Did Your Broker Recommend Investing in VelocityShares Daily Inverse VIX Short-Term ETNs?
Posted on Monday, February 12th, 2018 at 12:15 pm
Did you suffer significant losses investing in the Credit Suisse AG VelocityShares Daily Inverse VIX Short-Term Exchange Traded Notes (ETNs), symbol XIV? An ETN is a senior, unsecured, unsubordinated debt security issued by an underwriting bank. It has a maturity date and is backed only by the credit of the issuer, and is designed to provide investors access to the returns of various market benchmarks. VelocityShares Daily Inverse VIX shorts volatility by betting on calm market condition.
Because the XIV was designed to produce opposite returns of the VIX, when the volatility index shot through the roof Monday — a record 118 percent — the XIV went through the floor, down a devastating 90 percent. The ensuing negative feedback loop of selling is believed to have seriously exacerbated Monday’s market turmoil.
XIV is designed to produce opposite returns of the VIX, and when the volatility index increased by 188% on February 5 and the volatility index jumped to 38.3 (the highest level in several years), the XIV dropped. On February 6, 2018, stock indexes fell 10%, however VelocityShares Daily Inverse VIX ETN dropped more than 90% down, from $99 to $7.35. On February 9, 2018, XIV closed at $5.38.
Credit Suisse announced that it would liquidate and stop trading VelocityShares Daily Inverse VIX Short-Term Exchange Traded Notes and close the fund.
Investing in VelocityShares Daily Inverse VIX Short-Term ETNs may have been unsuitable for inexperienced investors who did not understand the risks associated with these investments.
A broker must have reasonable grounds for each recommendation made to investors considering such factors as the customer’s other securities holdings, financial situation, and risk tolerance. In addition, before a firm offers a security to its customers, the firm must conduct due diligence, investigating the facts surrounding the security, to confirm that it is suitable for any customer of the firm. The suitability of an investment for a particular individual is at the center of the investment process and one of the key duties owed by a firm and its broker to the customer. A firm may be held liable for its failure to recommend suitable investments to its customers.
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, Credit Suisse AG and other brokerage firms may be liable for investment or other losses suffered by its customers.
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