DGAZF Disaster Strikes As Dying ETN Blows Out Past Real Net Asset Value

Another disaster in the world of exchange-traded notes occurred Wednesday when the VelocityShares 3x Inverse Natural Gas ETN DGAZF entered the day with a net asset value of $121 from Tuesday only to trade as high as $25,000.

What Happened: No, that $25,000 isn't a misprint and, no, that's not supposed to happen with exchange-traded products. First, some quick backstory on DGAZF arrived at this wild place.

Back in June, Credit Suisse CS, the issuing bank behind the VelocityShares ETNs, announced it was delisting nine of those products from the Nasdaq and New York Stock Exchange. The old DGAZ being part of that group was largely overlooked because some gold and silver products were included on the list and those are among this year's best-performing commodities.

The usual methodology of delisting is to close an ETF or ETN, but Credit Suisse moved the nine inverse and leveraged ETNs in question to over-the-counter trading, which is akin to allowing the products to die a slow death. With the benefit of hindsight, it's clear DAGZF should have been put out of its misery weeks ago.

“Although it is not currently accelerating the ETNs at its option, Credit Suisse AG continues to have the right to do so, as described in the pricing supplement for the ETNs,” the bank said in a June statement.

Why It's Important: Beyond the fact ETPs aren't supposed to trade tens of thousands of percent above their net asset values, the DGAZF is important for another reason. Fifty-seven delisted but still breathing ETNs with a combined $2.4 billion in assets under management are trading over the counter. That doesn't mean the DGAZF scenario repeat, but it doesn't mean it won't happen again, either.

That's not the only bad news here. It seems Credit Suisse was collect fees by loaning out DGAZF shares to short sellers. This was a $400 product earlier this month, but in the span of a few days, it touched $25,000, potentially creating paper losses of as much as $300 million for short sellers.

Not surprisingly, there's social media chatter that the Swiss bank could face litigation, though disclaimers could make a class action suit tricky for traders.

What's Next: Apparently, Credit Suisse learned its lesson and is accelerating the closure of DGAZF and the eight other ETNs.

“As described in the Pricing Supplement, investors will receive a cash payment per ETN equal to the arithmetic average of the closing indicative values of the ETNs during the accelerated valuation period,” according to the bank. “The accelerated valuation period will be a period of five consecutive index business days, which is expected to be from August 14, 2020 to August 20, 2020. The acceleration date is expected to be August 25, 2020, three business days after the last day of the accelerated valuation period.”

Basically, Credit Suisse is trying to give traders involved with DGAZF a decent exit package, if it's even possible at this point.