iBankCoin
18 years in Wall Street, left after finding out it was all horseshit. Founder/ Master and Commander: iBankCoin, finance news and commentary from the future.
Joined Nov 10, 2007
19,854 Blog Posts

Credit Suisse Plunges in After-Hours Due to Black Swan Event Unfolding in Volatility ETNs

Shares of CS are down nearly 7% in after-hours thanks to the rickety bullshit unfolding in XIV, the inverse volatility ETN — which has been the single best performing ETN over the past 5 years. In what is truly hard to believe, there is a ‘termination’ trigger in this product that permits the underwriter, in this case Credit Suisse, to liquidate the fund in order to prevent a negative equity situation.


What their exposure is to this trade is unclear at this time. One trader has an idea what might be out there and it doesn’t bode well for CS. In after-hours trade, inverse volatility ETNs SVXY and XIV are down by 78% and 85%, respectively.

Larry McDonald, founder of the Bear Traps Report, warned that such a huge spike in volatility could spell similarly large losses for investors in popular inverse volatility notes like Credit Suisse’s XIV, which rises when the VIX falls.

“Positioning in all sorts of VIX ETFs has increased 5-fold in recent years,” McDonald said in an email. “Even a spike in volatility similar to August 2015, would force VIX ETFs to buy an incredulous $37 billion exposure in short-term VIX futures. Such a spike can even get more exacerbated in case liquidity dries up as the market realizes certain structures need to rush in and cover their shorts at whatever the cost.”

McDonald told CNBC that the August 2015 VIX move was roughly 45 percent, while today’s move was double that.

Here’s a CNBCtard attempting to explain the math here, but leaves out the black swan ‘termination’ even that is apparently happening.

I know a lot of people have been hit with this trade. Friends of mine have been emailing me some truly harrowing details about how they took million dollar positions before the bell today. Hopefully, you’re exposure is limited; but judging from experience, I imagine some of you have high exposure to this product. There’s no negotiating with events like this, which is commiserate to Bear Stearns opening up at $2 from Friday’s close at $30. We never had a chance with this thing, closing at $99 — only to trade down sneakily in the after-hours. Like thieves in the night, the people who concocted this product fucked up in a significant manner.

I’ll hold the damned thing and take the loss when the smoke clears. I am writing this off as a total loss, a sharp set back for me — but life has to continue and I will view this set back as another foray into hardship that has served me well in the past.

I am truly sorry to anyone who bought into this God forsaken curse.

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63 comments

  1. patrick

    No one is realer (authentic) than the Real Fly. Thankfully this won’t be a blow up for you, just a setback. Tough break but it could be worse I suppose, if that is any consolation.

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    • Dr. Fly

      10% allocation in an account that is less than 25% of my investment accounts. However, I am more worried about the readers here.

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      • sarcrilege

        You did well. 10% is just a cost of placing bets in the casino. Commenters and readers here are big girls responsible for their own actions. You’re not their babysitter. Many of us, myself included, learned valuable lessons during dotcom scams when our assess were handed to us. Some did their research and acted according. I thank Ron Paul for going on tee vee and pointing me in certain direction. Those filthy (((mofo’s))) at the FED can blow one bubble after another, I aint going to be fleeced by (((them))) again. You still got 90% to make it all back and more. Take delivery.

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        • ferd

          Lordy. I hope your mention of The Honest Politician’s name, won’t cause readers to associate Ron’s worship of exposing truth as he sees it, with your reactionary generalizations made in your past posts.

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          • sarcrilege

            No worries. You know yourself by the derision and contempt exuded by these useless marxist media brainwashed genderless low IQ tampon packing bleeding ass snowflakes frequenting this blog that the name Ron Paul and what he stands for goes completely over their heads because their brain is where everybody else’s asshole is. Try mentioning ‘sound money’ and their eyes glaze over and their filthy mouths star spewing something about racism. Sad affair to live among retarded sheep like this and watch them being fleeced by the usual synagogue suspects every day. Just like today. Watch the down votes and pathetic comments…here we go…

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      • calculater

        About 9K out of 40K (so down to 31K now). This account is a small fraction of what I am investing with… literally my YOLO / Zeeco account. I chalk this up to a tuition fee.

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      • edge

        I’m not sure it has triggered. And anyway it may be closed, not will if it has.

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    • it is showtime

      Perfect karma for the incessant uvxy-always-goes-down crowd
      “Oh So Sorry” “You’re financial instrument didn’t fare so well today”

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  2. uglyflint

    Hate to see a prick like showtime laughing at others pain. Karma’s a bitch bastard.

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    • it is showtime

      In good novels, the plot often reverses, and those at the top find themself writhing, and those at the bottom find themself rising, good chap

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  3. mensch

    Isn’t a LOT of money short vol one way or the other? And VIX will experience lots of forced buying, no?

    Reminds of when most investments were tied to US real estate, that turned out pretty well. I don’t think they can let it fail so quickly without a systemic crisis. No idea why this shit wasn’t halted AH; clearly neither the Fed or CS has any clue. Of course no one really knows how this plays out, but tomorrow will be interesting.

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  4. discoordinated

    What’s crazy is that the trigger for liquidation most likely happened BEFORE the bell and the market maker apparently continued to support the price. I got in this afternoon thinking “surely if we had triggered they would stop trading since they know it’s lost all value”

    I actually took the continuing market making to mean that it was still safe to trade.

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    • Po Pimp

      I bought a smidge 10 minutes before the close. Thought I was awesome making 5% in 10 minutes and began dreaming of boats and ho’s.

      Now, not so much.

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      • discoordinated

        Right everybody is talking about the clause. What I’m talkiimg about is the fact that they must have know they had triggered intra day and instead of halting trading they continued to make a market. That’s mind blowing!

        Regardless of the prospectus you have to stop trading when you know you’ve hit a trigger for liquidation.

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        • mensch

          But I don’t think they do. It’s their option. Theoretically it can trade to 0.

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          • discoordinated

            In an etn where the market maker is the originator and the stated goal of the etn is to reflect a certain performance of another trading vehicle. You can’t keep selling it to people at $99 when you objectively know that it’s worth zero. The market maker has a responsibility to at least stop supporting the bid at 99 and attempt to get it down to an accurate value.

            Otherwise you are selling it for 99 when you know its worth 0. And your the only one who has that inside info.

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    • numbersgame

      Agree on the trigger timing. The prospectus explicitly states “intraday” value. Wish I had read the prospectus sooner and shorted XIV at the close….

      This is why the big boys always win.

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  5. william_w

    I bought SVXY today when it was trading down 30%. Thankfully limited it to a 4% position. Looks like the other 70% will go, eh? Read the prospectus tonight to locate the termination clause. Here it is from page 92 – “the fund can be terminated at any time for any reason”. Oh, joy oh joy…..

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  6. Po Pimp

    Time to rev up the FAZmobile again to try and make up the XIV loss. What could go wrong?

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    • moosh

      Jerome could ban all leveraged etf’s for shits and giggles. This isn’t stopping here.

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  7. numbersgame

    Well, here’s what I think:

    If a bank sold a VIX ETF that is Long VIX Volatiltiy futures, then they they would probably have to buy VIX contracts to cover. Of course, that assumes that they didn’t ALSO sell Short VIX volatiltiy ETFs – which they do. So ask yourself this: are ETF **issuers** short or long volatility? After you guess, go check the Assets Under Management (AUM) and check your work.

    Now another reminder that CS did not issue ETFs – they issued ETN. This means everything is cash settled, and they don’t have to buy SHIT. Also, since XIV is the largest VIX ETN, they just made a huge profit on that. The amount they lose on the Long vol products is much smaller.

    Of course, no one really knows how much they are hedged: did they short VIX Future to compensate for their ETN issuance’s net long position? Even so, I don’t see how they could lose money today.

    The real issue is outside of the ETF/ETN field and no bank is safe. It is jsut a question of who is short and who is long vol, and unless you are working for a TBTF bank, it’s impossible to know. All I know is that JPM is the biggest derivative player on the planet, so I’d be comfortable going long CS and short JPM at this point if the derivatives market was freezing up.

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  8. it is showtime

    THIS IS GLISTENING KARMA AT ITS BEST

    ALL THE MILLION-ROLLERS, FRIENDS OF FLY, WHO MADE THE “SAFE” MOVE ON FRIDAY

    YOU KNEEL FEEL THE PAIN FEEL THE HUMILIATION

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    • Po Pimp

      I hope your first child is stillborn.

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      • heaterman

        While I understand your sentiment completely toward this gloating ass, Wishing death upon his offspring is a bit harsh. No?

        Maybe just a simple pox upon him personally and a herd of flea infested camels, in heat no less, lounging about his living room would suffice.

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      • ferd

        Very Old Testament of you.

        After months of watching everyone else party, allow him his moment.

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        • heaterman

          Ferd, read my comment below for an example of pure Old Testament vengeance.

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  9. theonnodick

    Closed at $99. I bought at $68 then $42 in the a/h w/o knowing it could be terminated. Thought I was so swift and so very nimble. “Look how sneaky I am!” How could you not? You forget the structure of the product and feel as thought it’s just AMZN or AAPL being halved in a day on some glitch. At least today gave me those feels not felt since the glorious FAZmobile and TNA days of ’08 ’09. Maybe can make this up shorting Semi’s because the cryptocoin-bubble popped.

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  10. numbersgame

    Let me take you back to early 2008. It was f*cking obvious that housing was in trouble, which meant consumer spendign would go down and the market woudl follow. However, most (including myself) did not realize the extent of the problem: it was the leverage. Due to the derivatives, certain companies (AIG, Lehman, Bear Staerns anyone) had losses so alrge, that they couldn’t trade. That means that if they owe you money, you basically had to write that off: contagion. What’s more, if banks weren’t lending to each other, they sure as hell weren’t lending to non-banks: contagion.

    So there will be chaos at the open: a lot of frantic minnows being eaten by sharks, at the very least. Best to watch for two hours, unless you have inside info. Then the real question gets answered:

    Are there any TBTF banks that have been so royally screwed by the volatility spike that they become pariahs? That could set off another credit freeze (as if the wells fargo FED order wasn’t bad enough) that could truly crush the credit cycle.

    basically there are two moves tomorrow:
    1)

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    • it is showtime

      Best freezeup ever

      I’ll wait till extra dimensional creatures start popping through CERN for 2)

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    • lottopol

      To determine if someone is an adherent of the regulatory fallacy ask this question: Do you believe that given the degree that the tax burden was shifted from the rich to the middle class, was there any type of regulatory policy which would have prevented the financial crisis? If they answer yes, they are adherents to the regulatory fallacy.

      Those on the right have their own version of the regulatory fallacy. They blame the government sponsored enterprises Federal National Mortgage Association Fannie Mae (FNMA) and Federal Home Loan Mortgage Corp. (FMCC) and the Community Reinvestment Act. According to their theory, regulation such as the Community Reinvestment Act resulted in a vast increase in subprime mortgage lending that caused the financial crisis. Possibly the non-bank private entities that originated and securitized the most of the subprime loans mistakenly thought the Community Reinvestment Act applied to them.

      A slight variation on the regulatory fallacy is the financial innovation fallacy. As with the regulatory fallacy, both left and right versions, there is a miniscule grain of truth to it. Financial innovations such as credit default swaps and regulatory changes like repeal of the Glass-Steagall Act slightly affected the exact timing of the onset of the depression. However, once the tax burden was shifted from the rich to the middle class it was just a matter of time before middle-class consumers became unable to absorb the increased production and service the debt that accompanied the overinvestment. Different regulatory policies might have shifted the bubble more towards commercial real estate rather than residential real estate or visa versa but the outcome would have been similar.

      Blaming regulatory policies and financial innovation for the depression is like blaming the armaments manufactures and soldiers for World War II. In order for the war to occur there had to some weapons made and some soldiers to fight. If those particular armaments manufactures and soldiers were not available, others would have taken their place…”
      http://seekingalpha.com/article/1543642

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  11. roundwego

    Termination begins. Will see how big this hole gets.

    https://www.zerohedge.com/news/2018-02-05/vol-etf-terminations-begin-nomura-announces-early-redemption-vix-etn

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  12. Lyndon Keltner

    MOAR CRASH, MOAR CRASH, MOAR CRASH!

    Let’s kick the fake top 1%, the so-called 401k millionaires in the nuts!

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  13. heaterman

    As for Credit Suisse…. fucking bankers are always inventing sneaky ways to play the game.
    This has to end. Those responsible for cooking up this XIV scheme must be publicly de-balled, drawn, quartered and then burned at the stake.

    From Psalm 109….
    8 May his days be few; may another take his place of leadership.
    9 May his children be fatherless and his wife a widow.
    10 May his children be wandering beggars; may they be driven from their ruined homes.
    11 May a creditor seize all he has; may strangers plunder the fruits of his labor.
    12 May no one extend kindness to him or take pity on his fatherless children.
    13 May his descendants be cut off, their names blotted out from the next generation.
    14 May the iniquity of his fathers be remembered before the LORD; may the sin of his mother never be blotted out.
    15 May their sins always remain before the LORD, that he may blot out their name from the earth.
    16 For he never thought of doing a kindness, but hounded to death the poor and the needy and the brokenhearted.
    17 He loved to pronounce a curse— may it come back on him. He found no pleasure in blessing— may it be far from him.
    18 He wore cursing as his garment; it entered into his body like water, into his bones like oil.
    19 May it be like a cloak wrapped about him, like a belt tied forever around him.
    20 May this be the LORD’s payment to my accusers, to those who speak evil of me.

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  14. Angel of Death

    Shades of $BSC? Get your popcorn ready.

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  15. Lyndon Keltner

    LOL MOAR CRASH FUCKING A BRO

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  16. the_wolf

    devil is on his way,…….

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  17. Lyndon Keltner

    There ain’t even fear, thus no capitulation in sight.

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  18. Lyndon Keltner

    I am so long Treasury futs. This is easy money.

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  19. Lyndon Keltner

    Closed out the long /TN and /ZB futs.

    This is just too much winning.

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  20. edge

    Credit Suisse holds 4.5 million shares of XIV. Morganstanly, 380k, Goldman 350k. CS has no reason to liquidate.

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    • numbersgame

      This isn’t a liquidation-because-of-redemptions type of event in which a fund manager is forced to liquidate and eat losses.

      CS is the issuer, hence the largest share holder. The amount of shares they hold is irrelevant.

      The decision process for CS is simple: currently they have a liability of <$10/share (for the ones they don't own). Because shareholders cannot *redeem* XIV shares from CS (they can only sell it to other investors) the liability if they do nothing will eventualyl be $0. However, it will take time for that to happen: 1 week or 3 years?. Considering that volatility will likely settle down this week or the next, then it makes more sense to redeem now and reissue shares after the volatility drops.

      If they do not termiante, then that means they think volatility will remain high – a signal from a big player that bulls should be weary of.

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  21. Lyndon Keltner

    I very much wish the Dow to crash another 5000 points so we can declare the phony Trump rally void and null before the impeachment.

    The Schadenfreude will be too great.

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  22. dragun

    This will have wide spread implications. I know of many managers who were using short VIX to generate income against their stock portfolio. Talk about a 2fer. poleaxed by the market, then monkey hammered on their VIX trade.

    Rucy there’s some splainin’ to do !!

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    • numbersgame

      Plus, I’m sure many were selling Puts – another double wahmmy

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    • bob smith

      There’s only 1.21 billion invested in XIV. That’s chump change. This ETN itself won’t cause any systemic damage.

      In the unlikely event a slew of other ETF/ETNs bite the dust, then Houston, we have a problem…

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    • peaches

      “I know of many managers who were using short VIX to generate income against their stock portfolio.”

      Those people you know are retarded. Who borrows against one risk asset to buy another much riskier security that moves in the same direction?

      “Managers”

      … There is no smart money out there is there.

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      • dragun

        your’re right peaches. this was a titianic trade for the longest time i.e. indestructible and infallible.

        when you hear its a cash machine and everyone is doing it its a matter of time

        risk parity has a stake in this too. vol increasing means decrease your equity exposure in favor of bonds. they will be selling into the hole to get their “parity” back

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  23. alf44

    … mic test 123 … mic test 123 !!!

    Is this thing on ?

    How bout dem EAGLES !!!

    Cowboy fan … but, an EAGLES FAN yesterday !!!

    YO FLY !!!

    .

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    • lapens

      Holy shit – there’s a blast from the past. G’day Alf!

      Anyway, I’m underwater in a few of my crypto plays now, but still well above on a few others (NEO, PPT, LTC).

      Serious question: What happens to crypto if banks start freezing up? It was created to get around that sort of scenario so will be interesting to see what happens.

      Fair well all and cross fingers!

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    • dawg

      ALF!!!!? You’re back?

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  24. uglyflint

    Holy shit. Alf in da house !

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  25. john_galt

    lol this thread is better than reddit’s bitconnect.
    Serves you all well for being greedy morons followers of a clown artist.
    Congrats!!! You are now poor.

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  26. peaches

    Sold all my XIV for SVXY in October after reading Credit Suisse prospectus. Still. I’ve been maintaining 1:1 ratio of cash to SVXY and rebalancing monthly or quarterly as the bulk of my portfolio for almost 2 years. 108% return for 2017.

    SPY was up what 20%??

    It was a good run.

    If the ETF exists in a week I’ll be buying. The world has been ending for 2000 years.

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  27. roundwego

    The hourly waterfall continues and threatens a daily waterfall. Asia is the largest holder of fake coins. Margin call.

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  28. zeena

    As usual, after all the nutty off color and amusing work the Fly does, when there is a real tragedy he reacts like the very true gentleman he is.
    You are the king of bloggers and traders and I salute you!! The finest type in the dark hour! Am man worthy of respect
    <3

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