Credit Suisse to Delist (but Not Liquidate) Three Commodity ETNs

Credit Suisse (CS) announced its intent to delist three of its ELEMENTS brand ETN products. The last day of trading is expected to be “on or about” April 3, 2009.

The affected securities are:

• Elements MLCX Gold Index ETN (GOE)
• Elements MLCX Livestock Index ETN (LSO)
• Elements MLCX Precious Metals Index ETN (PMY)

The delisting comes as no surprise. It’s what’s missing from the announcement that is shocking - there is no liquidation plan.

The background story on this is one of the more interesting tales in the ETF world. Recent trading in GOE has been strange enough to draw the attention of the NYSE.

I issued a “Sell” on GOE on March 9 at a price of $114.90 while the indicative value (NAV) was $10.90. It was trading at a 1,000% premium, and Credit Suisse informed me they were not planning to issue any more shares and that the market maker was out of inventory.

LSO and PMY also have some trading problems, but not to the degree of GOE. Fifteen minutes prior to today’s close, LSO had a bid of $8.00, an ask of $8.09, and an indicative value of $7.94 (rather reasonable for an ETN with only 100 shares traded). At the same time, PMY had a bid of $7.46, ask of $8.54, and indicative value of $7.77. A bid/ask spread of more than 14% with the last trade at a 9.9% premium.

As for not liquidating and closing these ETNs, Credit Suisse says it will publish bids on its website, but reminds us that it is not required to do so and could cease the practice at any time. Credit Suisse also reiterated its intent not to issue any additional shares.

So, why is Credit Suisse taking all these convoluted steps? They won’t say, but here is my opinion: I believe they did not fully appreciate the process of shutting down an ETN in an orderly manner. As a result, they stopped issuing new shares prematurely. An orderly closure and liquidation requires the ongoing presence of a market maker (or authorized participant) who can create and redeem shares as necessary.

In the case of GOE, investor demand increased to the point that the shares took on a life of their own. The price was moving up, and then momentum players jumped on board and pushed it even higher. In the absence of any statement from Credit Suisse, many traders were unaware that it was no longer subject to the normal ETF/ETN in-kind redemption practice.

I further suspect that the lack of a closure announcement is Credit Suisse’s attempt to fix the problem they created. By posting bids on their website, they can potentially retire the outstanding shares and eventually close the fund. In the meantime, current share holders are now in a race to see who can get out at the best price before GOE collapses back to its indicative value.

Oh yes, the recent Credit Suisse announcement also contained another oddity. They said the delisting would not involve Elements Credit Suisse Global Warming ETN (GWO), even though it hasn’t traded for five days and is on my DeathWatch. However, they reserve their right to change their mind.

Stay tuned - this story is far from over.

Disclosure: No positions.

Comments

[optionsgirl:]

Good article, Mr. Rowland. Why would anyone trust Credit Suisse after this?

Mar 14 11:22 AM

[Conan the B...:]

Optionsgirl: Why would you want to invest in ETNs which are illiquid?

100 shares, not traded for a week, etc.

One would think that their illiquidy would have prompted people to see the "writing" on the wall before something like this occurred.

Just an opinion, but I would think you will see more of the same from others.

Mar 14 12:13 PM

[Old Trader:]

Certainly a black eye for Credit Suisse, as well as the whole ETF/ETN sector. Hopefully, things like this will spur investors to DD issuers of ETF/ETNs, just as investors in OE funds need to consider the "family" background, not just the particular fund they're considering.

Mar 14 08:58 PM

[optionsgirl:]

I don't trust etn's. I trade commodities directly. I don't need an equity that mimics a commodity and is an approximation based on the credit worthiness of the issuer. Even SLV scares me. They removed the word "bullion" from their prospectus. Now it just says invests in silver. Yup, pieces of paper that say I. O. U. ... are the coffers empty, the physical asset leased out and the investor has no right to audit? Who knows!
With equities, I stay away from derivatives whenever possible!
Hey, Paul, do you know IBM is getting heavily involved in water infrastructure? They are doing with water what they have done with electric! And best of all, a lot of the work will be foreign!
How's TTEK working for you? Keep your stops tight. They are losing a lot of municipal business.


On Mar 14 12:13 PM paultaut wrote:

> Optionsgirl: Why would you want to invest in ETNs which are illiquid?
>
>
> 100 shares, not traded for a week, etc.
>
> One would think that their illiquidy would have prompted people to
> see the "writing" on the wall before something like this occurred.
>
>
> Just an opinion, but I would think you will see more of the same
> from others.

Mar 16 11:09 AM

[optionsgirl:]

correction: I don't mean the price is of the etn is based on the credit of the issuer. I mean the underlying security can be compromised based on the credit of the issuer. You probably already knew what I meant!


On Mar 16 11:09 AM optionsgirl wrote:

> I don't trust etn's. I trade commodities directly. I don't need
> an equity that mimics a commodity and is an approximation based on
> the credit worthiness of the issuer. Even SLV scares me. They removed
> the word "bullion" from their prospectus. Now it just says invests
> in silver. Yup, pieces of paper that say I. O. U. ... are the coffers
> empty, the physical asset leased out and the investor has no right
> to audit? Who knows!
> With equities, I stay away from derivatives whenever possible!
>
> Hey, Paul, do you know IBM is getting heavily involved in water infrastructure?
> They are doing with water what they have done with electric! And
> best of all, a lot of the work will be foreign!
> How's TTEK working for you? Keep your stops tight. They are losing
> a lot of municipal business.

Mar 16 11:16 AM