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Death Knell of Libor Heralds Structured Notes Backed by ... Libor

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Keep calm and carry on using Libor.

Just as the world was put on notice that the end is nigh for the scandal-plagued London interbank offered rate, Janus Henderson Group Plc has started two new exchange-traded notes linked to the doomed benchmark.

(Related: Libor Funeral Set for 2021 as FCA Abandons Scandal-Tarred Rate)

A case of bad timing? Perhaps. Bankers around the globe are abuzz about which benchmark, or benchmarks, will replace Libor, which has been the subject of a string of manipulation prosecutions. Last month, Britain’s Financial Conduct Authority said it would no longer force banks to help set the rate as of the end of 2021.

(Related: Janus Capital, Henderson Group Complete Merger)

But Janus, which launched the products last week, is sanguine in the face of such noise.

“The point of these products is to manage interest-rate risk, and for today the most liquid way to do that is with Libor,’’ said Nick Cherney, Janus’s head of exchange-traded products. The proposed changes for Libor “are very, very far out in the future.’’

Janus’s two notes — a Long LIBOR ETN and a Short LIBOR ETN sold under the VelocityShares brand — give investors a chance to bet on future Libor rates. Their indexes are calculated using the weighted average of the forward three-month dollar-Libor rate implied in the daily settlement of the next eight quarterly eurodollar futures. If the benchmark rate for the eurodollar contracts changes, the ETNs will adjust as well, according to Cherney.

Dim Prospects

Exchange-traded notes comprise less than 1 percent of the $3 trillion U.S. market for exchange-traded funds, housing just $23 billion of assets. Unlike ETFs, which as the name suggests are structured as funds under the 1940 Investment Company Act, ETNs are a type of debt security issued and guaranteed by a bank. In this case, that’s Citigroup Inc.

Starting a new product linked to a fading benchmark isn’t ideal, according to  Peter Tchir, head of macro strategy at Brean Capital LLC in New York. That, combined with the fact that these notes are more complicated to understand than the eurodollar futures backing them, makes the prospects of large inflows pretty dim, he says.

“If you were trying to design a long-term product, you’d have to take into account that Libor is questionable,” said Tchir by phone.

But even if Libor is phased out, it may take a long time. More than $350 trillion of financial products are pinned to the rate, helping it remain the default benchmark even after it was known to be rigged and manipulated. Pacific Investment Management Co. this month said that it expects banks will voluntarily administer Libor until an alternative is firmly in place.

“Our objective was to create a product that was the most interest-rate sensitive possible,” said Cherney. “I think we’ve done that. For right now, Libor is the only rate that makes sense.’’

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