Volatility as an Asset

At 4:00 pm New York time on Monday 5 February 2018, the US stock market closed with the S&P 500 down 4.1% on the day (Reuters, as cited in later litigation), and the Cboe Volatility Index, the VIX, which measures the implied volatility of 30-day S&P 500 options, closed at 37.32, against 17.31 the previous trading day. It was a rise of about 115.6%, the largest one-day percentage rise in the index's history. For one of the most popular securities in American brokerage accounts the closing bell was not the end of the day. XIV, the VelocityShares Daily Inverse VIX Short-Term exchange-traded note, was an unsecured note of Credit Suisse that paid the inverse of each day's return on an index of the first two VIX futures contracts. It had opened at $10 in 2010. On Friday 2 February its closing indicative value had been $108.3681, on 14,993,880 notes outstanding, about $1.62 billion; an investor complaint later put its market value at about $1.9 billion earlier that winter (Set Capital v. Credit Suisse, consolidated complaint, 20 August 2018).

Because XIV promised the inverse of each day's move, the bank that hedged it had to buy VIX futures on any day the index rose, and to buy them near the 4:15 pm settlement, when the day's return was fixed. Leveraged long-VIX products had to buy at the same time. On 5 February the February VIX future rose 43.7% and the March future 47.9% in the fifteen minutes between 4:00 and 4:15 pm alone. The plaintiffs estimated that hedging XIV and two other Credit Suisse short-VIX notes required buying 105,474 VIX futures by 4:15 pm; volume in the two contracts reached 167,377 in the minutes before settlement (complaint; allegations, not findings). XIV's indicative value was $72.59 at 4:00 pm and about $4.22 after the futures settled, a fall of about 96% from Friday's close.

The note's pricing supplement gave Credit Suisse the right, not the obligation, to redeem the notes early if their intraday indicative value fell to 20% or less of the prior day's close. On 6 February it declared that acceleration event. The notes were valued on 15 February, last traded on 20 February and were redeemed on 21 February at $5.99 each (Credit Suisse release; complaint). In January, three weeks before, Credit Suisse had offered 16,275,000 new notes on top of the 10,793,880 then outstanding (complaint). ProShares, whose SVXY fund offered the same inverse exposure as an ETF, survived the day but cut SVXY's target to −0.5× and its 2× long fund UVXY to 1.5× after the close on 27 February 2018. The LJM funds, which sold options on S&P 500 futures, lost about 80% over 5–6 February (Chapter 5). The class action against Credit Suisse was still running in 2026: the Second Circuit revived manipulation and misstatement claims in April 2021, a manipulation class was certified on 11 February 2025, and no settlement had been found (companion's profile of XIV and Volmageddon).