Credit Suisse 'volatility' fund liquidated after market selloff

ZURICH/NEW YORK (Reuters) - Credit Suisse CSGN.S said on Tuesday it would terminate the second-largest publicly traded product betting on future swings in the S&P 500 after its value plunged during the global market rout.

The logo of Swiss bank Credit Suisse is seen at a branch in Winterthur, Switzerland November 2, 2017. REUTERS/Arnd Wiegmann

The fund’s spectacular demise marked just one of the casualties in the “short-vol” trade investors piled into in recent years to profit from stable markets with complex products that gained on low and stable volatility.

Those bets unravelled on Monday as the benchmark S&P 500 .SPX index and the Dow Jones Industrial Average .DJI suffered their biggest respective percentage drops since August 2011. U.S. stocks ended Tuesday with gains after another wild trading session.

Monday's selloff triggered the termination of Credit Suisse's VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note (ETN) XIV.P, which tracks financial instruments that effectively bet against a fall in markets. It will stop trading by Feb. 20, the Swiss bank said in a statement.

The notes were worth a combined $1.6 billion on Friday, according to Thomson Reuters’ Lipper unit, but ended Tuesday at a more-than-92 percent discount to their closing value the prior day.

Just one fifth of XIV’s outstanding shares are owned by funds and institutions, according to Morningstar Inc. That suggests retail investors could own a sizeable chunk of the volatility product which booked a 585 percent gain for the two years ending Feb. 1.

Credit Suisse said earlier it faced no material impact from the fall in the ETN, in which it has a 32 percent stake. The bank’s exposure to the product, which Credit Suisse launched in 2010 and of which it has around 4.8 million units, was fully hedged, according to a source familiar with the matter, meaning they made other trades to eliminate their own risk.

Credit Suisse’s European-listed shares closed down 6 percent during a broader selloff.


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.

Janus Henderson Group plc JHG.N, which markets the notes and owns the VelocityShares brand, did not respond to multiple requests for comment.

Nomura Securities 8604.T said earlier Tuesday it would redeem its Tokyo Stock Exchange-listed "Next Notes" S&P 500 VIX Short-Term Futures Inverse ETN 2049.T after a massive loss in the product. Those notes will be redeemed at a cut of 96.1 percent from its closing price on Monday, and will be delisted from the Tokyo Stock Exchange on Feb. 19, Nomura said.

Other similar products were halted from trading. The CBOE Volatility Index .VIX fell 20 percent on Tuesday, meaning many inverse products could have made back some of their losses had trading in the products not been stopped.

“The unexpected level of volatility has impaired the trading of the underlying derivatives used by many VIX-related exchange-traded products,” said Horizons ETFs Management (Canada) Inc, which halted one of its volatility products and discouraged investors from buying another.

XIV’s prospectus spelled out the risks of an investment in the ETN, saying a large decline could result in its closure, removal from the market and likely loss of all or a substantial part of the investment.

“The long term expected value of your ETNs is zero,” the prospectus says.

It is not the first challenge for investors in a Credit Suisse ETN.

The firm was sued in 2012 by investors who owned a “leveraged” ETN after new issuances of the notes, which doubled one market’s returns, were suspended. 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.

In 2016, the bank took its leveraged oil-tracking notes off of exchanges without offering all of its investors a way to redeem them, forcing some to trade “over-the-counter,” where there was no guarantee of recouping their full investment.

Reporting by Michael Shields in Zurich and Trevor Hunnicutt in New York; Additional reporting by Saqib Iqbal Ahmed in New York, Ismail Shakil in Bengaluru and Silvia Aloisi in London; Editing by Alexander Smith and Andrew Hay