CS Credit Suisse Group

By Gunjan Banerji 

The Securities and Exchange Commission charged S&P Dow Jones Indices LLC forwith failing to properly oversee a volatility-related index that landed at the center of market turmoil in February 2018.

The civil charge pertains to the S&P 500 VIX Short Term Futures Index, which fed into the VelocityShares Daily Inverse VIX Short Term Exchange-Traded Note. The once-popular exchange-traded note, overseen by Credit Suisse Group AG, left investors with big losses during a bout of market volatility.

Exchange-traded products based on volatility swelled in popularity over the past decade, and the Credit Suisse note, known by its ticker XIV, had been a favorite among investors who sought to profit from a decline in volatility -- a lucrative but dangerous wager.

In February 2018, the note faced big losses as volatility roared back, and the central role that exchange-traded products like XIV played led the period to be called " Volmageddon." The SEC's latest charges reveal how the index behind the product was riddled with problems.

The SEC said S&P Dow Jones Indices didn't have enough people available to monitor the index and didn't follow the company's procedures for index monitoring. S&P agreed to pay a $9-million penalty to settle the charges with the regulator.

S&P didn't admit or deny the SEC's allegations. S&P said in a statement that it "has reviewed its methodologies and its related policies and procedures as part of its index governance processes." A spokeswoman for Credit Suisse declined to comment.

S&P Dow Jones Indices oversaw the index on Monday, Feb. 5, 2018, when the S&P 500 logged a steep drop and the Cboe Volatility Index recorded its biggest jump in history. The index was supposed to track VIX futures contracts.

After markets closed that day, the VIX futures contracts surged. However, the S&P index experienced an "auto hold" at times, freezing the value of the index. But the feature that allowed the index to freeze for certain periods had never been publicly disclosed, leading to stale index values and calculations for XIV. Instead of disseminating values that were based on real-time VIX futures prices, there were static index values being disseminated.

"Despite this notable market volatility on February 5, the Index remained static during certain intervals between the 4:00 p.m. hour up until 5:08 p.m., even though it was supposed to calculate values based on real-time prices of certain VIX futures contracts," the SEC's order states.

Additionally, provisions in XIV allowed Credit Suisse to "accelerate" the outstanding notes and effectively shut down the product. The stale index values means that XIV's values that day were lower than what was being reported to investors and could be accelerated -- which investors didn't know at the time.

"As such, during the 4:00 p.m. hour and until 5:09 p.m., when the closing indicative value of XIV was published, investors did not know that they had been purchasing and/or holding a product that had an economic value that was substantially less than what XIV's calculation agent had publicly reported and that was at risk of being accelerated by its issuer," the order says.

Credit Suisse decided to shut down the product shortly after.

S&P Dow Jones Indices is a joint venture of S&P Global and exchange operator CME Group. Dow Jones, the publisher of The Wall Street Journal, was previously a part-owner of S&P Dow Jones Indices but sold its last remaining stake in the unit to CME in 2013. A spokesman for CME declined to comment.

S&P Dow Jones Indices manages thousands of indexes, including the S&P 500 and the Dow Jones Industrial Average. The company licenses its indexes to fund managers and exchanges that offer ETFs and other products based on its indexes.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

(END) Dow Jones Newswires

May 17, 2021 16:54 ET (20:54 GMT)

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