If you look more broadly over the course of the last month, at times the ETFs represent the entire market for a given contract. Here’s the history of the ETF ownership of the March VIX contract, for instance:

The seemingly nonsensical situation where the funds own more than 100 percent of the actual futures is easily explained—the ETN counterparties are under no obligation to actually use the futures markets to offset their risk.

It’s entirely possible that the risk desk at Credit Suisse could offset their VIX risk by using the options markets, or they might have a counterbalancing short-VIX obligation from an unrelated, non-ETN client.

The contango effect, of course, ripples out over out-month contracts as well.

Because people know, more or less, that this massive buying pressure will exist in the April contract next month, they can start positioning for it now. That’s why you end up seeing massive contango out through multiple contracts, and a VIX futures curve that looks like this:

Last year (the pink line) contango wasn’t pretty. But it’s gotten uglier as more assets have flown into the ETFs.

So how does this all tie back to Credit Suisse? Well, looking back at the past month, ask yourself this question: Would you want to be the only buyer in one of the most volatile markets in the world? So, is it any wonder Credit Suisse called “uncle” and decided to stop taking new money?

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