A Bet on Stock Market Volatility Could Make Investors Pay Hundreds of Millions in Losses as Barclays Brings a Big Change to Funds

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A Bet on Stock Market Volatility Could Make Investors Pay Hundreds of Millions in Losses as Barclays Brings a Big Change to Funds


Market participants attempting to gamble on stock market volatility are faced with a showdown on Tuesday, with the possibility of hundreds of millions of losses in sight as fund provider Barclays says it has suspended sales and trading. issue of new shares of a VIX-anchored instrument.

Barclays said it has temporarily stopped creating new shares of the iPath Series B S&P 500 VIX Short-Term Futures ETN VXX,
as the stock exchange has seen its value rise in recent days amid concerns over the war in Eastern Europe and concerns about inflation and the potential for monetary policy missteps.

“They just stop creations when they get nervous,” Eric Balchunas, senior analyst at Bloomberg Intelligence, who focuses on exchange-traded products, including exchange-traded notes or ETNs, told MarketWatch in an interview Tuesday afternoon. exchange traded funds. , referring to Barclays.

IPath Series B S&P 500 VIX Short-Term Futures ETN is designed to allow investors to bet on the size of the swings in the S&P 500 SPX,
plotting an index linked to the daily readings of the so-called Wall Street fear indicator, the Cboe Volatility Index VIX,
or VIX.

ETNs and related ETFs are intended to trade close to the value of an underlying asset. While ETFs hold securities, ETNs hold unsecured debt obligations of an issuer, in this case Barclays, which promises to pay a return on a certain asset.

However, the cost of hedging the VIX product has soared for Barclays as the underlying asset has risen. The broadcaster said it does not have the ability to create more ETN shares and will resume creations once it does.

ETN debt essentially creates a liability on banks’ balance sheets, which they must then cover to comply with regulatory rules.

The discontinuation of new shares for the time being means that the shares of VXX, in reference to its ticker symbol, will not be synchronized with the underlying asset. It also means that investors who shorted VXX, by selling borrowed stock in a bet that its price would drop, have a hard time finding stocks they can buy to close their bearish positions.

“Investors can’t hedge their shorts,” said the Bl analyst.

ETF.com describes VXX as a liquid volatility ETP and claims it is one of the few that offers short-term exposure to VIX futures.

Balchunas estimates that nearly half of VXX’s shares have been kept short – some estimates point to 90% – and that the rising share price is in part a function of short investors being forced to buy back VXX on the open market for dissolve their short betting positions when the price goes up. He speculated that today’s hike alone for VXX could result in losses of around $ 200 million for those making short bets.

“I feel it’s a bit of a selfish move,” Balchunas said of Barclay’s decision to discontinue the creations. “You can’t just fund during good times when it’s easy and then stop creations in bad times,” he said.

“This suspension was imposed because Barclays does not currently have sufficient issuing capacity to support further inventory sales and any further ETN issuance,” Barclays said in a statement.

“These stocks are not the result of the crisis in Ukraine or any problem with market dynamics in the underlying index components. Barclays plans to reopen ETN sales and issuance as soon as it is able to accommodate additional capacity for future issuance, ”the bank said.

This is the second iteration of the iPath VIX product. It was originally launched in 2009, but in January. 30, VXX was removed from the list in an unusual event for such a popular product. Barclays launched a virtually identical product that traded soon after, with call features such as a bond, highlighting the debt nature of the product.

Barclays has also discontinued the creations of iPath Pure Beta Crude Oil ETN OIL,
which is down 8.4% for the week so far, but has risen more than 28% year to date, moving alongside CL crude oil futures prices.

Oil prices and equities have been particularly volatile as investors monitor developments between Ukraine and Russia, with that conflict helping to inject a new dose of volatility into already volatile markets.

The measure of implied volatility for equities, the VIX, which tends to move inversely to equities, has increased 78% so far in 2022, compared to the strong year-to-date losses of the S&P 500, Dow Jones Industrial Average DJIA
and the Nasdaq Composite Index COMP.

Movements in ETNs come from short volatility products, notably VelocityShares Daily Inverse VIX Short Term ETN and ProShares Short VIX Short-Term Futures ETF, which imploded in 2018.


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