"With the CBOE SPX Volatility Index.VIX nearly tripling over the last three trading days mark-to-market profit and losses have been significant", said Ihor Dusaniwsky, head of research at S3 Partners. For years, the stock market was generally quiet so the VIX would trade at low values, making the VelocityShares note a popular way to make money in a low-volatility environment.
Swiss bank Credit Suisse said Tuesday it is winding down its so-called VelocityShares Daily Inverse VIX Short-Term exchange-traded note after it lost 91 percent of its value Monday. The ProShares Ultra VIX Short-Term Futures ETF (UVXY) has experienced $83 million in outflows this year, while the iPath S&P 500 VIX Short-Term Futures ETN (VXX) has seen $52 million leave. The ETN's market closing Monday was $99, but its closing indicative price as listed on the VelocityShares website was just $4.22.
The XIV fell more than 80 percent and was down another 13 percent Wednesday.
"The long term expected value of your ETNs is zero". "If an Acceleration Event occurs at any time with respect to any series of the ETNs, we will have the right, and under certain circumstances as described herein the obligation, to accelerate all of the outstanding ETNs of such series".
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Credit Suisse said on Tuesday it had not suffered any loss on a volatility product that plunged on Monday when equities markets sold off sharply.
The redemption of the note will likely leave investors with a fraction of their initial investment.
Two inverse ETPs tied to the Cboe Volatility Index tumbled after volatility spiked, prompting a trading halt.
XIV wasn't the only exchange-traded product hammered by Monday's VIX spike. For example, XIV doubled in size in August. 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. Exchange traded notes are unsecured and unsubordinated debt securities issued by an underwriting bank.