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gill


Total Posts: 198
Joined: Nov 2004
 
Posted: 2018-02-07 12:30
Hi guys,

Could someone explain what exactly triggered XIV termination? I look at XIVIV which tracks intraday NAV of XIV. The lowest value is 24.893 at and after 4.15 pm.
At 4pm (which I assume is the end of day for ETN) XIVIV stays at 72.5937. I assume that it tracks from end of day till end of day. At least that what it says in the prospectus.

Even if we assume that they took as a base NAV for Friday February 2 NAV stays at 108.3681. Still we don't see 80% drop. The other question is how much their unwound of the hedges that contributed to the move of XIVIV?

My point is they where not even close to that 80% loss of NAV. Most likely they already started unwound when XIVIV was around 50 and as result of their trading XIVIV dropped to 24.893.

That seems to me they started unwound when a trigger has not been reached (and in fact it was not reached even after the unwound that inflated VIX futures prices). That’s perfectly understandable form trader’s point of view: there is no liquidity and no one knows how much higher up VIX futures can move. But from legal point of view I am not sure they were allowed to do so.

What do you think?

chiral3
Founding Member

Total Posts: 5048
Joined: Mar 2004
 
Posted: 2018-02-07 12:39
It closed at less than 20% of the previous close (XIV closed at 7.35, or 93% down). I didn't read the legal docs CS referenced, but their option on the redemption was if the "indicative value" on 2/5 was <= 20% of the previous "indicative value".

Personally, glad to see it gone. A few hundred more ETFs/ETNs gone would be good too.

Nonius is Satoshi Nakamoto. 物の哀れ

gill


Total Posts: 198
Joined: Nov 2004
 
Posted: 2018-02-07 12:48
That part i dont understand the close on Monday was at 99.00 from 115.55 on Friday. The lowest intraday price for XIV was 92.36.

I think what you are referring to is the price on Tuesday when the ETN has already been terminated.

chiral3
Founding Member

Total Posts: 5048
Joined: Mar 2004
 
Posted: 2018-02-07 13:14

Nonius is Satoshi Nakamoto. 物の哀れ

chiral3
Founding Member

Total Posts: 5048
Joined: Mar 2004
 
Posted: 2018-02-07 14:33
... sorry for the delay on completing my thought... trying to commute.

The key word is “indicative”. People should be concerned, at least about this shit in the broad investment space. This is an issue. Halted should mean it’s not moving, or not moving too much; it should not mean it’s on a rocket ship to hell and all you can do is grab your ankles.

Nonius is Satoshi Nakamoto. 物の哀れ

EspressoLover


Total Posts: 296
Joined: Jan 2015
 
Posted: 2018-02-07 14:38
I believe the "indicative price" just comes from a published feed put out by the ETF issuer. The basic point is to allow the ETF market makers to keep track of what price the issuer will create/redeem shares at the end of the day. There's no obligation, legal or otherwise, to actually make sure that it accurately reflects the market value of the underlying. The only incentive is business: accurate indicative values = happy market makers = better liquidity = more trading = more NAV.

My guess is that once Credit Suisse decided to de-activate the listing, they no longer gave a shit about publishing the indicative value. They probably just turned off the server. It's not like they were going to be creating/redeeming shares at the end of day anyway. They had enough fires to fight that day, so why even bother?

If you want an accurate picture of the intraday NAV, you'll probably have to look at the underlying. XIV tracks the 24 hour move in the 30-day constant maturity VX futures. You can pull this data from CBOE. The weightings should be about 25% on the February contract and 75% on the Match. (It also sometimes uses swaps, but those should pretty closely track the futures).

Now that being said, I'm not sure if there was any type of intraday margin call. If that was the case then XIV portfolio management would have to deviate from their mandate.

Good questions outrank easy answers. -Paul Samuelson

chiral3
Founding Member

Total Posts: 5048
Joined: Mar 2004
 
Posted: 2018-02-07 14:48
Good summary. That pretty much nails it EL. For an industry that wants less regulations this shit doesn’t help, though.

Nonius is Satoshi Nakamoto. 物の哀れ

Martinghoul


Total Posts: 864
Joined: Oct 2008
 
Posted: 2018-02-07 15:06
Not that I watch CNBC or listen to Carl Icahn...

But did anyone find his calls for more regulation of various investment products like ETFs rather ironic, given his former role in the Bigly Don's admin?

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

gill


Total Posts: 198
Joined: Nov 2004
 
Posted: 2018-02-07 15:13
Hi EspressoLover,

Have you had a chance to have look at their prospectus? They specifically indicate the ticker which is used to track intraday NAV: the difference between Closing Indicative Value and Intraday Indicative Value. And that index even have a bloomberg ticker (XIVIV) and that Index is explicitly mentioned in prospectus to track intraday performance of XIV. The 30 day constant maturirty swap gives the same result as an index: ETN was not 80% down.


cabron


Total Posts: 62
Joined: May 2006
 
Posted: 2018-02-07 15:29
The usual extended/after hours futures shenanigans.

Energetic
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Total Posts: 1476
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Posted: 2018-02-07 18:11
I agree with @gill. Per my calculations, they were not down 80%. And especially they were not down 95% off Friday closing price.

For every complex problem there is an answer that is clear, simple and wrong. - H. L. Mencken

gill


Total Posts: 198
Joined: Nov 2004
 
Posted: 2018-02-07 19:32
Cabron: the only question if they will be able to get away with that this time around. I even checked the volume of contracts traded starting from 4:08pm till 4:15pm on CBOE. It's supposed to be around ~130k contracts in both first and second month futures if they indeed closed it towards the close. But the total amount of futures traded is only 47k. Which is normal, since typically dealers start hedging in adavnce. To me that looks that the trading desk decided to make a nice P/L: probably an average purchase for the first and second month contracts was around 26 and 23 but that was "bought" by ETN holders at 33 and 27 respectively.
Not too shabby I gotta admit given the market cap of ETN was around $2BN....

The other thing which came to my mind if they were allowed to trade outside of regular business hours? I skimmed the prospectus but did not find the way trading hours are defined. Thats quite surprising imho.

cabron


Total Posts: 62
Joined: May 2006
 
Posted: 2018-02-07 19:46
http://www.cboe.com/products/contract-specs-and-trading-hours/extended-trading-hours

The low (high VIX) was around midnight GMT.

Energetic
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Total Posts: 1476
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Posted: 2018-02-07 19:59
If their prospectus allows liquidation clause to be triggered by a vol spike during EH trading on low volume then they are technically within their rights.

Why would anybody in the right mind design it this way is another matter.

For every complex problem there is an answer that is clear, simple and wrong. - H. L. Mencken

EspressoLover


Total Posts: 296
Joined: Jan 2015
 
Posted: 2018-02-07 20:02
VXG8 Chart
VXH8 Chart
CBOE VX Margin Requirements

Friday, Feb 02: VXG8 closes at $15.625. VXH8 closes at $14.965. XIV is holding approximately 25% of NAV short VXG8, and 75% of NAV short VXH8. XIV closes near $115. CBOE's margin requirements are $6200 for VXG8 and $4000 for VXH8. (Contract multiplier is 1000X.)

Monday, Feb 05: VXG8 reaches an intraday high of $33.35. A short position entered into at Friday's close would have lost 113% of its equity. VXH8 reaches an intraday high of $29.25. Equivalently a short would have lost 95% of its equity.

Therefore, assuming XIV held the same position from Friday's close to this intraday high point, its portfolio would have lost 99.5% of its equity. It also would have recovered had it continued hold this position into Tuesday morning. That position would currently be only 37% off its Friday close.

However, a margin call seems very likely, because peak losses were far outside CBOE margin limits. The threshold for an XIV margin call would be a 63% loss from Friday's closing value. Based on this and eyeballing the charts, XIV blew through its margin all the way to its theoretical 99% loss within 20 minutes between 5 PM EST and 5:20 PM EST. (This bar incidentally contained a huge amount of VX trading - 2.4 billion in notional volume. It seems quite likely this was the place the big beast was finally felled.)

Now normally, XIV rebalance around 4 PM, as per its mandate. At that time its position would have been 42% off its Friday close. However to rebalance, XIV would have to buy cover 84% of its starting NAV. The combined market cap between XIV and the equivalent SVXY was over $3 billion prior to Monday. So that's something like $2.4 billion in VX futures, all to be done in a short window. To put how huge of a trade that is, it's over 100% of the entire VX curve's ADV over the last 3 months.

I think something like a bear raid happened. The more the VX futures rose, the more XIV would have to buy back to stay balanced. And the more they had to buy, the higher the price went. And so on, with the market ultimately knowing that once they passed 63% losses, regardless of what they did CBOE would close them out. And the market knows exactly the logic that this humongous portfolio is working under, because its all published in the prospectus. So they're front-running the hell out of them the entire time.

For the traders at XIV, its a catch-22. Trade too slow, and the longer the bear raid has to push you to the margin call point. Trade too fast, and you have huge market impact and suffer huge losses, only worsening the feedback loop. This used to be not such an issue, because UVXY/TVIX was also pretty big and traded in the opposite direction. However short-vol's performance has been so good, that XIV got huge compared to UVXY/TVIX. Lesson: The market can stay irrational longer then you can stay solvent. Especially if you're a levered ETF operating under prefixed rules.

> Have you had a chance to have look at their prospectus?

Just browsed through it. It would seem that the issues have unilateral discretion in declaring a market disruption event, in which case they can set indicative value to be whatever number they decide.

> If their prospectus allows liquidation clause to be triggered by a vol spike during EH trading

Doesn't matter what the prospectus allows. If CBOE margin calls you during EH, then you have to trade. And not in a way that's going to contain market impact.

Good questions outrank easy answers. -Paul Samuelson

Energetic
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Total Posts: 1476
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Posted: 2018-02-07 21:18
Thank you, I didn't look at the intraday charts. You're right about peak losses and maybe about everything else, too.

Maybe I am misunderstanding a few things.

1. I thought, since Credit Suisse runs both VXX and XIV, CBOE would net out their respective gains or losses. Since XIV had more assets, there would still be a margin call but not as large.

2. I thought they announced liquidation on Tuesday when they should have been back over 20%.

3. I thought re-balancing was supposed to mean buying back an O(1/6) fraction of their position in G8 and shorting as much in H8, 6 being the number of trading days to expiration of G8 from Friday. So, let's say their market cap went from 3b on Friday to 1.2b on CoB of Monday. 1/6 of their 25% position in G8 at this point would be 1.2b*25%/6~50mln. Thus, I don't think re-balancing is the problem here.

That said, I still think you're basically correct on your bear run theory. Margin call probably forced them to reduce their short positions at the worst possible time so that they may have lost more than I thought.

For every complex problem there is an answer that is clear, simple and wrong. - H. L. Mencken

EspressoLover


Total Posts: 296
Joined: Jan 2015
 
Posted: 2018-02-07 22:41
1. FCMs have to segregate client collateral. VXX and XIV are two separate funds, and hence two separate client accounts. Therefore CS can't pledge collateral from one fund to support the positions of the other. The only thing CS could have done would be to pledge its own proprietary funds as collateral. Edit: As NeroTulip pointed, this may not necessarily be the case.

2. Idk. As far as I can tell, the prospectus says they can announce liquidation at any time after NAV has fallen 80%. So they got margin called Monday night, liquidated out of their position, were stuck holding the bag, lost 90% of investor money. Then, probably after a lot of late-night/early morning calls with lawyers, made the official announcement on Tuesday. I don't think they were under any legal obligation to announce immediately after a margin call.

3. You're describing the roll rebalance. I'm talking about the leverage rebalance. Say you have an inverse ETF on asset A. You raise $1 million in NAV, with the mandate of targeting -1X of daily returns on A. On day 0 you go out and short $1 million, which leaves you with $2 million in cash/collateral and $1 million in equity. The next day A rises 50%. You still have $2 million in cash, but your short position is now marked at $1.5 million. You only have $500 thousand in equity. Effectively, you're now -3X levered ($1.5mn short / $500k account value). To get back to -1X target, you have to reduce your short position to $500 thousand. Which means you go out and buy back $1 million of A. Edit:/ Errata correction - thanks Energetic.

All daily inverse ETFs have to trade %2X of their underlying everyday, where %X is the daily move. So if the price rises %10 they have to buy back %20 of their opening NAV. If the price falls 50% they have to go out and short another %100. (Incidentally, my original math was under by a factor of 2.). This isn't an issue for VXX, because it's not levered, it only has to roll. But for every other levered ETF it is. It's an even bigger issue with inverse ETFs because they have to trade into extreme market moves.

Good questions outrank easy answers. -Paul Samuelson

chiral3
Founding Member

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Posted: 2018-02-07 22:50
EL, great color, thanks for doing some leg work with the estimates.

Nonius is Satoshi Nakamoto. 物の哀れ

NeroTulip


Total Posts: 1010
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Posted: 2018-02-08 01:52
@EL: Thanks for the excellent explanation. One thing though:

XIV and others are ETNs, not ETFs. There is no Fund that an FCM can segregate. The customer buying them is buying a note from CS which promises to pay them according to some formula. CS in turn hedges its position with the exchange.

So CS only hedges the net exposure of all the VelocityShares VIX ETNs. However, because XIV and ZIV were much larger than the others it didn't help that much.


"Earth: some bacteria and basic life forms, no sign of intelligent life" (Message from a type III civilization probe sent to the solar system circa 2016)

gill


Total Posts: 198
Joined: Nov 2004
 
Posted: 2018-02-08 10:03
Sorry, a stupid question: how to upload bloomberg print screen? I get a prompt:
The file you uploaded was of incorrect type. Please upload files of type ZIP, RAR, PDF, MP3, MPEG, DOC, XLS only....


klon


Total Posts: 8
Joined: Mar 2009
 
Posted: 2018-02-08 13:34
Thanks, EspressoLover, this sorry affair makes more sense now.

Energetic
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Posted: 2018-02-08 20:25
@EspressoLover

Thank you for the explanation.

Just to be perfectly clear: did you mean to lay out a scenario whereby the next day A rises 50%? This would make sense to me: the short position loses 50% of value, so the equity goes down from 1 m to 500k.

For every complex problem there is an answer that is clear, simple and wrong. - H. L. Mencken

KangaXX


Total Posts: 293
Joined: Mar 2005
 
Posted: 2018-02-09 00:07
I do think termination is a bit of a red herring as regardless of termination the loss would have occurred - XIV was down 96% inline with the formula used to calculate its value, the loss itself was unrelated to the fact that XIV would be subsequently terminated.

SVXY had a slightly different outcome, although they were down 96% when they calculated nav, their nav magically rebounded so they were only down 91% at open the next day. When I spoke to them (I was short, somewhat annoyed at the rebound and was trying to figure out why their nav was opening up 2.5x my expectation) they told me they used some of the firms cash to allow them to cover some of SVXY futures exposure in the aftermarket at better levels than the print at nav time... c'est la vie.

The different outcome for SVXY is unrelated to termination, and instead related to setup.

I suspect the banks did very well out of this. Retail were buying these well above nav all day, and I presume the dealers would have been on the other side. The dealers would have only been smoked had vix futures followed through in which case their short etf would have been floored at zero whilst their futures loss would have mounted. I found it a bit surprising that we stopped where we did.

Bright, energetic people—usually quite young—have promised to perform miracles with “other people’s money” since time immemorial.

vinpao


Total Posts: 17
Joined: Mar 2013
 
Posted: 2018-02-09 00:40
I found this post somehow informative (sorry but I don't seem able to create an url link)

www.kiddynamitesworld.com/xiv-volpocalypse-sea-disinformation-ignorance

EspressoLover


Total Posts: 296
Joined: Jan 2015
 
Posted: 2018-02-09 03:11
@Energetic

Yes, thanks for pointing that out.

Good questions outrank easy answers. -Paul Samuelson
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