Friday, 25 May, 2018

Credit Suisse Roiled by Volatility Bet

It's Going To Be A Wild Day For XIV The Credit Suisse Volatility ETN Instant View: US stock slide drags S&P down 5 percent from January record
Laurie Berry | 10 February, 2018, 12:34

And it's gonna be an even greater trade going forward, according to Credit Suisse: "History shows that investing following spikes in Volatility tends to lead to above average returns", the strategists wrote, pointing to data on buying into those two stock indexes when volatility is elevated.

As of this writing, both XIV and SVXY were halted for trading, but were expected to resume trading later in the day.

Just one fifth of the outstanding shares in these products are owned by funds and institutions, according to Morningstar Inc, suggesting the product could be extensively owned by retail investors. The VelocityShares Daily Inverse VIX Short Term ETN (XIV), which had $1.9 billion in assets as recently as Friday, lost 96.3% of its value on Monday, prompting its issuer to redeem the notes early.

Credit Suisse's European-listed shares closed down 6 per cent during a broader sell-off.

As Benzinga reported Tuesday, XIV was halted Tuesday, and Credit Suisse subsequently issued a press release saying it will be delivering an irrevocable call notice to The Depository Trust Company for the XIV on February 15.

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The long-awaited market decline from record highs sent people to options for protection, raising prices for those derivatives, and eroding the value of XIV and other investments that effectively bet on tranquil conditions.

On late Monday, Credit Suisse said that the XIV drop would have no material effect on the Swiss bank itself.

The VelocityShares refused to comment on the Monday's move. As the sponsor of the VelocityShares note, Credit Suisse had the right to wind down and liquidate the note if its value changed more than 20 percent in a day.

A similar note issued by Nomura was also...

Despite a steady rally in the past 12 months that saw the USA benchmark S&P 500 stock index gain almost 20 percent previous year, retail and institutional investors were lured into using complex exchange traded products (ETPs) to reap even bigger gains by betting against a correction in prices, based on the volatility index offered by Cboe Global Markets, commonly known as Wall Street's "fear gauge". However, an exchange traded note, like the name implies, is a type of debt note that trades on an exchange. A federal appeals court in 2014 ruled in favour of the bank, saying no reasonable investor could have read disclosures for the product without understanding their risk.

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