Credit Suisse AG (CS) shares opened sharply lower Tuesday, falling at more than twice the rate of the benchmark SMI index in Zurich, as investors question whether losses linked to a specialised market risk product may impact the lender's balance sheet.
One of the bank's risk products, an exchange traded note known a the Credit Suisse AG - VelocityShares Daily Inverse VIX Short Term ETN, was marked nearly 85% lower in pre-market trading Tuesday. The note is designed to mimic, in reverse, moves in futures contracts tied to the broader market's key benchmark for near-term volatility, the CBOE's VIX index. Its declines have raised concerns about a so-called termination event if the losses persist throughout today's session in order to prevent the note from having a negative value.
"The XIV ETN activity is reflective of today's market volatility. There is no material impact to Credit Suisse," the bank said in a statement to the media Tuesday. Trading of the note, known by its ticker symbol XIV, was halted prior to open, the NASD said in a statement that followed.
Credit Suisse shares were marked 4.44% lower by mid-day in Zurich and changing hands at Sfr17.02 each, a move that trims their three-month gain to just over 5%.
The Chicago Board of Trade's Volatility Index, better-known by its ticker symbol, VIX.X, surged 115.6% Monday to end the session at 37.32, the highest closing level since China's currency devaluation in 2015. That move has hammered one of the market's most crowded trades -- the so-called "short vol" play -- in which investors had been betting against a sudden rise in market volatility amid the unprecedented gains in global equity benchmarks around the world.
"One of the key debates on Tuesday will be whether Monday's spike in volatility cleared the deck of volatile short-options positions, or is likely to lead to further buying of volatility to cover the significant explicit and implicit short volatility positions across investor types," Goldman Sachs (GS) wrote in a note to clients.
Bank of America Merrill Lynch's monthly fund managers' survey, which polls asset mangers in control of more than half a trillion on wealth, has consistently listed the "short vol" trade as one of the market's most crowded. In its January survey, BAML said it overtook long positions in so-called FAANG tech stocks and bitcoins as the most one-sided.