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Cboe CEO: Bets against volatility 'worked exactly' as designed

Cboe Global Markets Inc. executives are pushing back on concerns raised about its plethora of volatility-related products.

In the wake of the Feb. 5 market rout, Cboe has been catapulted into the spotlight as its fixture Cboe Volatility Index, or VIX, saw its largest single-day increase ever. That same day, the S&P 500 dropped 4%, while the values of many products betting against the VIX, and volatility, tanked.

The decline of products like Credit Suisse Group AG's Velocity Shares Daily Inverse VIX Short-Term exchange-traded notes, which has a trading symbol "XIV," has prompted concerns over the future of Cboe's suite of VIX-related options and futures products, which accounted for about 25% of the company's total revenues during the second half of 2017, according to a Feb. 6 research report from Keefe Bruyette & Woods analyst Kyle Voigt.

In the days since the sell-off began, analysts from JPMorgan and Goldman Sachs downgraded Cboe's rating over such concerns, while Cboe's shares have fallen about 14.4% since Feb. 2.

Still, Cboe Chairman and CEO Edward Tilly said volumes on the exchange have been "great," particularly in products that bet long volatility, designed for investors who believe volatility will exist in the future. Those long-volatility products performed well during the heightened period of trading activity, Tilly said, as investors would likely use such a product to hedge themselves from a bet against volatility.

But for investors who did not appropriately hedge their bets against volatility, the recent market-wide sell-off may end up being a "learning opportunity," Tilly said Feb. 7 during a conference call with analysts.

"These contracts that are not extremely sophisticated worked exactly as they were intended to," he said.

Betting against volatility's return became increasingly popular in recent years as the VIX, a gauge of market anxiety based on the S&P 500, lulled near or at all-time lows, creating increased confidence among some investors that volatility would remain at bay.

The resurgence of volatility in recent days has, as a result, led products like Credit Suisse's XIV and a similar product from Nomura Holdings Inc. to lose the vast majority of their values. Both Credit Suisse and Nomura have said in the days since that they plan to liquidate their respective products.

Regulators are expected to begin probing the decline of such short-volatility products, particularly on the exposure to retail investors who may have been left out in the cold as a result of not properly hedging themselves. More specifically, regulators will likely focus on the products' disclosures, sales and deliveries, said Cboe President and COO Chris Concannon, who added that the products' disclosures are "very clear on how they perform in volatility."

"Professionals are expected to understand their disclosures and understand these products," he said, adding that the products performed as designed and the long products performed "exceptionally well."