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Libor-tracking investments hit U.S. exchanges; complexity a worry

Published 08/16/2017, 07:38 PM
© Reuters. A trader works on the floor of the New York Stock Exchange shortly after the opening bell in New York
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By Trevor Hunnicutt

NEW YORK (Reuters) - Investors who place wagers on the direction of interest rates got a new set of U.S.-listed investment products on Wednesday, but their complexity may prove an obstacle to them gaining broad acceptance.

VelocityShares Long LIBOR Exchange-Traded Notes and VelocityShares Short LIBOR ETNs track an index designed to mimic changes in the U.S. dollar-denominated London interbank offered rate (Libor), a widely used but potentially soon-to-be-extinct, interest-rate benchmark.

Libor reflects banks' estimate of what they would be charged to borrow money and is used to price financial contracts worth $350 trillion, ranging from home loans to credit cards and derivatives.

Banks have been fined billions of dollars for trying to manipulate the benchmark, in a multi-year scheme that reached its zenith in 2012.

Last month, the head of Britain's financial markets regulator said a Libor substitute must be in place for use by the end of 2021. The U.S. Federal Reserve is developing a home-grown benchmark as an alternative.

VelocityShares said the products can help investors get exposure to rate moves without having to tie up capital buying bonds.

Investors cannot invest directly in Libor. But VelocityShares is looking to give them a proxy with the new ETNs, which rely on Eurodollar futures contracts.

That could prove an obstacle as Eurodollars are not something a lot of retail investors know about, said Jared Dillian, an independent investment strategist.

"Things that are difficult to price, Wall Street is really good at pricing them, and no one else really knows where the value is," he said.

Nick Cherney, head of exchange-traded products for VelocityShares owner Janus Henderson Group plc, said the appeal of the product was its ability to track interest rates and that the ETN could follow a different benchmark should one eventually replace Libor as an industry standard.

He said the notes are debt market analogs to products that bet on or against equity market swings based on the CBOE Volatility Index.

ETNs are, unlike their exchange-traded fund cousins, debt obligations of their issuer and do not provide investors the same legal protections. The new notes are guaranteed by Citigroup Inc (NYSE:C), while VelocityShares markets the notes, and come with a 1.5 percent annual fee. Citigroup declined to comment about the ETN's launch.

The ETNs can lose value over time regardless of the direction of Libor.

© Reuters. A trader works on the floor of the New York Stock Exchange shortly after the opening bell in New York

"It's going to be a big wealth transfer from the unsophisticated to the sophisticated," said Dillian.

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