Mar 24, 2023
Credit Suisse’s Infamous ETN Misadventure May Be Limping to End
(Bloomberg) -- UBS Group AG’s abrupt takeover of Credit Suisse Group AG may mark the beginning of the end for one of the industry’s more notorious franchises.
At one point one of the largest issuers of exchange-traded notes — cousins of exchange-traded funds that come with a riskier reputation — Credit Suisse has been at the heart of some of the business’s ugliest moments.
Most notably, it was a Credit Suisse ETN that played a starring role in 2018’s ‘Volmageddon’ episode. Two years later, an oil note run by the bank was also wiped out when crude prices turned negative. Shortly afterward, Credit Suisse shocked the market by delisting a suite of ETNs worth roughly $3 billion, but made the controversial decision to allow them to keep trading in the wilderness of the over-the-counter markets.
Now, as UBS takes control of Credit Suisse’s assets, the fate of its remaining exchange-traded products is unknown. All told, the lender manages about $700 million over 12 ETNs. Given the spotty history, investors will likely exit the products organically even if the business isn’t shut down, according to Bloomberg Intelligence.
“People are done with Credit Suisse” ETNs, Bloomberg Intelligence ETF analyst Athanasios Psarofagis said on Bloomberg Television’s ETF IQ. “They’ve already seen flows start to come out of their products. I think now they’re going to move to ETFs or they’re going to move to other ETN issuers.”
Representatives for Credit Suisse and UBS declined to comment.
Unlike their fund brethren, ETNs are unsecured debt obligations backed by the bank that issued them, rather than the assets the product is linked to. The notes are often used as a way to get leveraged exposure to asset classes that might not fit into the confines of a traditional fund — a practice that’s drawn scrutiny from regulators.
It was that leverage component that put the ill-fated VelocityShares Daily Inverse VIX Short-Term ETN (ticker XIV), which was designed to profit when markets are calm, at the heart of Volmaggedon. Credit Suisse was forced to liquidate the nearly $2 billion note after Cboe Volatility Index futures surged, kicking off what traders theorized was a feedback loop.
Six years earlier, the VelocityShares Daily 2x VIX Short-Term ETN, or TVIX, went off the rails, veering away from the index it was created to mimic as investors became obsessed with using it to bet against stocks.
The bulk of the assets still left in Credit Suisse products sit in the $323 million X-Links Crude Oil Shares Covered Call ETN (USOI) and the $136 million Credit Suisse X-Links Silver Shares Covered Call ETN (SLVO). There’s less than $100 million each in the Credit Suisse X-Links Gold Shares Covered Call ETN (GLDI) and the Credit Suisse S&P MLP Index ETN (MLPO).
Outside of those four products, Credit Suisse made the unusual decision not to liquidate the ETNs it delisted back in 2020. As such, the majority are still trading on an over-the-counter basis, though with very little in the way of assets — the VelocityShares Daily 3x Long Natural Gas ETN (UGAZF), for example, holds just over $200,000.
Of all the potential suitors for Credit Suisse, UBS is the bank most likely to leave the Credit Suisse products running, according to VettaFi’s David Nadig, given UBS already has its own suite of ETNs. The bank has several other options it could pursue as well.
“The four Credit Suisse extant ETNs have early call provisions, so UBS could absolutely just recall them — give everyone their money back essentially,” Nadig said. A more controversial option would be “to delist without closing, which Credit Suisse has done in the past.”
©2023 Bloomberg L.P.