The Swiss bank's anti-volatility bet which soured earlier this week in a market rout could have regulatory ramifications.
Zurich-based Credit Suisse earlier this week closed out a security which bets against the widely-followed VIX volatility index, after the instrument lost more than 80 percent of its value amid market turbulence.
The snafu, which will have incurred painful losses for the hedge funds and other clients which bought the security, may have a regulatory aftermath in Switzerland, according to news agency «Reuters»: Finma, the country's overseer is in touch with the bank over the exchange-traded notes.
Unconventional Design
The instrument was designed in 2010 as a short-term bet against volatility, and has raised eyebrows for its unconventional mechanism. For example, investors would seen 27 percent of their investment wiped out even if the VIX index rose by 99 percent, «The Wall Street Journal» reported – and still pay Credit Suisse for the privilege:
But here is my *absolute* favorite table in maybe any prospectus. The index GOES DOWN by 99%. Remember, you have an INVERSE ETN. But if it is volatile enough you *still* lose 27% of your money. That's right, you bet against an index, it is all by annihilated, and you LOSE. /end pic.twitter.com/hsswBf2hXe
— Charles Forelle (@charlesforelle) February 6, 2018
To be sure, the Swiss regulator's interest may be routine, or simply prudent information-gathering. Credit Suisse didn't incur trading losses on the deals and won't issue new notes, but it is becoming apparent that the notes don't reflect very well on the Swiss bank as it seeks to reinvent itself under Chief Executive Tidjane Thiam. Credit Suisse reports the fourth quarter next Wednesday.
