The "grey swan" we all have spoken about for years - that being the absurd "tail wagging the dog" potential of Vix ETN market structure (inverse and leveraged products) and the massive growth in "negative convexity" / "vol target" / "vol rebalancing" strategies to either generate extra income or "systematically allocate risk" (looks good in the prospectus, right?!) - finally "broke" the volatility market, and has now bled-through to the "underlying" spot equities market... as the short vol trade went "lights out", Charlie McElligott, who joined Nomura as a managing director of cross-asset strategy last week, wrote in a blog post today (Nomura: More selling to come), following a 75% fall of the CBOE Volatility Index futures curve, which, in turn, has hit a number of Vix-linked ETNs.

Credit Suisse announced that its Velocityshares Daily Inverse Vix Short Term ETNs (XIV) will be terminated due to an acceleration event expected to be February 21, 2018. In 'response to certain media enquiries, the bank confirmed that it has experienced no trading losses from Velocityshares Daily Inverse Vix Short Term ETNs (XIV) due December 4, 2030', and confirmed that on the acceleration date, 'investors will receive a cash payment per ETN in an amount equal to the closing indicative value of XIV on the accelerated valuation date', said the Swiss bank in a statement.

Credit Suisse also stated that it will no longer issue new units of XIV ETNs and that the closing indicative value on February 2, 2018, was US$108.3681. The last day of trading for XIV is expected to be February 20, 2018.

Barclays had already announced the delisting and call of its two short volatility ETNs (XXV and IVOP), both scheduled to be effective on April 12, 2018, and relaunched other commodity ETNs. "Our platform streamlining was long scheduled and has nothing to do with the past three days," said a spokesperson for the UK bank.

There was 'record-breaking one-day percentage moves for both the CBOE Short-Term Volatility Index (VXST), which rose 214.6% to close at 59.34, and for the popular CBOE Volatility Index (VIX) which rose 20.01 points (or 115.6%) to close at 37.32' yesterday (February 5), according to Matt Moran (pictured), vice president, business development, Chicago Board Options Exchange.

'[This] can provide some clues as to where the financial markets think that the Vix will be at in future months,' said Moran. 'Today, the Vix Index is in backwardation (rather than contango).'

Questions about the future of exchange-traded products (ETPs) linked to the volatility index were raised when Nomura Europe Finance announced earlier today that its Next Notes S&P 500 Vix Short-Term Futures Inverse Daily Excess Return Index ETN, which had JPY32.4bn (approximately US$300m) in assets, will be "delisted on February 19, following movements in the underlying index triggering early redemption conditions".

Payments to investors on the S&P 500 VIX Inverse ETN will begin on April 2, According to a Nomura spokesperson.

The ETNs are the "patient zero" of this market meltdown, according to McElligott.  'It is estimated that there was anywhere from ~$125m to $200m of vega / Vix futs to BUY on the close from the two main "short Vix" ETNs that rebalance daily (XIV and SVXY),' he wrote. 'As S&P traded -50 handles after the cash close from 4:00pm to 4:15pm into the market's anticipation of the massive rebalancing of volatility (buy to cover) on the close, XIV then saw a delayed and terrifying ~-87% move after the close, as some who owned XIV puts as crash protection sniffed this potential and speculated liquidation from the ETN, which is set per a rules-based system to buy back short vega after an 80% "crash trigger"(which again isn't a certainty because they use a blend of 1st and 2nd month).'

Despite the asset pool being 'seemingly/largely wiped-out', the note 'is guaranteed to "pay out" to their shareholders as set per their prospectus' and that the 80% fall resulted on the fund's owners liquidating 'the product to avoid losses', said the Nomura executive.

'The issue now is the pile-on going-forward across assets, as the systematic "short vol" community's models are now completely toast, and they too will be forced to cover remaining "short vol" positions that didn't trade today,' said McElligott. 'Be prepared for a major VIX follow-through tomorrow.'

There are over 800 structured products linked to the CBOE SPX Volatility index across jurisdictions of which 776 are still live products, according to SRP data. There are also three products marketed by Barclays in the US market linked to S&P VIX indices including two products linked to the S&P500 VIX Mid-Term Futures Index ER and one linked to the S&P500 VIX Short-Term Futures Index ER.

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