Banks are now shying away from the ETN business as regulatory pressures forced many to set aside more capital to cover potential losses. Consequently, as ETNs grow in size, banks would have to set aside more capital to safeguard against a default, which may not be the most profitable use of their shrinking balance sheets.
However, banks can’t force investors to liquidate their ETNs, and ETNs can’t be closed until they mature – typically between 20 to 30 years after they are issued. Consequently, some are opting to delist the ETNs from major exchanges and allowing the notes to trade in gray markets, such as what Credit Suisse AG, the underwriting bank, did for the VelocityShares 3x Long Crude ETN (NYSEArca: UWTI) and VelocityShares 3x Inverse Crude (NYSEArca: DWTI).
The underwriting banks may also suspend issues of new shares, which would cause the ETNs to act more like closed-end funds and trade at huge premiums or discounts to their net asset value. For example, the iPath Crude Oil Futures ETN (NYSEArca: OIL) traded with a premium of as high as 48% in January after the issuer suspended creations.
For more information on the ETF industry, visit our current affairs category.