Opera Trading Capital Sells 9912 Shares of Credit Suisse AG

Analyst Explains The Inverse Volatility Fund Feedback Loop

The biggest rally ever in the Cboe Volatility Index (CBOE) is raising thorny questions about the future of exchange-traded products tied to the gauge.

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.

"Credit Suisse - which is the largest holder of the ETN - issued a statement saying the bank has not suffered any trading losses due to the XIV implosion". 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. Last summer I wrote an article for Bloomberg Businessweek titled "Why Investors Shouldn't Trust Low Volatility: Don't let the long run of market calm lull you into complacency".

Other volatility-related funds, including the ProShares Short VIX Short-Term Futures (SVXY), have also fallen precipitously; that ETN was also halted Tuesday morning pending news. "Nevertheless, the Swiss lender this morning set a redemption date of February 20, for the volatility note, well ahead of the December 4, 2030, maturity date", according to Schaeffer's Investment Research. 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.

It is the relatively newer entrants to this market who are likely to be hurting from the implosion of these products, market participants said.

Just one fifth of XIV's outstanding shares are owned by funds and institutions, according to Morningstar Inc.

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I've heard a lot of explanations but none explains both how it was so high in regular trading, and so low after hours.

"The reality is that we trade in a market where everyone has equal access", Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas.

"That's what happened", he said.

Some hedge funds were caught holding the bag on this security.

Credit Suisse announced a redemption of its Vix short-term exchange-traded note later this month after the rise in market volatility led to the note losing more than 80 per cent of its value, triggering a clause allowing the Swiss bank to shut it down.

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