Bloomberg News

JPMorgan Sells Record Notes Tied to Proprietary Volatility Index

April 03, 2012

JPMorgan Chase & Co. (JPM:US) sold $59.1 million in structured notes tied to a proprietary volatility index in March, the most for any month since the gauge was created more than a year and a half ago.

The J.P. Morgan Strategic Volatility Index, which uses a strategy based on a set of rules, has increased 17 percent this year. The gauge seeks gains when the market for longer-term futures on the VIX trade higher than those with closer expirations, which is referred to as “contango,” and also when the reverse is true, called “backwardation.”

Investors have piled into investments that track the VIX, as the Chicago Board Options Exchange Volatility Index is known, as volatility drops to multiyear lows. The number of shares outstanding for 17 exchange-traded products that increase when the VIX rises has jumped more than fivefold this year, according to data compiled by Bloomberg.

Justin Perras, a spokesman for New York-based JPMorgan, declined to comment.

The VIX has plummeted 64 percent in the last two quarters, the most ever, Bloomberg data show. The gauge, which touched its lowest level since June 2007 on March 26, gained 0.9 percent to 15.64 yesterday.

JPMorgan sold $23.6 million in 15-month notes tied to its proprietary gauge on March 13, the bank’s largest such sale, according to Bloomberg data. The notes yield the gains and losses in the index, according to a prospectus filed with the Securities and Exchange Commission. The New York-based bank distributed the securities for a 1 percent commission.

Mitigating Contango

The volatility index, created July 30, 2010, is long on VIX futures with a maturity of about two months, and short on those of about one month, whenever the fear gauge is less than the weighted average of one- and two-month contracts. Selling some futures short, with an expectation of a price drop, is intended to mitigate the problem of contango.

ETNs are unsecured bank debt backed by their issuer’s credit, unlike exchange-traded funds, which hold assets. Banks create and redeem shares of ETNs based on the level of demand for the securities. That demand typically doesn’t affect the price since the ETNs track the performance of an index.

To contact the reporters on this story: Matt Robinson in New York at;

To contact the editor responsible for this story: Alan Goldstein at;

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