So if I short an ETN...

[Saltynuts]

and the issuer goes belly-up, does that mean I earn 100% on my short, i.e., don't owe anything since the issuer isn't paying out anything?

Never really focused on ETNs and what they really were - seems owning them long would be nuts - and unsecured obligation of the issuer is just asking for trouble it would seem to me haha.

Thanks.

 

[quant1]

Most early redemption procedures state that the note will be redeemed at a given NAV (see prospectus for how the NAV will be computed). So a short position will be effectively covered at that NAV price via a cash redemption. A good example of this process was the XIV early liquidation in February.

 

[Saltynuts]

Thanks quant1. I'm thinking about a scenario where the company that issued the ETN runs out of money to fund the redemption. I read that Lehman did that when it went bust in 2008 I believe - like the holders of 3 ETNs I believe ended up seeing pennies on the dollar with respect to their investment in Lehman ETNs. XIV was closed down, but the issuer did not go under. Thanks!

 

[Sig]

Thanks quant1. I'm thinking about a scenario where the company that issued the ETN runs out of money to fund the redemption. I read that Lehman did that when it went bust in 2008 I believe - like the holders of 3 ETNs I believe ended up seeing pennies on the dollar with respect to their investment in Lehman ETNs. XIV was closed down, but the issuer did not go under. Thanks!

You still have to return the shares you borrowed to the person you borrowed the shares from. How do you do that if the ETN no longer exists? Eventually the company will liquidate and determine exactly how many pennies shareholders will get on the dollar, but until then you're still holding a short position with margin requirements by your broker same as if it was a trading stock, and that could take a long time. Even worse it's a short you can't close, so those funds are completely locked up. Something to keep in mind for any strategy that involves holding a short to bankruptcy, but probably even a bigger deal here where it's almost certain the short won't go all the way to zero but you don't know where it will go, leaving you with an uncertain liability over an uncertain amount of time.

 

[lightninboy]

You could be like Timothy Sykes and hope it goes bankrupt.

 

[Saltynuts]

You still have to return the shares you borrowed to the person you borrowed the shares from. How do you do that if the ETN no longer exists? Eventually the company will liquidate and determine exactly how many pennies shareholders will get on the dollar, but until then you're still holding a short position with margin requirements by your broker same as if it was a trading stock, and that could take a long time. Even worse it's a short you can't close, so those funds are completely locked up. Something to keep in mind for any strategy that involves holding a short to bankruptcy, but probably even a bigger deal here where it's almost certain the short won't go all the way to zero but you don't know where it will go, leaving you with an uncertain liability over an uncertain amount of time.

Thanks so much Sig. So let's say there is an ETN that has a "value" of $100 on day 1 - that is, ignoring the issuer credit risk, if the ETN was liquidated the issuer would owe $100 on it. I short it. On day 2, the stock markets world wide collapse. The ETNs "value" drops to $70 at the close of day 2. However, in the after-market hours, the issuer announces that it has filed for bankruptcy. It is guesstimated that all that will get ultimately paid out on the ETN is $20, rather than the $70 closing "value".

So, realistically, how much margin could the brokerage tie up? If it tied up $70 worth of margin, I'd be ok with that, even if it took years, because I would know at the end of the day I would make about 80% ($100 I short less the ~$20 expected recovery).

Obviously one thing I would be worried about is the broker having some abnormal margin requirements just given that there is "uncertainty". That is, even though the expected recovery is only $20, they have some margin based on some much, much higher number just because there is "uncertainty". To your knowledge can they or do they ever do this?

Even more worrisome is what you mentioned about still having to return the shares that I borrowed. Let's say that, as above, the issuer has declared bankruptcy, the return on each share is expected to be $20, and the person whose shares I borrowed calls the broker and says it wants its shares back. Obviously I can't give them back because they ceased being traded. What happens then? What is my liability? Surely it has to be capped at either $70, the last trading price, or the ~$20 expected recovery?

Thanks!

 

[Sig]

Thanks so much Sig. So let's say there is an ETN that has a "value" of $100 on day 1 - that is, ignoring the issuer credit risk, if the ETN was liquidated the issuer would owe $100 on it. I short it. On day 2, the stock markets world wide collapse. The ETNs "value" drops to $70 at the close of day 2. However, in the after-market hours, the issuer announces that it has filed for bankruptcy. It is guesstimated that all that will get ultimately paid out on the ETN is $20, rather than the $70 closing "value".

So, realistically, how much margin could the brokerage tie up? If it tied up $70 worth of margin, I'd be ok with that, even if it took years, because I would know at the end of the day I would make about 80% ($100 I short less the ~$20 expected recovery).

Obviously one thing I would be worried about is the broker having some abnormal margin requirements just given that there is "uncertainty". That is, even though the expected recovery is only $20, they have some margin based on some much, much higher number just because there is "uncertainty". To your knowledge can they or do they ever do this?

Even more worrisome is what you mentioned about still having to return the shares that I borrowed. Let's say that, as above, the issuer has declared bankruptcy, the return on each share is expected to be $20, and the person whose shares I borrowed calls the broker and says it wants its shares back. Obviously I can't give them back because they ceased being traded. What happens then? What is my liability? Surely it has to be capped at either $70, the last trading price, or the ~$20 expected recovery?

Thanks!

I don't think the last thing is an issue you have to worry about, the whole thing is basically frozen. The margin I would think would be up to your broker and may vary wildly depending who you're with. Let's just say I wouldn't want this to happen with IB!

 

[Saltynuts]

I don't think the last thing is an issue you have to worry about, the whole thing is basically frozen. The margin I would think would be up to your broker and may vary wildly depending who you're with. Let's just say I wouldn't want this to happen with IB!

Thanks Sig, good to know. Funny you mention IB, that is exactly who I use. I think I'm going to put in a call to them to see exactly how they would handle the margin requirements in this case. But good to know essentially I can't likely get "short squeezed" in an ETN issuer bankruptcy scenario. Thanks!

 

[Saltynuts]

You could be like Timothy Sykes and hope it goes bankrupt.

Baahahaha, I listened to a few of his podcasts. I know he shorts them a lot, but in these podcasts he was talking about going long in various penny stocks and how so many of his listeners have made millions, etc. buying and selling these penny stocks. In the middle of all this, he explicitly says that all the stocks he is discussing (essentially recommending) are total pieces of shit that will ultimately be worthless. I thought what a shit head, recommending people buy stocks in companies that he knows are essentially valueless haha.