U.S. regulators are scrutinizing this month's implosion of investments that track stock-market turmoil, including whether wrongdoing contributed to steep losses for VIX exchange-traded products offered by Credit Suisse Group AG and other firms, several people familiar with the matter said.
The Securities and Exchange Commission and the Commodity Futures Trading Commission have been conducting a broad review of trading since Feb. 5, when volatility spiked and investors lost billions of dollars, the people said.
Among those looking into what happened are lawyers in the SEC's enforcement division, which investigates firms for potential misconduct and fines them if it finds violations of securities laws, two of the people said. There is no indication thus far that specific companies, including Credit Suisse, are being probed.
The scrutiny puts a spotlight on a small corner of the $3.4 trillion exchange-traded fund industry that lets everyone from hedge funds to mom-and-pop investors engage in complex trading strategies. With losses now piling up, allegations of market manipulation are getting more attention and government watchdogs face questions about why small-time investors were permitted to buy such products in the first place.
"The values of these exchange-traded products are based on a combination of futures, options and three indices. Quite the maze," Democratic SEC Commissioner Kara Stein said in a Friday speech. "What troubles me is that oftentimes complex products fall into the hands of people who don't fully understand them."
An SEC spokesman declined to comment on the agency's review, while CFTC officials didn't respond to requests for comment.
The investments that blew up two weeks ago move in the opposite direction of the Cboe Volatility Index — a benchmark better known as the VIX that serves as Wall Street's barometer of market stress. Betting the VIX would fall was for years a winning trade because volatility was close to non-existent.
But that changed Feb. 5 after the Dow Jones Industrial Average had its biggest ever one-day point decline and VIX futures surged. The next day, Credit Suisse said it would liquidate the VelocityShares Daily Inverse VIX Short-Term ETN, a nearly $2 billion exchange-traded note known by its trading symbol XIV. Meanwhile, the ProShares Short VIX Short-Term Futures ETP plunged 83 percent.
After the losses, SEC officials reached out to Credit Suisse, a person with direct knowledge of the conversations said. Neither Credit Suisse nor ProShares have been accused of any wrongdoing. The regulators' examinations are at an early stage and won't necessarily lead to sanctions or new rules.
Spokesmen for Credit Suisse and ProShares declined to comment.
Fear Gauge
The VIX is known among traders as the fear gauge and investors often use it to hedge their bullish stock bets, as the index typically rises when shares fall.
It's calculated from prices for S&P 500 Index options and reflects expectations for the magnitude of swings in the U.S. stock market. Wagering on the VIX has become increasingly popular in recent years, particularly after Cboe Global Markets Inc. introduced futures tied to the index more than a decade ago.
