the leverage factor and the reset,” he said.

“If you have a two times for instance, depending on the functionality of the product, the reset may end up dragging the leverage factor over time so that you end up with only one for one exposure, just as an example,” he said.

No daily reset

None of the three inverse ETNs included a daily reset for the leverage, according to their respective prospectuses.

The purpose of a daily reset is to give investors a fixed multiple of the performance of the reference index, or its inverse value if the product is bearish, in order to provide compounded returns.

Because there were no daily resets, the returns were not compounded, the prospectuses said.

More specifically, the ratio between the value of the notes and the notional exposure varied, which means that the participation in the inverse performance of those three products with their respective multiple would vary.

For instance instead of getting a negative two times multiple, the notes may give less or more, according to each prospectus.

“When the leverage varies like that, it becomes problematic. You could have someone who bought the notes with a two-times exposure. Two years later, a new buyer may only get 50% of the upside,” the market participant said.

“In general, the knock-outs are designed to deal with these adverse events.

“There are many reasons to include a trigger event. They vary from product to product. Certain products have hedging costs that can rise as conditions change. In that case the knock-out is designed to protect the hedging costs.

“Usually the intent of the trigger is for the product to continue to do what it was designed to do. It’s rule-based. If the market goes in a certain direction where the product won’t work the way it was originally designed to work, it gets automatically terminated.”

A spokesperson at Barclays did not comment.

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