In VIX Trading

Bristol, Aug. 14, 2017 / — VIX Product Margins Increase. Holders of VIX related ETF’s see margin requirements increase. Placing pressure on traders shorting volatility via ETN’s such as NYSE:XIV.

Last weeks market action which saw $1 trillion wiped from global stocks and the VIX index climb to over 16 for the first time since mid April. Market gyrations have spurred increased caution amongst financial institutions that facilitate VIX products on behalf of clients. The caution appears justified as volatility traditionally increases throughout August and heightened geopolitical tensions take centre stage.

Risk off assets including the Yen appreciated towards the end of last week seeing the YEN hit 108.70 to the Dollar. “As long as the geopolitics ease, we look for dollar/yen to gradually grind higher, back above the 110.00 level, along with gently rising U.S. yields,” ING Bank analysts told clients.

The VIX has been historically low over the last few months as the stock market has steadily risen, grinding out all time highs day after day.

Many market participants claim low volatility is historically normal, and is not representing a warning sign, evidence is beginning to mount that equity markets may be near a volatility-driven tipping point. “Low volatility could be ‘the quiet before the storm,’” Nobel laureate Robert Shiller told CNBC last week, adding: “I lie awake worrying.” Over the past 20 years, the CBOE Volatility Index (VIX) has closed below 10 on only 21 days, 13 of which have been in the past two months.
In any event financial institutions who provide leverage to client have taken to increasing margins on products tracking the VIX.

VIX product margin increase

The following is an extract from an email sent to Interactive Brokers’ clients’ who hold VIX related products.
VIX (the CBOE Volatility Index) has established new all-time lows over the course of the past month. The price dynamics of that product are such that it can have very large relative price increases over a very short period of time base on news and other market factors. In recognition of the special risk of sudden, large increases in market volatility, that is inherent in Volatility Products such as VIX, Interactive Brokers will put into place greater margin requirements for Volatility Products after expiration processing on Saturday, 19 August.

IB’s margin policy will be to consider market outcome scenarios under which VIX might rise to a price of 18 (even when it is currently priced much lower) and under which the other Volatility Products could rise to proportionately similar degrees. If you have positions in Volatility Products that have risk in large upward moves of market volatility, then your margin may increase significantly.

You can use IB’s Risk Navigator SM to understand how the Maintenance Margin will change for your current positions or to see what the Maintenance Margin will be for any portfolio that you would like to construct. Instructions are provided at the end of this email.

You should exercise care to plan your positions so that they will be in compliance with the new margin policy by the effective date of 19 August.

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