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Halo brings transparency to structured notes

The XIV note blow-up highlights risks lurking in the opaque market in structured notes, but also obscures potential benefits for a wider group of investors and issuers if the market could be opened up.


Tidjane Thiam, CEO of Credit Suisse

The long and largely uneventful life of the XIV – the VelocityShares Daily Inverse VIX Short-Term exchange-traded note (ETN) – and its sudden and fiery end at the start of February amid surging US stock market volatility provides a reminder of how big a business structured notes have quietly become in the years since the financial crisis.

Many banks now issue billions of dollars each year in such notes, tying in dependable intermediate maturity liabilities at low cost and often earning fat fees in the process. Monthly new issue volumes are measured in hundreds of billions of dollars.

Structured Retail Products puts the global market’s outstandings at $2.4 trillion, but it is probably bigger: some sales to accredited investors in the US under 144a are not reported. It could be a $3 trillion market.

Credit Suisse, issuer of the XIV note, has of necessity been playing down its significance since accelerating it after it lost 80% of its value in a single day. The note was a bet on volatility staying low.

At the start of February, with investors growing nervous that the US Federal Reserve has fallen behind the curve on inflation and that rates will rise faster than generally expected, volatility went through the roof.

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