This morning Barclays resumed the share creation process on $VXX, the 6 month fiasco is over. VXX's behavior will return to its previous self, but it remains to be seen how much of the former 60 million/day volume returns. Probably not all of it... Overall Barclays will likely pay SEC a large fine (e.g, $100M) for the screwup,which impacted over 3000 securities (mostly structured products), but it appears that in the specific case of VXX that Barclays didn't pay compensation to anyone. The fine print won...

Yes, I've fallen down the $VXX rat hole, but it's a fun place to be... It's a game theory problem with lots of potentially different players, some of which (e.g., the VXX perma-longs) are probably in denial, not even looking at their brokerage account balances. Other players include the shorts (who might get their positions yanked right before VXX creations resume) & Create-To-Lend players who bought VXX, hedged it with VIX futures & lend their share to the shorts. They are likely sitting on huge profits & collecting fat borrow fees.

Thinking about a nightmare scenario associated with $VXX's resumption of share creations in Sept/Oct. VXX been available to short since start of this fiasco in March. This is surprising since parties loaning out shares are sitting on a 30% premium that will go away #VXX #$VXX I suspect most of these lenders are Create-To-Lend (CTL) operations. They bought VXX shares, near-perfectly hedge them with VIX futures or short $VIXY and lend out the shares to shorts for a sweet borrow fee (last I hear at the rate of 30% per year).

When Barclays stopped $VXX's share creation (SC) process on March 14th the initial price action was predictable. Tons of people were short VXX & without SCs there's no way for Authorized Participants (AP) that normally use arbitrage to keep VXX trading close to its NAV price. VXX's price quickly climbed 30% over its NAV price. This might have been fueled by A. Shorts covering positions, either voluntarily or via margin calls, or B. speculators betting on/causing A. However, what happened next was different than previous instances of SC closures

Barclays has released information about its rescission offer for $VXX, $GAS, and other ETNs. sec.gov/Archives/edgar… Offer will start Aug 1 and terminate 30 business days later on 12-Sept. As expected, retail investors are NOT eligible. It doesn't appear that share creations have resumed for the ETNs, at least for VXX, so these products are still trading at a premium to their real, index based value (IV price), so buyers beware! For lots more information on how share creations work see sixfigureinvesting.com/2022/07/arbitr…

Well, it looks like we know the root cause of Barclays halt of share creations for $VXX & $OIL. These funds are Exchange Traded Notes (ETNs) which are a subtype of something called Structured Notes. Structured notes are unsecured bonds, issued, and backed by banks. The "structured" part of these notes refers to the issuing bank's ability to tie the value of these bonds to a wide variety of very unbond-like financial constructs. In the case of OIL & VXX, indexes tied to periodically rolled portfolios of Oil and VIX futures.

One of the things that caught my eye yesterday during $VXX's 35%+ morning runnerup was that on my watchlist ProShares' 1.5X $UVXY also went green for a while. I was surprised at this because $VIXY, ProShare's 1X long volatility, which is working correctly (unlike VXX) was down. This should not happen. $UVXY & $VIXY seek to track the same index, SPVXSP. I thought this might be a tracking error due to high demand but a look at UVXY's holdings on ProShares' website told a different story. The holding highlighted below is a swap based on Barclays VXX!

Regarding Barclays' halting creations on $VXX and $OIL, I'm thinking it's likely because the costs of Barclays' hedging activities, an essential part of running a Exchange Traded Note (ETN), were going into the red on these two products. When an ETN issuer gets cash from a customer it gives them shares, & the ETN immediately hedges that exposure with futures or swaps with counterparties. If that hedging gets expensive the issuer is in a bind because ETN's will normally buy/sell shares at an index price.

As to the cause of Barclays' halting $VXX and $OIL share creations, a couple of possibilities:

1. Barclays just needs to issue more shares, generally a straightforward process. VXX jumped up $400 million in assets in last two days so this might have caught them by surprise. 2. There are futures position size limits that they might be running into

If you're wondering why election risk is causing $VIX futures to peak in Oct rather than Nov, it's because VIX futures, like $VIX are based on $SPX option prices with 30 days until expiration. Oct $VIX future will settle on Oct 21st based on Nov 20 SPX option prices that AM. Since the election will be 2 weeks off at that point those option prices will still reflect election uncertainty. Nov VIX futures are currently priced lower than Oct futures because Dec 17th options are priced cheaper than you'd typically expect.

Around 85% of the time the 2nd month VIX future is priced higher than the front month future. This configuration is called contango in futures' parlance and is usually associated with a drop in $VXX's value. However, contango does not cause $VXX's decline. $VXX's daily roll of futures from the next to expire month to 2nd month does not change its value. VXX's value is established by the value of the $VIX futures it holds.