Friday, July 6, 2012

Another ETN Halts New Share Redemptions, Creates Premium

By Tim Husson, PhD and Olivia Wang, PhD

In March we reported on TVIX, the leveraged volatility-linked exchange-traded note (ETN) which started trading at a very large premium to indicative value after its issuer halted the creation of new shares.  Bloomberg's Matt Robinson is reporting that AMJ, a JPMorgan ETN linked to oil partnerships, has also limited new share creations and is developing a similar premium.

JPMorgan limited new share creations on June 14, and the premium to indicative value (the value of the underlying index) has been increasing ever since the limit was hit--only days after the announcement of the halt:



Typically, ETNs track their underlying indexes very closely, as they are essentially debt that promises payouts linked to the level of that index.  Premiums to NAV arise in ETNs due to supply-demand imbalances, such as when issuers restrict new share creations.  This imbalance can create attractive short positions, as traders bet that the issuer will soon allow new shares to be created and the premium will collapse.  So far, however, it does not seem that short interest in AMJ has increased due to the premium:


It is not always clear why issuers may want to limit new share creations.  Credit Suisse limited TVIX shares as a result of unspecified 'internal position limits,' presumably related to their hedge position for the notes.  Like TVIX, open interest in AMJ has grown in early 2012 (by just over 38%), meaning JPMorgan may similarly require a much larger hedge position; alternatively, the share halt could be related to JPMorgan's recent derivatives losses.  So far, JPMorgan has not offered an official explanation.

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