Libor-Tracking Investments Hit U.S. Exchanges; Complexity a WorryLibor-Tracking Investments Hit U.S. Exchanges; Complexity a Worry

By Trevor Hunnicutt

NEW YORK, Aug 16 (Reuters) - Investors who place wagers onthe direction of interest rates got a new set of U.S.-listedinvestment products on Wednesday, but their complexity may provean obstacle to them gaining broad acceptance.

VelocityShares Long LIBOR Exchange-Traded Notes andVelocityShares Short LIBOR ETNs track an index designedto mimic changes in the U.S. dollar-denominated London interbankoffered rate (Libor), a widely used but potentiallysoon-to-be-extinct, interest-rate benchmark.

Libor reflects banks' estimate of what they would be chargedto borrow money and is used to price financial contracts worth$350 trillion, ranging from home loans to credit cards andderivatives.

Banks have been fined billions of dollars for trying tomanipulate the benchmark, in a multi-year scheme that reachedits zenith in 2012.

Last month, the head of Britain's financial marketsregulator said a Libor substitute must be in place for use bythe end of 2021. The U.S. Federal Reserve is developing ahome-grown benchmark as an alternative.

VelocityShares said the products can help investors getexposure to rate moves without having to tie up capital buyingbonds.

Investors cannot invest directly in Libor. ButVelocityShares is looking to give them a proxy with the newETNs, which rely on Eurodollar futures contracts.

That could prove an obstacle as Eurodollars are notsomething a lot of retail investors know about, said JaredDillian, an independent investment strategist.

"Things that are difficult to price, Wall Street is reallygood at pricing them, and no one else really knows where thevalue is," he said.

Nick Cherney, head of exchange-traded products forVelocityShares owner Janus Henderson Group plc, said theappeal of the product was its ability to track interest ratesand that the ETN could follow a different benchmark should oneeventually replace Libor as an industry standard.

He said the notes are debt market analogs to products thatbet on or against equity market swings based on the CBOEVolatility Index.

ETNs are, unlike their exchange-traded fund cousins, debtobligations of their issuer and do not provide investors thesame legal protections. The new notes are guaranteed byCitigroup Inc, while VelocityShares markets the notes, andcome with a 1.5 percent annual fee. Citigroup declined tocomment about the ETN's launch.

The ETNs can lose value over time regardless of thedirection of Libor.

"It's going to be a big wealth transfer from theunsophisticated to the sophisticated," said Dillian.

(Reporting by Trevor Hunnicutt; Additional reporting by RichardLeong; Editing by Daniel Bases and Andrew Hay)