Of financial products under the spotlight after the stock market correction


On the platform of the New York Stock Exchange, in New York on February 8, 2018 (Photo SPENCER PLATT. GETTY IMAGES NORTH AMERICA)

The steep fall in Stock markets this week on Wall Street has put the limelight of indexes based on volatility, complex financial products, accused of having exacerbated the panic of the investors.

The alert had been given only a few days before the rout in the market on Monday with the director general of the bank Barclays (LON:BARC).

“We have built and structured products all around the world who are trying to improve profits by betting on the (low) volatility. It is a practice skillful (but) when the market will turn, fasten your seat belts,” said Jes Staley at the Davos economic Forum.

The dreaded phenomenon occurred on Monday: the VIX index, which measures volatility, has surged more than 100% in four hours. The panic has won the market and in less than twenty minutes by the end of the session, the index feature of Wall Street, the Dow Jones industrial average has plunged into a spiral of 500, then to 1,000 and then to 1,500 points.

The VIX, also known as the “fear index”, is an indicator that is based on the risk of fluctuations in the index of financial S&P 500-comprising the 500 largest companies listed on the New York.

Originally intended to assess the “temperature” of the markets, it has become a fully-fledged tool on which to bet.

– Mr and mrs smith –

Many have chosen to bet on the decline of the index, a market that is flourishing and juicy as the VIX remained almost flat since the summer of 2015.

According to the american bank Goldman Sachs (NYSE:GS), these bets are known as “the best performance of their history in 2017,” with close to 200% performance for the most important.

“Hedge funds, broker-dealers, mr and mrs smith… All the world held this investment since its structure was guaranteed to make it a winner almost every time,” says Brett Manning, an analyst at Briefing. Provided that the volatility remains low.

But when the stock markets have been taken of concerns about the risk of inflation in the end of last week, they had trapped those who had relied on the persistence of the volatility low.

“Everyone had the same bets. Hedge funds have started to come out and a panic to try to cover these investments has followed,” says Mr. Manning.

The increase of the volatility has been all the stronger for it, ” he continues, pushing two big players in the sector, Credit Suisse (SIX:CSGN) and Nomura, to announce the closure of their fund related to the volatility and massive losses for those who had invested.

Friday, one of the largest retail brokers Fidelity has announced that it interrupted the orders of purchases on the index “SVXY” marketed by the company ProShares, it has not closed despite heavy losses also.

It is difficult, according to experts, how much money has been lost, but this market was estimated to be between 3 and 4 billion dollars.

– Grand casino –

In Switzerland, the financial regulator is seized of the matter and said that he was in contact with Credit Suisse .

The bank had taken care to specify in the documents of presentation of the infringing product, known as “XIV”, that its perceived value “over the long term is zero”.

“What was originally meant to be nothing more than an insurance policy has become an instrument of buying and selling in a big casino,” says Christopher Low of FTN Financial.

In the United States, the president of the central bank of New York William Dudley stated that these products were going to be looked at more closely, in light of the recent turbulence.

BlackRock (NYSE:BLK), the world’s leading asset management, said that he supports “strongly a classification system that would clarify in the eyes of regulators and investors the risks associated with these products”.

“With a level of VIX is higher, and positions significantly debased, rehearsal upcoming events February 5, seems to us unlikely”, however, has estimated Bank of America (NYSE:BAC) Merill Lynch in a note.

“They are far less dangerous. Who will now believe that you can buy and hold these products forever?”, note Mr. Manning.

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