Credit Suisse Exchange Traded Notes (ETNs) Clean Investors’ Clocks


Credit Suisse’s VIX (volatility)-linked exchange traded note? named “VelocityShares Daily 2X VIX Short-Term ETN” ? plummeted 30 percent on March 23 after Credit Suisse announced it would resume issuing new shares. “This is a wake-up call,” a Morningstar analyst was quoted as saying, adding: “People don’t take seriously the options that issuers have” that can cause ETNs to suddenly stop behaving as expected.

The bank’s earlier cessation of issuing new shares had been followed by a steep rise in the note’s market price to a record premium over the net asset value. Credit Suisse cited “internal limits on the size of the ETN” as the reason for the cessation, but Morningstar explained that issuers like Credit Suisse often stop issuing shares when they reach an imposed limit on the derivative positions used to track the underlying index, because they are then no longer assured of delivering the targeted return without risk of loss. Investors who perhaps did not realize that the cessation of new shares was temporary got “their clocks cleaned.” (“Credit Suisse VIX Note Decline Highlights Investor Risk,” Bloomberg).

In addition to the unstable premium/discount associated with many exchange traded products, the Credit Suisse product uses leverage to amplify price movements by a factor of two, which adds another dimension of risk to the product.

Also, as the Financial Industry Regulatory Authority (FINRA) has warned, these synthetic or derivatives-based products may not faithfully track the underlying index over time, and are, therefore, not intended to be held over a long term.

The Credit Suisse exchange traded note is an example of why BlackRock Inc., the world’s largest ETF provider, has asked regulators to require more disclosures and more accurate product labeling.

“Examples like this support what we’re trying to do around regulatory reform and the education of investors about exchange-traded products,” Jennifer Grancio, head of U.S. distribution for BlackRock’s iShares unit, was quoted as saying, referring to the Credit Suisse ETN (GAZ).

“Retail investors are going to get their clocks cleaned if we keep letting them do this stuff,” Colby Wright, assistant professor of finance at Central Michigan University, was quoted as saying.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.