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GraniteShares, a $10.6bn manager of high-risk leveraged and inverse exchange traded products, has been suspended from selling new units in its European range.
The base prospectus for the company’s 65 European ETPs expired on Friday, and a regulatory note posted on its website said an updated prospectus had not been approved “at the date of this announcement”.
“As a result, issuance of new tranches of ETP securities will be suspended from March 22 2025” until regulators have signed off the revised prospectus, the statement added.
Existing investors will still be able to redeem their shares. However, the suspension of creating new shares may impact the arbitrage mechanism that ETPs use to keep their share prices in line with their net asset value.
GraniteShares’ European ETP range held a total $346mn of assets as of Thursday, according to data from ETFbook. Its most popular products include vehicles offering three times long or short daily exposure to companies such as MicroStrategy, Nvidia, Tesla and Rolls-Royce.
The suspension only applies to the UK and EU, and does not affect GraniteShares’ far larger US range of ETPs.
“This should be bread and butter in a larger organisation, but something has clearly gone wrong,” said Kenneth Lamont, principal of research at Morningstar, who said he had never before seen an issuer fail to secure an updated base prospectus in time.
“They are a fairly small outfit,” Lamont added. “This emphasises the importance of the parent [company]. If it’s a skeleton operation, then mistakes can be made and it has a real impact on investors.
“There is significant investment risk in all of GraniteShares’ products. This adds operational risk.”
The New York-based group was founded in 2016 by Will Rhind, a veteran of the ETF industry, with backing from Bain Capital Ventures and other investors.
Base prospectuses need to be signed off by regulators, in this case the UK’s Financial Conduct Authority and the Central Bank of Ireland, on an annual basis. They cover areas such as the issuer’s legal and regulatory status, the types of ETP it offers and the various risk factors for investors.
Gianmarco Roncarolo, director of GraniteShares Europe, said: “The suspension of issuance of new tranches of ETP Securities solely affects GraniteShares’ European programme. It has no impact on its US activity.
“GraniteShares remains committed to the European market and continues to work with the regulators regarding the renewal of the base prospectus. GraniteShares continuously monitors the situation in co-operation with the exchanges and the market-makers in ETP securities.”
The FCA and CBI declined to comment.
The episode is far from the only glitch to impact the leveraged and inverse ETP sector, a niche of the broader global $15tn ETF market.
Both GraniteShares and rival issuer Leverage Shares were forced to suspend trading in their London-listed leveraged MicroStrategy ETPs for three days in October because of a disagreement with the FCA as to how the company’s business should be described.
In November, investors in two US-listed 2x MicroStrategy ETFs, managed by Tuttle Capital Management and Defiance ETFs, failed to receive the stated leverage on several occasions. This was seemingly because the fund size was exceeding the supply of total return swaps the ETFs rely on to generate leverage, forcing them to use call options — which can track less accurately.
Earlier, in 2023, Leverage Shares was unable to deliver the full three-times returns on its $320mn London-listed 3x Tesla ETP on six trading days during the month, apparently because unable to access the necessary financing to generate the leverage.
In March 2020, WisdomTree had to close its three-times leveraged oil products after their value was wiped out by Covid-induced market volatility. In 2018, Credit Suisse’s short volatility XIV ETP was killed off after collapsing 90 per cent in one day. Two years later, the Swiss bank delisted and suspended nine more leveraged and inverse products.
“We have seen issues with leveraged products before. Some of them haven’t been able to provide the full leverage in certain market conditions. It’s in the fringes of the ETP market that these things tend to happen,” Lamont said.
