Sorry, not sorry: Wall Street not quitting ‘vol’ products

Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York February 13, 2018. —  Reuters pic
Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York February 13, 2018. — Reuters pic

NEW YORK, Feb 15 — One bank has expressed its regrets for the unravelling volatility trade.

But in general Wall Street is offering up apologia — rather than an apology — for the dramatic windup last week of investment products that had profited from calm stock markets.

Credit Suisse Group AG and Nomura Co Ltd have said they would kill two exchange-traded notes that effectively bet on little movement in stock prices and lost most of their value last week when the opposite happened.

Nomura initially said “we sincerely apologise to the notes’ owners for causing significant troubles.”

Despite the mea culpa, which is common in Japanese culture, the company has not announced plans to withdraw other volatility products it offers, including a note tied to moves in the Japanese stock market, though it did tell Reuters “we have no plans to produce any similar product at this stage.”

A week later, there are few signs that the repercussions go beyond two products.

The chief executive of Credit Suisse yesterday defended the VelocityShares Daily Inverse VIX Short-Term ETN — which has as its ticker symbol VIX backwards — his bank issued and stops trading next week following its losses.

“It’s a legitimate market instrument that serves a purpose that is very useful for market participants to manage their risk,” Tidjane Thiam told CNBC.

“And, yes, it has had a lot of attention because this kind of short vol, long S&P trade was run by a lot of people, at their own risk, and it worked well for a long time until it didn’t — which is generally what happens.”

The bank has not announced any plans to change its note lineup besides withdrawing XIV, even as some investors expressed outrage over declines in after-hours trading and the market action drew attention from regulators.

Credit Suisse discloses the notes’ intended audience and use in the prospectus, a spokeswoman for the bank said. Richard Weil, co-chief executive of Janus Henderson Group plc, which owns the VelocityShares brand and markets the product, said last week they are “performing as advertised.”

Other firms stood behind their products. ProShare Advisors LLC, run by the manager of a competing product not being pulled off the market, said that fund’s performance “was consistent with its objective and reflected the changes in the level of its underlying index” and that they “intend to continue to manage the fund as usual.”

Thiam said XIV contributes approximately 10 million Swiss francs (RM42 million) in revenue to the bank, a drop in the bucket for a bank that pulled in 20.9 billion francs in 2017.

“It’s not material, and yet Credit Suisse looked like they blew the world up because they happen to have their name as the ETN issuer,” said Jack Fonss, a fund structuring consultant who previously worked at Credit Suisse and later created a volatility product that competed with XIV.

“The thing worked for so long and it attracted so many assets and it was free money.”

So far, investors are validating banks’ and asset managers’ decisions to stay in the volatility business.

Even in a period that US-based inverse-volatility notes sank by as much as 96 per cent, a group of those products tracked by Thomson Reuters’ Lipper unit attracted nearly US$257 million (RM1 billion) in new cash from investors during the most recent week. Some investors burned by the steep drop in such products told Reuters they would use them again.

UBS Group AG launched two volatility products last year in the United States that are tied to the European equity market. They declined to comment.

Just last month, Barclays plc rolled out two volatility-tracking notes that effectively replace existing products that were already due to end their lives next year. Unlike XIV, those Barclays’ iPath products are meant to profit when VIX futures increase in value.

The company is also de-listing or redeeming its relatively small US-listed inverse VIX products in April, a decision that was made before XIV ran into issues. Barclays declined to comment. — Reuters

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