Barely a month after delisting a suite of notorious exchange-traded notes, Credit Suisse Group AG will kill one off for good following a more than 6,000% price jump in over-the-counter trading.
The leveraged inverse product tied to natural-gas futures surged as high as $25,000 on Wednesday from $400 on Aug. 4, creating havoc for traders still involved with the note. Several took to Twitter, claiming they faced huge margin calls to cover short positions.
Confusion grew and questions mounted over the past week as the price surged. On Wednesday evening in New York, Credit Suisse announced it will “accelerate at its option” the VelocityShares Daily 3x Inverse Natural Gas ETN, known by the ticker DGAZF.
In other words, the note will be shut down. Investors will be paid out at an average of its indicative value over several days, which was $124 on Thursday morning in New York versus a closing market price of $15,000 a day earlier.
A spokeswoman for the bank declined to comment beyond the announcement.
The drama is the latest twist in the saga of ETNs, a wonky cousin of exchange-traded funds that have become a magnet for controversy.
They trade just like ETFs, but are in fact debt obligations backed by a bank often used to invest in hard-to-access assets. ETNs frequently use derivatives to amplify returns or deliver the inverse performance of whatever they track. In the case of DGAZF, it did both.
The note was one of nine formally delisted by Credit Suisse on July 12 “to better align its product suite with its broader strategic growth plans,” according to the bank. UBS Group AG and Citigroup Inc. have also liquidated products this year.
Margin Calls
As part of the delisting, Credit Suisse stopped creating new shares in the ETN, meaning it was likely to become untethered from the natural gas prices it tracks. The exact reasons behind the surge in DGAZF remain unclear, but the extremity of the move surprised industry watchers.
“Historically there have been funds that had big premiums over the indicative value price when creations were halted,” said Vance Harwood at Six Figure Investing. “TVIX in 2012 is an example, but it ‘only’ went up 100%.”