Credit Suisse's leveraged ETNs linked to precious metals target frequent traders

By Emma Trincal

New York, Oct. 14 - Credit Suisse AG, Nassau Branch has partnered with VelocityShares LLC to introduce eight leveraged exchange-traded notes linked to gold, silver, palladium and platinum indexes in response to institutional investors' demand for precious metals products.

"There's been an explosion of demand for precious metals trading, with people implementing a variety of trading or hedging strategies in the asset class, often using leverage as a part of their strategy," Nick Cherney, chief investment officer at VelocityShares, told Prospect News.

Credit Suisse plans to issue $100 million principal amount of each series of 0% VelocityShares ETNs, according to a 424B2 filing with the Securities and Exchange Commission.

The eights series of notes are as follows:

• VelocityShares 2x Inverse Palladium exchange-traded notes linked to the S&P GSCI Palladium Index Excess Return;

• VelocityShares 2x Inverse Platinum ETNs linked to the S&P GSCI Platinum Index Excess Return;

• VelocityShares 3x Inverse Silver ETNs linked to the S&P GSCI Silver Index Excess Return;

• VelocityShares 3x Inverse Gold ETNs linked to the S&P GSCI Gold index Excess Return;

• VelocityShares 2x Long Palladium ETNs linked to the S&P GSCI Palladium Index Excess Return;

• VelocityShares 2x Long Platinum ETNs linked to the S&P GSCI Platinum Index Excess Return;

• VelocityShares 3x Long Silver ETNs linked to the S&P GSCI Silver Index Excess Return; and

• VelocityShares 3x Long Gold ETNs linked to the S&P GSCI Gold Index Excess Return.

Each series matures on Oct. 14, 2031.

"We're offering the first ever inverse leveraged exchange-traded product on palladium and platinum as well as the first three-times leverage long or inverse on gold and silver," Cherney said.

Leveraged exchange-traded products on gold and silver exist in the market but only on a two-times leverage basis, he noted.

Institutional

The new ETN suite is designed for investors who seek leveraged long or leveraged inverse exposure to the four precious metals via the S&P GSCI sub-indexes that track each of these.

"The new products are targeted toward institutional clients, high-frequency traders and small to medium hedge funds," an industry source said.

With their high share of trading turnover, hedge funds are regular users of ETNs as those vehicles offer the liquidity and low cost required for frequent trading, he added.

While most structured notes are sold to retail investors, the new products have not been designed for that end of the market.

"It won't go into the retail channel, partly due to the daily reset that makes this product more appropriate for short-term traders but also because a lot of the retail channels restrict the use of leverage," he said.

Second series

The new series represent the second launch of products by Credit Suisse in partnership with VelocityShares, an exchange-traded products provider and marketer specializing in the institutional market.

The initial series of VelocityShares ETNs was focused on volatility trading and linked to the daily performance of either the S&P 500 VIX Short-Term Futures index or the S&P 500 VIX Medium-Term Futures index.

One structural characteristic common to the two product suites - volatility and metals - is the leverage built around a daily reset mechanism.

"The VelocityShares VIX brought the first daily resetting two-times leveraged ETN and also introduced the first inverse daily resetting product in the VIX space," a market participant said.

The daily reset feature is designed for taking short-term views on the direction of the underlying asset or index, something that meets the needs of institutional investors.

Big guys only

It is not a coincidence that both ETN series target institutions and not retail.

"As a firm, our mission is to develop sophisticated products for institutional investors," Cherney said.

Exchange-traded notes and funds provide liquidity and transparency, which give professional traders the means they need to express their market views.

"The institutional market continues to be underserved. Most of the firms developing exchange-traded products are doing so for the retail marketplace," the market participant noted.

Some of the products that VelocityShares is working on developing for the institutional market are instruments that allow traders to either hedge their losses or express macroeconomic views.

"Institutions are using precious metals in a variety of ways, not necessarily only for directional trades. They see precious metals as an inversely correlated asset class, not unlike volatility, which is why we saw a niche and opportunity. They're using it for relative value trades and for hedging purposes or in a variety of ways," Cherney said.

Multi-issuer platform

So far, VelocityShares' sole partner for the issuance of ETNs is Credit Suisse, but the firm plans to reach out to other potential partners.

"Credit Suisse is a great partner for us, and we're happy to continue to launch new products with them," Cherney said.

"We are also a multi-issuer platform, and we're in conversations with other firms as well for new launches."

VelocityShares specializes in institutional distribution, which is an advantage for an issuer, the industry source said.

"They can bring the structural and marketing expertise. They get involved on both legs," he said.

The initial tranches of each series priced on Friday and will begin trading on Monday.

Cherney said that the total priced on Friday was $40 million, with $5 million for each series.

The notes will be listed on the NYSE Arca under the following ticker symbols:

• "UGLD.IV" for the 3x Long Gold ETNs;

• "USLV.IV" for the 3x Long Silver ETNs;

• "LPLT.IV" for the 2x Long Platinum ETNs;

• "LPAL.IV" for the 2x Long Palladium ETNs;

• "DGLD.IV" for the 3x Inverse Gold ETNs;

• "DSLV.IV" for the 3x Inverse Silver ETNs;

• "IPLT.IV" for the 2x Inverse Platinum ETNs;

• "IPAL.IV" for the 2x Inverse Palladium ETNs.

Credit Suisse Securities (USA) LLC is the agent.

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