Amid all the madness in markets today, Treasury markets are seeing as much of not more chaos, as one of the key Treasury ETNs was shut down or delisted due to what are perceived by the exchange to be dangerous conditions.
Barclays Bank PLC (“Barclays”) said today that it received a notice from Cboe BZX Exchange, Inc. (“CBOE”) that, before market open on March 9, 2020, the CBOE will suspend trading in the iPath US Treasury Long Bond Bear ETNs (DLBS) and will commence delisting proceedings in the ETNs.
The CBOE’s decision to cut the contract, for the time being, comes as recent declines in the aggregate principal amount of the ETNs caused them to drop below the $400,000 minimum required by CBOE, including the fall to $0 on March 6, 2020, and as a result of expensive trading premiums relative to the intraday indicative note value between March 2, 2020, and March 6, 2020. The $931,000 ETN closed below $3 on February 28.
The $451 million ProShares UltraShort 20+ Year Treasury Fund (TBT) also plummeted to the lowest since it was initiated during the global financial crisis before trading was halted.
Holders of these ETNs should be aware that during suspension and after delisting is effected, the ETNs may trade, if at all, on an over-the-counter basis. The secondary market for the ETNs may, therefore, undergo a sizable drop in liquidity, whereas a result, holders of the ETNs may find themselves unable to trade or sell the ETNs readily.
“There’s a lot of exotic and dangerous products in the exchange-traded ecosystem, and this is a reminder of that,” said Eric Balchunas, an ETF analyst for Bloomberg Intelligence.
The DLBS situation recalls the fall of the VelocityShares Daily Inverse VIX Short-Term ETN, ticker XIV, according to Balchunas. XIV was forced to liquidate in February 2018 when volatility spiked. However, assets in XIV topped $2 billion in the previous month, while DLBS holds less than $1 million, he said.
Another crucial difference is the sheer size and liquidity of the $16.9 trillion Treasury market. Given that DLBS and similar funds are forced to liquidate, it’s enough to affect Treasuries in the same way that XIV’s blow-up rocked volatility markets, according to Greenwich Associates.
“There is likely to be additional suffering, but probably not insanity like February 2018,” said Ken Monahan, a senior analyst covering market structure and technology at Greenwich.
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