It's Going To Be A Wild Day For XIV, The Credit Suisse Volatility ETN

The ongoing controversy surrounding volatility exchange-traded products is poised to grow. On Monday, the VelocityShares Daily Inverse VIX Short-Term ETN XIV tumbled 14.3 percent on volume that was nearly quadruple the daily average and almost six times the trailing 20-day average, but that wasn't the worst of it for the exchange-traded note.

While U.S. markets close at 4 p.m. Eastern time, index values for volatility products settle after-hours. The CBOE Volatility Index, also known as the VIX, ripped higher Monday night, sending inverse volatility ETNs plunging.

Here's the ugliness straight from the VelocityShares website: XIV's closing price Monday was $99, but its closing indicative value was $4.22, according to issuer data. As of 7:12 a.m. E.T. Tuesday, XIV was sporting a pre-market loss of 84 percent.

Editors note: The XIV was halted Tuesday morning, 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 Feb. 15. It also named Feb. 21 as the acceleration date for the XIV.

More About XIV

XIV is designed to deliver the daily inverse performance of the S&P 500 VIX Short-Term Futures index. ETNs are debt instruments, generally issued by a bank. In the case of the VelocityShares ETNs, Credit Suisse AG CS is the issuing bank. By one estimate, the bank suffered a $500 million loss following XIV's plunge.

Short volatility ETNs have been widely popular in recent years as U.S. equity markets have become increasingly docile, but that trade reversed sharply Monday, stoking speculation of a termination for XIV and some rival products. In fact, some prescient market observers saw this coming.

“For XIV ETF a termination event is triggered if the daily percentage drop exceeds 80%. Then a full wipe-out is avoided insofar as it is preceded by a game-over event,” said Francesco Filia of Fasanara Capital in a July 2017 post on ZeroHedge.

Credit Suisse has not yet made a decision with regard to calling an acceleration of the $XIV, according to a person with direct knowledge of the matter. Credit Suisse is completely hedged against its exposure, the person said.

— Leslie Picker (@LesliePicker) February 6, 2018

Not Alone

XIV wasn't the only offender among inverse volatility products on Monday. Its stablemate, the VelocityShares Daily Inverse VIX Medium-Term ETN ZIV closed at $74.54, but slid to closing indicative price of $58.76, according to VelocityShares data.

On volume that was more than 10 times the daily average, the ProShares Short VIX Short-Term Futures SVXY sank nearly 32 percent during regular trading Monday before plunging more than 79 percent in after-hours trading.

“SVXY provides short exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration,” according to Maryland-based ProShares.

That after SVXY's net asset value jumped 179.1 percent last year. Some market observers are speculating, though it's not as explicit as in the case of XIV, that SVXY could follow a similar termination course.

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