Credit Suisse's VelocityShares ETNs tied to S&P 500 VIX Futures target institutional traders

By Emma Trincal

New York, Nov. 22 - Credit Suisse AG, Nassau Branch is jumping on the volatility-based exchange-traded notes bandwagon. It launched a family of ETNs linked to the S&P 500 VIX Futures index that are designed mostly for traders as firms are increasingly trying to issue niche products in the growing volatility-linked market.

Credit Suisse plans to price six volatility-related ETNs on Nov. 29 to be listed on NYSE Arca the next day, according to a 424B2 filing with the Securities and Exchange Commission.

As Barclays Bank plc did with its iPath S&P 500 VIX ETNs, Credit Suisse is giving investors access to volatility through the S&P 500 VIX Short-Term Futures index and the S&P 500 VIX Mid-Term Futures index, which hold positions in VIX futures contracts.

The VIX, or the Chicago Board Options Exchange Volatility index, is a key measure of the implied volatility of the S&P 500 index.

A broad suite

The suite of products is broad, sources noted. It gives investors long, short or leveraged exposure to the short-term S&P 500 VIX index or the mid-term index via six different products.

Those are the following:

• VelocityShares Daily Inverse VIX Short-Term ETNs, which will be listed under the symbol "XIV";

• VelocityShares Daily Inverse VIX Medium-Term ETNs, which will be listed under the symbol "ZIV";

• VelocityShares VIX Short-Term ETNs, which will be listed under the symbol "VIIX";

• VelocityShares VIX Medium-Term ETNs, which will be listed under the symbol "VIIZ";

• VelocityShares Daily 2x VIX Short-Term ETNs, which will be listed under the symbol "TVIX"; and

• VelocityShares Daily 2x VIX Medium-Term ETNs, which will be listed under the symbol "TVIZ."

Each series will mature Dec. 4, 2030.

No retail

The new family of ETNs was specifically designed for institutional rather than retail investors, according to the head of VelocityShares LLC, an ETN provider whose subsidiary VLS Securities will be marketing the product.

"We think the sophisticated traders market is underserved in the ETN space, and with Credit Suisse, the issuer, we're launching this new family of volatility-linked ETNs to give institutional traders the ability to implement market views using leveraged and inverse exposure on volatility," Greg King, chief executive officer of VelocityShares, told Prospect News.

Daily rebalancing

Another characteristic of the products is the daily rebalancing of the futures contracts underlying the indexes.

"These are the first daily rebalanced inverse and first daily rebalanced two-times leveraged ETNs on volatility," King said.

The daily rebalancing feature is specifically designed for sophisticated traders who need to manage risk on a daily basis, he noted.

"The trading community needs transparency and liquidity for hedging purposes," said a market participant.

"They need to know what their leverage is going to be each day. That's why the daily rebalancing is a great tool."

Market momentum

The new launch of volatility ETNs by Credit Suisse comes on the heels of a series of new products and innovative indexes based on volatility that have been recently launched, data compiled by Prospect News shows.

The first big provider of such products was Barclays, which launched in 2009 its iPath S&P 500 VIX Short-Term Futures ETNs and iPath S&P 500 VIX Mid-Term Futures ETNs.

Barclays' iPath S&P 500 VIX Short-Term Futures ETNs have been the bank's most-traded iPath ETNs for more than a year, according to SEC filings.

The market for notes giving investors access to volatility has recently benefited from a surge in liquidity, which came as the result of the introduction of new options, market participants noted.

In the late spring, the CBOE introduced options on Barclays' VIX ETNs to respond to increasing demand from investors, giving issuers more leeway to hedge their products.

Earlier this month, the CBOE obtained authorization to trade options on leveraged ETNs.

In July, Barclays launched its first series of ETNs tied to the inverse performance of the S&P 500 VIX Short-Term Futures index. The ETNs were recently renamed iPath Inverse S&P 500 VIX Short-Term Futures ETNs. The firm does not yet have an iPath ETN giving leveraged exposure to the VIX index, according to its website.

But Barclays' ETNs linked to the S&P 500 VIX Short-Term Futures index have gathered enough assets to enable the firm to roll out a note last month that uses the iPath ETN itself as the underlier.

Other firms, such as Bank of America Corp. and Citigroup Funding Inc., took a separate path from Barclays and Credit Suisse, rolling out products this fall that were tied to their own proprietary volatility indexes.

In September, Bank of America priced $65 million of its new Strategic Return Notes linked to the Investable Volatility index. The index was created in March, and this was the first time it was used in a structured product.

Earlier this month, Citigroup rolled out its first volatility ETNs using its own index through the pricing of $20 million of C-Tracks linked to the Citi Volatility Index Total Return.

Whether through a note or an ETN wrapper, whether using the S&P 500 VIX benchmark or their own indexes, and whether delivering long, short or leveraged exposure, firms are increasingly innovating and competing against one another in order to position themselves in the ever-growing, multi-billion-dollar volatility-linked securities market, sources said.

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