Barclays VXX and OIL ETNs, an admin error and a £450m loss

ETNs are extremely complex products

Tom Eckett

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The suspension of two exchange-traded notes (ETNs) offered by Barclays was not due to the war in Ukraine or any other market dynamics but what seems to be an admin error from the bank.

On 14 March, Barclayshalted new creationson the iPath Pure Beta Crude Oil ETN (OIL) and the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX), however, little reason was given to the suspensions at the time.

The decision to stop new assets from flowing into the ETNs – which had around $1bn assets under management (AUM) – led to wild swings from net asset values (NAV), especially VXX which is trading at a record 24% premium, according to data from Bloomberg.

It now has been revealed that the UK giant simply lacked the issuance capacity to create any further shares in the two ETNs.

A footnote in a statement made on 28 March notes Barclays registered a maximum issuance of $20.8bn for its structured products, an amount that it exceeded by roughly $15.2bn over roughly a 12-month period.

This error means Barclays will repurchase the issued ETNs at their original purchase price which will lead to a loss of approximately £450m, the bank forecasted.

Barclays said in a statement: “Barclays expects the rescission losses (net of tax) to be circa £450m.

“Barclays has commissioned an independent review of the facts and circumstances relating to this matter including, among other things, the control environment related to such issuances. Separately, regulatory authorities are conducting inquiries and making requests for information.”

The trading mistake is set to have ramifications for the bank including the postponement of its planned buyback programme from Q1 to Q2 while Sky News revealed its leading investors want it to cut executive bonuses.

The news also serves to highlight the key differences between ETNs and exchange-traded funds. ETNs are highly complex debt notes issued by a bank. They sometimes combine stock positions with options overlays or use other sophisticated strategies to track an underlying index.

As Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, said: “This is not a blemish on ETFs. It is a unique situation but investors should be aware of the differences between ETFs and ETNs.

“ETNs tend to be the home of more esoteric exposures. Halting the creation of new shares is more susceptible in ETNs due to the fact they need to register a certain number of shares while an ETF is open-ended.”

While this is an isolated incident, trading ETNs is a minefield investors should avoid and shows the importance of classifying the exchange-traded product (ETP) space, something EFAMA has done a lot of work around over the past 18 months.

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