What on earth is going on with the TVIX ETN?
Last week we pointed out that there has been a hugely unusual rush into the double volatility ETN — which is managed by VelocityShares but backed by the banking prowess of Credit Suisse. Daily trading volume has also been noticeably high.
Now news reaches by way of Phillip Rapoport at Macro Risk Advisors that strange things are brewing once again at the 2x VXX offering.
As he noted on Wednesday:
TVIX shares outstanding recently eclipsed VXX shares outstanding, leading to a lot of raised eyebrows. (Where is this TVIX demand coming from?) Below we chart the total TVIX vega outstanding and daily vega volume
Which is pretty crazy in its own right. But it gets weirder still.
Demand has in fact been so great that Credit Suisse has been forced to suspend further issuance until further notice (echoes of what happened to the UNG ETF, though, we should add, for entirely different reasons).
As Rapoport notes, this time it’s ‘internal limits’ which are being cited:
Last night, Credit Suisse announced that it is suspending new share issuance in TVIX, citing internal limits on the size of the ETN. This effectively makes TVIX a closed end fund. So if demand for the product continues, TVIX could start trading at a premium to NAV. We’ve seen situations like this before in other products. Back in Nov’09, for example, UUP had to suspend share issuance as it bumped up against the max allotment allowed by regulators. The fund administrator applied for an increase in share count, but while the market waited on approval, UUP traded at a 46c premium to NAV.
Though this is the odd thing. As yet — at least to our knowledge — there are no regulatory limits that apply to Vix futures. (Although as we noted in our previous post, we’re not sure why. You’d think the same arguments about passive funds skewing the underlying due to their massive positions would apply just as much to volatility as they do to commodities. But perhaps no-one in the political sphere has really thought about that impact yet?)
Besides it’s quite clear that Vix futures are not really the issue here. This is all down to Credit Suisse’ own internal limits. Which highlights yet another point we’ve made already. Since this is an Exchnage Traded NOTE, rather than a fund, Credit Suisse can hedge its exposure any way it wishes. It doesn’t have to own any Vix futures at all. It can for example recycle its own internal volatility position to hedge the product instead.
Which makes us wonder, is the sudden popularity of TVIX more to do with pushing Credit Suisse beyond its limits — i.e. to a point where it is forced to plunge into the underlying market at great expense or suspend issuance outright — than a genuine desire to hold the underlying instrument?
Rapoport’s thinking is possibly yes:
Is it possible that the buyer of TVIX shares has been buying with Credit Suisse’s limit in mind? We haven’t had a great explanation of where the TVIX demand was coming from. It’s not impossible that a large buyer was accumulating with the intent to corner…
My, that would be