Credit Suisse spent most of the day seeking to get in front of the volatility issue: it told shareholders that is has not been hit by trading losses on its anti-turbulence product dubbed a XIV - an exchange-traded note sold to clients such as hedge funds. For years, the stock market was generally quiet so the VIX would trade at low values, making the VelocityShares note a popular way to make money in a low-volatility environment.
Those bets unravelled on Monday as the benchmark S&P 500 index and the Dow Jones Industrial Average suffered their biggest respective percentage drops since August 2011. At the peak of its value, on Jan 11, the total XIV worth was $2.2bn.
Credit Suisse's share price has recovered slightly following a statement to the effect that the bank's exposure to the XIV ETN was fully hedged and CS therefore won't be affected by any of the losses relating to it.
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Credit Suisse's European-listed shares closed down 6 per cent during a broader sell-off.
The VelocityShares refused to comment on the Monday's move. Jump Trading LLC bought a new position in Credit Suisse AG - VelocityShares Daily 2x VIX Short Term ETN during the 2nd quarter valued at approximately $253,000. Similar to index-based ETFs, ETNs also track some sort of index as part of their investment strategy.
They're just numbers. Derivatives exists to bet on where the numbers will be in the future, but for many investors a more attractive option was a product that could be traded on an exchange. The CBOE Volatility Index fell 20 per cent on Tuesday, meaning many inverse products could have made back some of their losses had trading in the products not been stopped.
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It is not the first challenge for investors in a Credit Suisse ETN.
"If the price of the underlying futures contracts increases by more than 80 percent in a day, it is extremely likely that the Inverse ETNs will depreciate to an Intraday Indicative Value or Closing Indicative Value equal to or less than 20 percent of the prior day's Closing Indicative Value and will be subject to acceleration", read the company prospectus.
The firm was sued in 2012 by investors who owned a "leveraged" ETN after new issuances of the notes, which doubled one market's returns, were suspended.
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Multiple exchange-traded securities that are supposed to be bets on calm markets were halted Tuesday morning after losing the majority of their value overnight.