The CBOE Futures Exchange, LLC (“CFE”) has announced its plans to eliminate the current practice of rounding up the daily settlement price for the CBOE Volatility Index® (“VIX”) futures contracts to the nearest minimum pricing increment if the average of the final bid and offer is not at the minimum pricing increment for each respective contract. Instead of rounding, CFE plans to permit the daily settlement price for all contracts to go out to four decimal places and to be a price that is not at a minimum pricing increment for the contract. CFE anticipates that the change will go into effect after December 2014 expiration1.
The minimum pricing increment, or “tick”, for VIX futures contracts is currently 0.05 points, which is equivalent to $50.00 per VIX futures contract, each of which has a contract size of $1,000 times the VIX. As it has been applied, the value of the rounding up described above is half a tick or 0.025 points or $25 per VIX futures contract. As of December 1, 2014 the rounding up was equivalent to 0.16% of the December 2014 VIX futures contract settlement price of $15,600 per contract.
S&P Dow Jones Indices, LLC (“S&P Dow Jones Indices”) has announced that no index adjustments will be made due to the revised settlement procedures to the S&P 500 VIX Futures Index family of indices (together, the “Indices”) for which it acts as index sponsor2.
If the CFE’s proposed change in settlement pricing is implemented and S&P Dow Jones Indices does not make any index adjustment to the Indices to reflect the impact of this change, certain Indices offering long exposure to VIX futures contracts may be subject to a loss in value of the index components resulting solely from how the settlement prices of VIX futures contracts would be calculated as of the date on which the CFE’s change is implemented (the “implementation date”) as compared to how such settlement prices were calculated on the day before the implementation date. Without accounting for any change in the settlement price due to market fluctuations, this loss in value would arise for any Index if the settlement prices of any of the VIX futures contracts tracked by such Index would have been rounded up on the index business day prior to the implementation date but, because of the change in settlement pricing, are not rounded up on the implementation date. This potential loss in value of the index components may result in a decrease in the levels of any affected Indices as of the implementation date, although it is not possible to predict which Indices will be affected or the magnitude of the impact of the proposed change on any Index.
Barclays Bank PLC has issued exchange-traded notes (“ETNs”) linked to certain Indices within the S&P 500 VIX Futures Index family, as detailed in the table below. Any ETNs directly linked to an Index that experiences a decrease in Index level as a result of the change in settlement pricing may also be subject to a corresponding loss in value on the implementation date, without accounting for any change in value due to market fluctuations. Similarly, ETNs that are inversely linked to an Index that experiences a decrease in Index level as a result of such change in settlement pricing may also be subject to a corresponding gain in value on the implementation date, without accounting for any change in value due to market fluctuations.
Any such loss or gain in value would be reflected in the closing indicative value (“CIV”) of the affected ETNs calculated on the implementation date, as the CIV of such ETNs references the closing level of the respective Index which in turn references the settlement prices of the applicable VIX futures contracts tracked by the Index. It is also possible that the market prices of the affected ETNs on the exchange may be negatively impacted as a result of this change, either before or after the implementation date.
It is not possible to predict which ETNs will be affected or the magnitude of the impact of the proposed change on the CIV or the market price of any ETNs. The CIV and the market price of the ETNs may be influenced by many unpredictable factors, which may also affect the level of any of the Indices. For a description of some of these factors, please refer to the paragraph entitled “The Performance of the Underlying Indices are Unpredictable” in the Selected Risk Considerations below. Any of these factors may interrelate in complex ways, and the effect of one factor on the level of the Indices or on the CIV or the market value of the ETNs may offset or enhance the effect of the proposed change described above or any other factor.
The Barclays ETNs that potentially may be impacted are:
|iPath® S&P 500 VIX Short-Term Futures™ ETN||VXX||S&P 500 VIX Short-Term Futures™ Index TR|
|iPath® S&P 500 VIX Mid-Term Futures™ ETN||VXZ||S&P 500 VIX Mid-Term Futures™ Index TR|
|iPath® S&P 500 Dynamic VIX ETN||XVZ||S&P 500® Dynamic VIX Futures™ TR Index|
|iPath® Inverse S&P 500 VIX Short-Term Futures ETN||XXV||S&P 500 VIX Short-Term Futures™ Index ER|
|iPath® Inverse S&P 500 VIX Short-Term Futures ETN (II)||IVOP||S&P 500 VIX Short-Term Futures™ Index ER|
|Barclays ETN+ VEQTOR ETN||VQT||S&P 500® Dynamic VEQTOR™ TR Index|
1 CFE Information Circular IC14-056, dated October 15, 2014. This information circular is not incorporated by reference into this announcement.
2 S&P Dow Jones Indices Index Announcement, dated September 19, 2014. This index announcement is not incorporated by reference into this announcement.