UPDATE 3-Credit Suisse to redeem volatility notes after market selloff

(Adds details on consequences from product redemption)

ZURICH/NEW YORK, Feb 6 (Reuters) - Credit Suisse said on Tuesday it would terminate the second-largest publicly traded product tracking swings in the S&P 500 after its value plunged during the recent selloff in global markets.

VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note (ETN), which tracks financial instruments that bet against a fall in markets, will stop trading by Feb. 20, the Swiss bank said in a statement.

The notes were worth a combined $1.6 billion on Friday, according to Thomson Reuters' Lipper unit, but the redemption after Monday's selloff will likely leave investors with a fraction of their initial investment.

The spectacular demise of XIV marked just one casualty of a sharp decline in stock prices on Monday. The benchmark S&P 500 index and the Dow Jones Industrials suffered their biggest respective percentage drops since August 2011 as a long-awaited pullback from record highs deepened.

Credit Suisse said earlier it faced no material impact from the fall in the VelocityShares ETN, in which it has a 32 percent stake. The bank's exposure to the product, which Credit Suisse launched in 2010 and of which it has around 4.8 million units, was fully hedged, meaning they made other trades to eliminate their own risk, according to a source familiar with the matter.

Credit Suisse's European-listed shares were down 4.4 percent during a broader selloff.

The decline in global markets has sent people to options for protection, raising prices for those derivatives, and eroding the value of XIV and other investments that bet against VIX short-term futures and effectively on market calm. Until recently, investors using the products had been able to generate steady returns.

Janus Henderson Group plc, which markets the notes and owns the VelocityShares brand, did not respond to multiple requests for comment.

For the two years ending Feb. 1, investors in XIV booked a 585 percent return.

Nomura Securities said earlier Tuesday it would redeem its Tokyo Stock Exchange-listed "Next Notes" S&P 500 VIX Short-Term Futures Inverse ETN after a massive loss in the product. Those notes will be redeemed at 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.

Other similar products were halted from trading. The CBOE Volatility Index last fell 9 percent, meaning the inverse products likely would have risen on Tuesday had they not been halted or shut.

"The unexpected level of volatility has impaired the trading of the underlying derivatives used by many VIX-related exchange-traded products," said Horizons ETFs Management (Canada) Inc, which halted one of its volatility products and discouraged investors from buying another.

XIV closed down 14 percent on Monday, but then lost most of its remaining value in after-hours trading that evening.

XIV's prospectus spelled out the risks of an investment in the ETN, saying a large decline could result in its closure and its removal from the market.

"Upon such an event, your ETNs would be subject to acceleration and you will likely lose all or a substantial portion of your investment," the prospectus says.

"The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment." (Reporting by Michael Shields in Zurich and Trevor Hunnicutt in New York; Additional reporting by Saqib Iqbal Ahmed in New York, Ismail Shakil in Bengaluru and Silvia Aloisi in London; Editing by Alexander Smith and Andrew Hay)