Credit Suisse will shut down a little-known instrument that crashed amid a wider plunge in global financial markets. The Swiss bank maintained that it hadn't suffered any trading losses as a result.
The Zurich-based bank's stock was hit by speculation that it had taken a massive trading hit overnight as global markets plunged. Credit Suisse shares fell by as much as 8 percent during the European trading day, due to angst that the bank is ensnared in big losses on an exchange-traded note that bets against volatility.
The huge drop in an obscure security appears to have raised jitters from financial investors for its parallels to the beginnings of the financial crisis of 2008/09, the first signs of which were banks such as HSBC issuing profit warnings on losses from U.S. mortgage lending.
Credit Suisse spent most of the day seeking to get in front of the volatility issue: it told shareholders that is has not been hit by trading losses on its anti-turbulence product dubbed a XIV – an exchange-traded note sold to clients such as hedge funds.
«XIV» Shuttered
A short time later, the bank said it will take the XIV security out of the market by buying them back from investors next week. The reason? The securities have plummeted more than 80 percent on Monday, triggering a so-called acceleration event.
The XIV effectively bets against the widely-followed VIX volatility index, which gauges market fluctuation. Volatility, of course, is exactly what investors are getting as financial markets plunge for the second day in a row. The VIX surged on Monday, which roiled Credit Suisse's XIV product.
«Investors will receive a cash payment per exchange-traded note in an amount equal to the closing indicative value of XIV on the accelerated valuation date,» said Credit Suisse, which won't sell new XIV notes after the buyback.
Credit Suisse Hedged
The bank created the notes eight years ago as anti-turbulence bets for institutional clients like hedge funds. Credit Suisse, the market-maker for the XIVs, remained hedged in the products in the intervening years, had held them on behalf of clients, and hadn't housed them on its books, according to a person familiar with the matter.
The bank, which is set to report a huge fourth-quarter loss next Wednesday, didn't immediately respond when asked what the financial impact of the XIV buyback would be.
