What is an ETN?

General Questions

Update : Oct. 29, 2012



General Questions

Listing and Disclosure

ETN Trading Method and Settlement


Q1) What is an ETN? What are the differences between ETNs and ETFs?

ETN is an abbreviation for "Exchange Traded Note". ETNs are notes issued on the credit of highly credible financial institutions which guarantee that the ETN tracks a specified indicator, such as a stock price index.
ETNs and ETFs are similar in that they both track a specified indicator. However, though ETFs are issued as beneficiary certificates backed by stocks or commodities, ETNs differ in that they hold no backing assets.

Please refer to the following page for details.

Q2) What are the merits of ETNs?

ETNs may be issued flexibly and at low cost on the credit of the issuer by not using an investment trust structure, allowing investment in assets which are difficult to hold as backing assets, such as stocks in countries which limit foreign investment and commodities which are hard to hold.
For investors, because the issuer financial institution guarantees the correlation with the underlying indicator, there are no tracking errors. Also, costs associated with management are generally low.
Please refer to the following page for details.

Q3) Where can ETNs be purchased?

As with stocks, it is possible to purchase and sell ETNs at securities companies in Japan.

Q4) What costs are involved?

As with stocks, trading fees are required when trading ETNs through a securities company.
Additionally, investors must bear a management fee after purchasing an ETN. Management fees are specified in advance by the issuer at an annual rate, and the ETN’s redemption value (purchase value) is the underlying indicator’s price with the fee’s annual rate subtracted at a per-diem basis.

Q5) What taxes are required for ETNs?

Because ETNs are listed in the form of JDRs, the same securities taxes apply as those for stocks.
Additionally, as with stocks and ETFs, a specified account (for specified accounts with income, an income tax return is generally unneeded) may be used for a securities trading account and is eligible for offsetting (consolidated taxation for corporations with other corporate income).

Q6) Is margin trading possible?

Margin purchasing is possible for issues selected as standardized margin trading issues from their initial listing date. Furthermore, in cases where an issue is selected as a loan trading issue, both loan sales and purchases are possible.
Designation differs for each issue, so please check the information available on the TSE home page and Japan Securities Finance Co., Ltd. homepage.

Q7) Can a specified account be used?

Because ETNs are listed in the form of JDRs, as with stocks and ETFs, a specified account may be used and is eligible for offsetting.

Q8) What sort of risks are involved in ETNs?

ETNs differ from ETFs in that they do not hold backing assets and are issued on the credit of the issuer financial institution. Thus, the credit risk of the issuer is involved. In addition to credit risk, there are risks associated with price movements and liquidity.
For details, please refer to the item "ETN Risks" on the following page.

Q9) What happens when the maturity date of an ETN arrives?

Because ETNs are designed as a note, they will be redeemed upon the arrival of the maturity date. Currently, most ETNs listed in the US and Europe also have maturity dates, however the period until maturity is often 30-40 years.
In cases where an ETN reaches maturity and final redemption occurs, such ETN shall be delisted. Because the ETN will be redeemed at a price based on the specified indicator, the ETN holder will receive such redemption money.
Furthermore, some ETN products are able to extend the maturity date, in which cases investors will be notified via disclosure, etc. in advance.

Q10) What are the listing and delisting criteria for ETNs?

Primary Listing Criteria for ETNs

[Issuer Criteria]
  • Equivalent of a financial instruments business operator or registered financial institution with at least 3 years of continuous business operations
  • No false statements on financial documents in the most recent 2 years
  • Unqualified opinion or qualified opinion with exceptions on auditor reports in the most recent 2 years
[Financial Criteria]
  • At least JPY 500 billion in net assets
  • Equity capital ratio of over 8%
  • Credit rating of at least A- or equivalent
  • Total amount 25% or less of net assets
[Marketability Criteria]
  • The redemption/purchase value tracks a specified indicator
  • Response to request for redemption/purchase within a period of 5 business days
  • Over 5 years remain until the maturity date
  • Meets with listing examination criteria in accordance with other foreign ETFs (including JDRs) (ensure smooth circulation, designated depository institution, multiple listing on foreign exchange, conclusion of trust agreement, preparation of legal basis for issuance, presence of monitoring government body for issuer, public interest and investor protection, etc.)

Primary Delisting Criteria for ETNs

[Issuer Criteria]
  • Losing status as equivalent of a financial instruments business operator or registered financial institution
  • Halt of business activities, dissolution, bankruptcy, etc.
  • False statement, delayed submission, or adverse opinion/disclaimer of opinion on securities report
[Financial Criteria]
  • Net assets are under JPY 250 billion (continuous 3 year period)
  • Equity capital ratio is 8% or less (continuous 3 year period)
  • Credit rating less than BBB- or equivalent (continuous 3 year period)
  • Total amount over 25% of net assets (continuous 3 year period)
[Marketability Criteria]
  • The redemption/purchase value does not track the specified indicator
  • Does not respond to request for redemption/purchase within a period of 5 business days
  • Less than 0.9 correlation with specified indicator (continuous 1 year period)
  • Difficulties in ensuring smooth circulation, halt on book-entry transfer operations by designated depository institution, loss of multiple listing (delisting) on foreign exchange, termination of trust agreement, public interest and investor protection, etc.
    For details regarding the listing and delisting criteria, please refer to the "ETN Listing Guidelines" on the following page.

Q11) What type of information disclosure is required of ETNs?

In addition to the statutory disclosure documents (securities registration statement/securities report), the following information is released by the ETN issuer through the TSE homepage (Company Announcements).

[Daily Disclosure]

Number of listed beneficiary right units, remaining total redemption value of ETN, redemption value per note, disparity between daily fluctuation rate of specified indicator and redemption value per note

  • (*)"Remaining total redemption value" is generally equivalent to the total unredeemed face value of notes and equivalent to the total net assets of ETFs.
  • (*)"Redemption value per note" is equivalent to the base value of ETFs (total net assets per unit).

Because ETNs fall under foreign corporate bonds under laws and regulations, company information such as dissolution, bankruptcy, or dishonor, etc. is treated as material facts under insider trading regulations. As such, matters which are decided and matters which occurred are items for disclosure with importance to credit-related information.

[Decisions by Listed Companies]

・Merger, demerger (limited to cases where all business is succeeded), transfer of all business, dissolution (excluding dissolution by means of a merger), petition for commencement of bankruptcy/ rehabilitation /reorganization proceedings, etc.

[Occurrence of Facts]

・Fact leading to delisting, loss of status as a registered financial institution/ financial instruments business operator, half of business activities, government disposition, forfeiture of benefit of time, etc.

[Earnings Information, etc.]

・Annual earnings, interim earnings, credit status, etc.

Q12) Are insider trading regulations handled the same as they are for ETFs?

Because ETNs listed as JDRs are JDRs of foreign corporate bonds under the Financial Instruments and Exchange Act, insider trading regulations pertaining to foreign corporate bonds apply. As such, in cases where material facts falls under dissolution, bankruptcy, dishonor, etc., insider trading regulations apply.
Furthermore, ETFs are not included in the specified securities, etc. which are subject to insider trading regulations.

Q13) What are the differences with the trading method of regular stocks?

ETNs, like ETFs, do not have any special trading rules which differ with those of stocks.

・Auction trading, quotes, and daily price limits are the same as those for domestic stocks.
・Base price is a yen-converted price of the closing price in the issue’s home country. When there is no price in the home country or after a certain period following listing, the base price shall be the closing price in the TSE market.

・ETNs are eligible for standardized margin trading.
・ETNs are eligible for auction and off-auction trading.
・ETNs are exempt from short-selling regulations.

Q14) How is ETN settlement conducted?

Settlement of ETNs traded on TSE is the same as that for stocks and ETFs, and is conducted by securities company account transfer at Japan Securities Depository Center, Inc. (JASDEC).


This FAQ is an outline of the nature of ETNs and their trading rules. When trading ETNs, in addition to the possibility of incurring losses due to movements in the price of the product or the underlying securities, there is also credit risk associated with the issuer. Additionally, when conducting margin trading, there is a possibility that losses could exceed deposited collateral. Please adequately read the documents distributed by the financial instruments business operator before concluding an agreement and ensure you sufficiently understand the products, rules, fees, and risks involved, before trading under your own responsibility and judgment. Tokyo Stock Exchange, Inc. reserves all rights pertaining to this FAQ. Separate use or duplication of this FAQ, in full or in part, without permission is expressly prohibited.

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