JPMorgan (NYSE:JPM) announced today that the maximum number of Alerian MLP Index ETNs (NYSE:AMJ) authorized for issuance will be 129 million ETNs.
Unlike traditional ETFs, exchange-traded notes or ETNs are registered as debt instruments that have credit issuer risk. ETNs typically pay a return linked to the performance of a single security or index.
As a result of JPMorgan’s move, the maximum number of AMJ shares authorized for issuance would be equal to $4,694,310,000, which is calculated by multiplying the $36.39 closing price of the ETN as of the June 13, 2012 market close. Currently, AMJ has $4.19 billion in assets and has declined 4.60% since the beginning of the year.
As of June 15, AMJ traded at a modest 0.17% premium to its underlying assets, but that could change. If AMJ nears or surpasses its share issuance cap, the share price could begin trading at a premium to its underlying indicative value because of supply/demand imbalances.
Similar operational problems have been experienced by other ETNs like the VelocityShares Daily 2x VIX ST ETN (NYSE:TVIX) and the iPath DJ-UBS Natural Gas TR Sub-Idx ETN (NYSE:GAZ).
Any stumbles for AMJ, could be a boon to competing products like the ALPS Alerian ETF (NYSE:AMLP), which is linked to the same MLP index. In contrast the JPMorgan note, AMLP uses an exchange-traded fund structure and has not made any announcements on a restriction in shares. AMLP has $3.21 billion in assets.
JPMorgan Chase has come under fire for its multi-billion trading losses along with its massive exposure to derivatives.
According to the a Q4 2011 report from the U.S. Office of the Comptroller of the Currency (OCC), JPMorgan alone accounted for more than $70 trillion or one-tenth of the $700 trillion in global OTC derivatives exposure.
Other ETNs, structured notes and debt securities issued by JPMorgan Chase are not affected by AMJ’s maximum issuance authorization.
As of late May 2012, there’s roughly $16 billion invested in 216 U.S. listed ETNs, according to the ETF Industry Association.