The Credit Suisse Note That Plummeted 67% in a Day

December 07, 2022

The sudden price collapse of one of November’s best-performing exchange-traded products is raising questions about what spurred soaring trading volumes and sky-high premiums. 

Shares of the Credit Suisse S&P MLP Index ETN (MLPO), a note with nearly $30 million in assets under management, jumped almost 55% in the five trading sessions ending Dec. 1 to $41.50, before plummeting 67% the following day to $13.60. Exchange-traded notes are debt issued by a bank, as opposed to exchange-traded funds, which are pooled investment vehicles.  

MLPO has also significantly deviated from its underlying index, the S&P MLP, which tracks companies listed as master limited partnerships or limited liability companies.  

 

MLPO Returns Deviate from Underlying Index  

Source: Bloomberg  

 

“It's pointing to some abnormalities,” said Mark Neuman, CIO and founder of exchange-traded fund issuer Constrained Capital. “It could be a one off, idiosyncratic,” he said, adding the note’s unusual movements may be explained by the growing uncertainty the bank has faced in recent months.  

Credit Suisse has clients and investors speculating as to its future, after the bank announced a sweeping overhaul of its operations, including a spinoff of its U.S.-based investment bank. The second largest Swiss bank also cautioned late last month about a painful fourth quarter ahead, projecting it would lose about $1.6 billion following customers’ investment and deposit withdrawals.  

Credit Suisse declined to comment. 

MLPO’s volumes and premiums for the fund also spiked the week ending Dec. 2, yet no new shares were created, according to ETF.com data.

“To see the premium balloon to over 200% is surprising,” said Sumit Roy, senior ETF analyst at ETF.com. “Interestingly, there doesn’t seem to be a creation associated with the drop, and based on the data we have, MLPO hasn’t seen any inflows since 2018.”  

 

 

Source: FactSet  

 

Still, analysts point to abnormalities in the fund reaching back to March 2020, when MLPO’s market price started to disconnect from its net asset value, creating premiums between 10% and 20%.  

“We saw a number of ETNs shutter during that tumultuous period, and Credit Suisse itself delisted and suspended creations on a number of its ETNs around that time,” Roy said. “Maybe the events of 2020 spooked market makers and that resulted in wider bid/ask spreads in the product, which in turn led to bigger premiums and discounts.”  

Meanwhile, premiums on MLPO shot up from 0.2% to 217% in the span of a month. 

 

Source: FactSet  

 

The anomaly could also point to the possibility of a clerical error, according to Peter Sleep, senior portfolio manager at 7 Investment Management in London, which may have caused the disruption.  

“It looks like there was a big buy order on a small fund on the 2nd [of] December that drove the fund to a 217% premium,” Sleep wrote in an email to ETF.com. “It could have also been the case that the shelf registration allowing CS to issue new notes had run out in a similar way it did for Barclays earlier this year.”  

Clerical errors are uncommon in the ETF industry but have happened as recently as this year. In mid-March, Barclays halted new creations for its iPath Pure Beta Crude Oil ETN (OIL) and the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX) after it accidentally overissued shares of the ETN, exceeding the amount allowed by its shelf registration statement for a period of roughly one year, according to statements by the firm.  

Barclays attributed the overissuance to a clerical error. The error led to Barclays suspending issuance and sales of its entire ETN lineup for a few months as it sorted through the problem.   

 

Contact Shubham Saharan at [email protected]   

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