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Credit Suisse VIX Note Tumbles to Record-Low Price

A Credit Suisse Group AG (CSGN) security tracking the benchmark measure of U.S. options prices plunged to an all-time low, reversing ground after trading at a record premium to its underlying assets the last four days.

The VelocityShares Daily 2x VIX Short-Term ETN (TVIX), or TVIX, retreated 29 percent to $10.20 at 4 p.m. New York time, on volume that was 2.6 times the three-month average. Credit Suisse’s exchange-traded note closed at $14.43 yesterday, or 89 percent above its so-called indicative value, after falling 86 percent from its Oct. 3 peak as the Standard & Poor’s 500 Index rose 28 percent to the highest level since May 2008.

The gap between the security’s price and the value of the index it tracks has widened since Credit Suisse suspended issuance of new shares, causing a supply shortage amid record demand for volatility products that provide a hedge against U.S. equity losses. Short sellers may be accelerating bets against TVIX today on speculation Credit Suisse will permit issuance of more shares, said WallachBeth Capital’s Chris Hempstead.

“People are waiting for Credit Suisse or VelocityShares to come out and say what’s going to happen,” Hempstead, director of exchange-traded-fund execution services at WallachBeth in New York, said in a phone interview. “The trading community believes that they will be able to create these shares again in the near future, and if that’s the case then that’s why they are shorting it.”

Market Cap Surges

Katherine Herring, a spokeswoman for Credit Suisse in New York, declined to comment. Her company suspended issuance of TVIX shares after its market value more than quadrupled this year to almost $700 million, data compiled by Bloomberg show. Its market capitalization has since plunged to $415.4 million.

The VelocityShares ETN aims to produce twice the daily return of the S&P 500 VIX Futures Index, which tracks a trading strategy involving futures on the Chicago Board Options Exchange Volatility Index. The VIX (VIX), as the CBOE gauge is known, is used as a benchmark measure of U.S. equities derivatives and measures the cost of protection from losses in U.S. stocks. It rose 2.9 percent today.

ETNs are unsecured bank debt backed by their issuer’s credit, unlike exchange-traded funds that hold assets. Banks create and redeem shares of ETNs based on the level of demand for the securities. That demand usually doesn’t affect the price since the ETNs track the performance of an index.

Credit Suisse’s decision to halt new issuance of TVIX shares coincided with a period in which the ETN began moving independently of its underlying assets. The S&P 500 VIX Futures Index lost 32 percent between Feb. 21, the day of the suspension, and yesterday. That was more than twice the decline in the ETN.

Bigger Premium

The faster decrease in the underlying index contributed to a widening in the premium of the TVIX to its underlying asset. The gap reached a record 36 percent on March 16 and then expanded to 62 percent, 78 percent and 89 percent in the next three days, according to data compiled by Bloomberg.

“People are likely shorting the TVIX and creating the underlying portfolio by buying the VIX futures to hedge,” Michael McCarty, managing partner at Differential Research LLC in Austin, Texas, said today in a phone interview. “That will cause the premium to contract.”

Demand to protect against losses in equities pushed up the number of shares available for trading to records this week in four of the five largest exchange-traded products that rise when U.S. stock volatility increases, data compiled by Bloomberg show. For the iPath S&P 500 VIX Short-Term Futures ETN (VXX), the biggest, outstanding stock reached 113.8 million yesterday, up 80 percent since March 12 and more than fivefold since Dec. 30.

TVIX trading volume surged to 29.7 million shares today, the most since Feb. 17 and more than twice the three-month average, according to data compiled by Bloomberg.

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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