XIV termination

UPDATE

Credit Suisse terminated XIV due to a greater than 80% drop in its indicative value on 5-Feb-2018.  The final payout was $5.99 per share.  The last day of trading was the 15th of February 2018.


In the prospectuses for  XIV, there are some disconcerting discussions about termination events. For XIV the termination event is triggered if the daily percentage drop exceeds 80%. I did some digging into these events to try and figure out how likely they are to occur.  If you’d like to read a more general discussion about this ETN you can read this post.

First of all  XIV provisions for termination/acceleration relate to VIX futures, not the CBOE’s VIX index. The VIX relates to the instantaneous implied volatility of the S&P 500—which is a different thing. Volatility futures have contracts with different expiration dates. Typically the further out their expiration dates (e.g., 6 months from now), the slower they react to the day-to-day moves of the market. XIV is based on the two futures contracts that are closest to expiration, the administrators for these funds adjust their positions in these contracts daily to achieve an effective average time till expiration of 30 days.

VXX does the same thing, except it is trying to be long volatility, not short/daily inverse % of volatility. When trying to understand XIV you can view them as being a short position in VXX, or tracking the opposite daily percentage move of VXX (XIV).

VXX is not as volatile as the VIX index. On a day with sharp market moves, VXX will typically move about half the percentage move of what VIX does. VXX can still make big moves, however—one day during the May 2010 Flash Crash, it jumped almost 25%—the VIX on that day jumped 46%.

Now we can talk about termination/acceleration. I think it is reasonable to assume that the goals of the ETN providers in including these measures are to:

  • Prevent the ETN value from going negative (they specify in these prospectuses that the value will be greater than or equal to zero)
  • Protect the provider from undue market risk in hedging these products during volatile times

With XIV termination (or “acceleration” in marketing speak) relates to daily percentage moves. If VXX jumped more than 100% in a day, then if VelocityShares didn’t terminate XIV its notational value could go below zero.   They avoid this particular unhappy situation by terminating the fund if the daily move of VXX is 80% or more—although losing 80% in one day would still be plenty traumatic.

Just to be clear, this fund isn’t tied directly to VXX, but rather the underlying futures contracts, but I believe VXX is a good proxy for the situation.

The termination risk for XIV appears to be limited to market crashes worse than the Flash Crash. Two examples that come to mind are the 2009 crash and the October 1987 crash. VXX didn’t exist for either of these. I have analyzed VIX data (or simulated data) since 1992—there were 20 days with VIX jumping over 30% (previous day close to intraday high) during that period. The highest percentage jump over that period was 70.5% on February 27, 2007. There were three days with VIX jumps over 30% in the 2008/2009 crash, and during the Flash Crash.

If VXX had existed during this time span and held to its typical behavior of 50% of VIX’s move it looks like the XIV termination event would not have occurred, but obviously, it would have taken heavy losses on those days.

If you are investing significant amounts of money in these products it looks prudent to at least hold some OTM VIX or VXX  calls. These would provide some insurance against these infrequent, but dramatic events.

Thanks to Steve, who commented on the first version of this post pointing out that the ETN providers were probably not looking out for the investor, but rather for their own hides in incorporating these termination events.


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73 thoughts on “XIV termination”

  1. “The termination risk for XIV appears to be limited to market crashes worse than the Flash crash. Two examples that come to mind are the 2009 crash and the October 1987 crash.”

    Apparently not.

  2. Credit Suisse AG Announces Event Acceleration of its XIV ETNs
    New York February 6, 2018 Credit Suisse AG (“Credit Suisse”) today announced the event acceleration of its VelocityShares™ Daily Inverse VIX Short Term ETNs (“XIV”) due to an acceleration event. The acceleration date is expected to be February 21, 2018.

    Since the intraday indicative value of XIV on February 5, 2018 was equal to or less than 20% of the prior day’s closing indicative value, an acceleration event has occurred. Credit Suisse expects to deliver an irrevocable call notice with respect to the event acceleration of XIV to The Depository Trust Company by no later than February 15, 2018. The date of the delivery of the irrevocable call notice, which is expected to be February 15, 2018, will constitute the accelerated valuation date, subject to postponement due to certain events. The acceleration date for XIV is expected to be February 21, 2018, which is three business days after the accelerated valuation date. 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.

    The last day of trading for XIV is expected to be February 20, 2018. As of the date hereof, Credit Suisse will no longer issue new units of XIV ETNs.
    On February 2, 2018, the closing indicative value was USD 108.3681. None of the other ETNs offered by Credit Suisse are affected by this announcement.

  3. As a $25k holder of 200+ shares – how do we find out what happens next – trading is halted today?? My trading account is thus frozen

  4. Man this is prophetic. 2/5/18 XIV down 85% in after hours. Its sitting at 14.9 when it traded as high as 118 today. Pretty sure its terminated.

    • It doesn’t say anywhere that after hours trading is considered valid for the purpose of these termination events. In any event, VXX and UVXY have not correspondingly jumped.

      • Ok good work. In that case, then high watermark is today’s close, 69.87, and the max limit down number before the trigger is 0.20 x 69.87 which is $13.97. I think it opens at $4 tomorrow 3am to be honest. I mean, the DOW futures are down 5% already, thanks to Bitcoin futures.

          • Still a chance it closes above 14 tomorrow! Never say never!!! It all depends on what bitcoin does tonight and tomorrow. Markets are following bitcoin’s lead right now. So bitcoin needs some magical $10 billion infusion somehow.

          • I’m on the wrong thread then. I was referring to SVXY. I don’t and never traded XIV because of the slightly higher expense ratio vs SVXY. SVXY has/had better liquidity in the options market as well as trading pre-and post market anyway for the etf. I love the SVXY/UVXY pair. UVXY swings today were insane! Could make money on both the long and short sides. 60% swings today.

          • XIV being an ETN had better tax advantages over the ETF SVXY. I find playing the long side of the VIX much more difficult because the VIX rarely spikes for more than a couple of days.

          • What are the tax advantages? Don’t you get a K-1 for the XIV too? So it becomes ordinary loss if you are considered a “partner” no?

          • I was talking about SVXY. Will probably open around $3-$4. Wondering if we can sue them because they didn’t disclose the risk that a one day 5% drop in the DOW can tank SVXY or XIV 90%. That’s like a 19x gearing. That is a monstrous amount of leverage.

    • This was pure market manipulation. The vix futures overnight didn’t even increase. That means, that the market maker of xiv simply decided not to follow the xiv rules (which are comprised of vix futures) and let it run ‘free’ (not create units or redeem units as needed). That is not what I bought. The way xiv declined it would have meant that the vix would have to push way past 90.
      I smell lawsuits …

      • Also, have you noticed how the TVIX and VXX are completely out of sync? Both are supposed to track the vix. One is major down today the other up.

          • I mean, i wanna find out if we cand find a legal and productive solution. I got some ideas on my own also and i want to talk more and try them.

          • Most of the arb is gone since South Korea implement face verification. Now it’s like 1-2% here and there instead of the 8-9% before. And if you use anyone else’s code that they sell online, expect it to be malware and for your coins to be hacked.

      • I agree. Whoever lot money should pool money for a class action. SVXY is still trading. This drop wasn’t even as bad as 2015 and XIV survived that

      • I see XIV having a nav of 4.22, and SVXY having a nav of 3.458.. Chances are XIV will be gone or have a <5 price tomorrow, from which it'll take a 2000% up move to get back to where things were last week. Not going to risk it.

      • They would be insane to try to liquidate after hours. Also, after hours can have pricing errors. Remember 2015? I don’t know for certain but would think the 80% drop has to be during regular market hours.

        • It would also be incredibly easy to manipulate these instruments if they liquidated after hours. My guess is tomorrow it will open low, and then either it will be terminated at end of trading day, or people will bid it back up and it won’t be.

  5. If I protect against XIV terminating by buying puts on XIV, would that be enough? Would XIV puts would continue to trade even if XIV gets terminated?

    • Yes of course, XIV terminating is something like ETN price drop too much for example from $100 to $10-20, and then, may be, it will be delisted. Or, may be, managers wait some time (some days) and run their strategy again.

  6. When i think about possible XIV/SVXY termination i always think to:

    1) How many days are left before F1 expires? The more we’re approaching expiration the more F1 will track the VIX.

    2) Historically the correlation is that the front month futures moves at about 0.5 of the VIX. Do you consider this statement to be true? I still have to do my research on this.

    Federico

    • 1. Because the index that XIV/SVXY is a dollar weighted average between the front VIX futures the number of days remaining on FI is relatively unimportant. If F1 expiration is near then it’s proportion in the fund is relatively small.

      2. The 0.5 number is pretty good. Historically the median has been around 0.45. For big VIX moves up the data suggests a somewhat lower number (e.g, 0.35).

    • The daily differential converges exponentially I believe. Similar to daily theta decay on a front month option using Black Scholes.

  7. Hi Vance, Your blog is a great resource – thank you for sharing your insights. Question – could the ProShares’s SVXY also have a “termination event” similar to the XIV?

    • Hi Marc, There is nothing in the prospectus except for the generic “The Trust, or, as the case may be, a Fund, may be dissolved at any time and for any reason by the Sponsor
      with written notice to the shareholders.”. I think ProShares would terminate the fund rather than let it go negative, as a self protective action. I don’t see any way ProShares could require investors to kick in additional money if its value went below zero.

      — Vance

  8. Vance, nice post on the termination condition for xiv. When I go back to 2011 and checked the price of vxx, it was around 750 on Nov 18,2011 while the vix was around 37. How could the vxx be so much bigger than vix if it were to track the vix futures? May

  9. Vance,

    Does it seem that it would need a 140-160% type daily move in the VIX then to terminate “XIV” since you suggest that VXX likely moves around half that?
    And has such moves ever occurred in the new or old VIX calculations (1987)?

  10. Vance, what happens if they terminate XIV? they liquidate the fund at the threshold price and pay you back that amount/share?

  11. Hi Vance,

    With regards to termination events, wouldn’t ZIV be significantly safer than XIV given that its volatility is about 50% that of XIV?

    I’d also be interested in seeing a back tested analysis of ZIV vs XIV. I suspect ZIV has a higher Sharpe ratio than XIV looking at its recent performance.

    Also, I realise that ZIV has lower liquidity than XIV although it’s volume seems to be steadier than XIV’s too – XIV has dropped off a lot recently.

    Finally, a small correlation analysis between these two etfs and SPX shows that ZIV is currently a better diversifier if you have an equity portfolio. Admittedly the history is short and again, I’d like to backtest to get a better idea of how the correlation varies over time.

  12. Has anyone else noticed a huge amount of erosion of the XIV during the last week or so? what happened here? te erosion is supposed to be in the VXX because of the contango and the XIV investors should benefit from it.
    So what is going on now? suddenly the VXX investors are enjoying the erosion?
    can anyone give an explaination to this phenomenon?

  13. Hi Steve,
    Of course you are right. I guess I’ve had short selling on the brain. I’ll update the post to correct the error.

    Thanks!

    — Vance

  14. “The goal of these measures is to avoid the situation where the investor loses more than they invested.”

    I don’t think that the investor can lose more than they invested in this. I imagine these are so that the ETN sponsor doesn’t lose out.

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