Credit Suisse Group AG had previously warned investors against holding VelocityShares Daily Inverse VIX Short Term exchange-traded notes for more than a day, as long-term investment in such products may result in huge loss of value, CEO Tidjane Thiam said Feb. 14.
The Swiss banking group decided to redeem its notes after their value had dropped dramatically earlier in February. The ETNs traded at $129.35 apiece on Feb. 1 but gradually slid to $99 each by Feb. 5, before an overall stock market collapse pushed the product over the edge and it lost some 92% of its value overnight, opening at a mere $7.35 apiece on Feb. 6. The ETNs were trading at $5.30 apiece on the NASDAQ on Feb. 14. Credit Suisse has set Feb. 15 as the last trading day for the product, with redemption payments to investors to be made on Feb. 21.
Credit Suisse had enclosed clear warnings to investors in the related prospectus issued to the U.S. Securities and Exchange Commission, its CEO told a press conference Feb. 14. The document states that "ETNs are intended to be trading tools for sophisticated investors to manage daily trading risks. [They] are riskier than securities and may not be suitable for investors who intend to hold them for longer than one day... The long-term expected value of the ETNs is zero," Thiam said, reading from the prospectus.
"If you buy something and we are telling you to hold it no longer than one day, it is a pretty strong signal," he added.
He also stressed that Credit Suisse has not sold ETNs directly but acted as a wholesale institution for other traders. "We manufacture [this product], we don't sell it, and that is our rule in VIX," he said, adding that the only reason to launch the product was that clients had requested it.
The prospectus further states that if the value of the ETNs should drop below 80%, the bank would probably discontinue it, as it considers a rebound in value impossible at that point, according to Thiam. This is the reason for the decision to redeem the product and stop the trading.
"We do not take those decisions lightly," he said. "Clearly, they have an impact on ... relationships."
Investors were informed before the market opened on Feb. 6, and the closing of the product was also not immediate, the CEO said.
The effect on Credit Suisse itself will be negligible, according to the CEO.
"The contribution of these products to our revenue is only CHF10 million per annum. We made CHF5.7 billion of revenue. So really, any notion that this is material to us is fanciful," he said.