3 ETNs suspended as price premiums hit extreme levels

Three exchange traded notes (ETNs) tracking crude oil futures have been suspended by the Korea Exchange after the instruments traded at a huge premium to their indicative value.

ETNs are debt instruments issued by banks that are designed to track underlying assets. They trade on the market like funds.

The exchange said it would suspend trading in leveraged ETNs tracking West Texas Intermediate (WTI) futures issued by Samsung Securities, Shinhan Investment and NH Investment & Securities today as the discrepancy between the market price and indicative value rose to dangerously high levels.

It is the first time the local exchange operator order the suspension of an ETN.

The exchange can suspend trading of the ETNs if the gap between the market price and the underlying value exceeds 30 percent for five consecutive days. Normally, the gap stays under 6 percent.

The price gap grew as local investors bet heavily on the price of oil.

Crude oil prices have been plummeting recently on Covid-19-related economic weakness and a price war between Russia and Saudi Arabia. WTI, which is based on the price of a specific grade of Texas light sweet crude and is a U.S. benchmark, hit an 18-year low in the last week of March.

Investors in Korea have been heavily buying ETNs to bet on a rebound, while issuers have been unable to meet demand for the instruments.

The discrepancy for three ETNs exceeded 30 percent from April 8 to April 14, triggering the exchange to suspend trading today for one day. The market was closed Wednesday due to general election.

According to Korea Exchange, the discrepancy was 42.6 percent for the ETN from Samsung Securities, 36.6 percent for the Shinhan Investment ETN and 34.7 percent for the NH Investment ETN. The premium for Samsung notes hit 82.6 percent Monday.

“From the beginning of March, the market prices of the ETNs in question have been abnormally high compared to the indicative value which tracks the WTI futures,” the Korea Exchange said in a release.

“If the buyer purchases the notes at a price far higher than the indicative value, the investors will end up losing their money because the oil price will never go as high as that level and will eventually the market price will return to the indicative value.”

The trade of the notes from three brokerage houses will resume on Friday, but if the discrepancy continues to hover around 30 percent, the Korea Exchange can tentatively suspend the trade until it believes enough supply has been made available.

“Retail investors are shifting from long-term and safe investment to speculation,” said Ha In-whan from Meritz Securities. “The hefty purchase of WTI-related ETNs will leave the retail investors vulnerable to market volatility unlike their somewhat successful investments in Kospi and Kosdaq stocks.”

The Financial Supervisory Service on April 9 issued its highest warning to retail investors betting on leveraged WTI futures products. It was the first time it sounded an alarm of this level since the warning system was adopted in 2012.

BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]