February 6, 2018 / 7:32 AM / 16 days ago

UPDATE 1-Nomura to redeem volatility-short ETN as markets tumble

(Adds redemption price, more background)

TOKYO, Feb 6 (Reuters) - Nomura Securities said on Tuesday it will redeem its Tokyo Stock Exchange-listed S&P 500 Vix Inverse ETN after a sharp equity sell-off since late last week triggered a massive loss in the product.

The exchange traded notes (ETN) are designed to track the opposite of the daily return of S&P Vix short-term futures index .

In essence, investors who hold the notes are taking a short position on market volatility, which is a winning strategy most of the time as long as markets remain calm.

Many investors had used such a strategy to enhance return amid low interest rates around the world.

But the sell-off in Wall Street shares since last week on growing worries about inflation and interest rates pushed the Cboe Volatility index to a 2-1/2-year high of 37.32 on Monday from Friday close of 17.31.

That caused an unprecedented 96 percent plunge in the S&P Vix short-term futures inverse index, which Nomura’s ETN is tracking.

The Vix Inverse ETN was one of most popular notes among Nomura’s 19 ETNs, having net assets of more than 32 billion yen ($294.80 million) before the latest plunge.

The notes will be redeemed at 1,144 yen, a cut of 96.1 percent from its closing price on Monday, and will be delisted from the Tokyo Stock Exchange on Feb. 19, Nomura said.

Nomura said it will redeem the notes early, based on the their provision that they will be redeemed when the inverse volatility index falls more than 80 percent from previous day.

Nomura’s move came as the survival of ETFs (exchnage traded funds) and ETNs with similar strategy is called into question.

$1 = 108.55 yen Reporting by Hideyuki Sano; Editing by Kim Coghill

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