Barclays this week announced it had made what amounted to a $600 million clerical mistake — it sold more securities than it was authorized to sell.
The Financial Times reported the mistake was that Barclays
used to have an automatically increased shelf registration at the U.S. Securities and Exchange Commission. However, that was removed following a trading scandal — the report didn’t say which one — but Barclays kept operating under the assumption it had such a registration in place when it didn’t.
Barclays earlier in the month suspended issuance of two exchange-traded notes, the iPath Pure Beta Crude Oil ETN
and the iPath Series B S&P 500 VIX Short-Term Futures ETN
At the time, Barclays said it didn’t have “sufficient issuance capacity,” which now makes sense in light of the disclosure about the shelf registration debacle.
Kevin Muir, a former institutional equity derivatives trader who authors The Macro Tourist blog, says there’s an opportunity to exploit. The VXX product has been trading at a roughly 30% premium to its net asset value since Barclays stopped issuing new securities.
“When we were in the dark about the reason for the halt, there was uncertainty whether issuance would ever resume,” he says. “However, now that the reason for the halt is known, it makes me more confident that once this error is rectified, issuance will resume, and the premium to NAV will narrow.”
Here’s his recommended trade: shorting long-term call options on VXX. “As for more adventurous souls, here is what I am doing; we all know about the long-term decay in VIX products. Well, shorting VXX now includes that decay along with an extra 30% premium to NAV which I believe will eventually resolve itself with a move back to NAV. That’s a lot of edge,” he says.
A word of caution — it could go “cataclysmically wrong” — so he recommends making that trade small.