FEATURE
Shenwan Hongyuan capitalises on market transition The securities house has won the Rising Star accolade at the SRP China Award 2021 on the back of a tier-1 OTC option licence received in 2021, which boosted its structured product business. During the same period, SWHY issued a total 1,043 retail structured notes, known as “beneficiary certificates (收益凭证)”, with a combined notional of CNY33 billion in China, which translated into a 147% increase year-on-year.
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he full licence, handed out by the China Securities Regulatory Commission (CSRC) in December 2020, enables securities firms to conduct over-the-counter (OTC) derivative trading with any company qualified to trade equity derivatives while Tier 2 companies can only trade with Tier 1 companies. Prior to that, Shenwan Hongyuan Securities (SWHY) was also granted a pilot scheme licence for cross-border business in July 2020, which paved the way for the use of offshore underlying assets. “We achieved more than most tier-1 dealers operating as a tier-2 dealer until 2021. From 2018 to 2020, SWHY jumped from sixth to third to second in the league table of OTC options notional outstanding [made by CSRC],” Tang Jun (pictured), member of executive committee and head of equity derivatives at SHWY told SRP. In 2021, the firm completed 9,144 OTC option trades with a notional amounting to CNY649.2 billion (US$100 billion), which was up 42.1% year-on-year, or nearly the triple compared with 2019.
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“Following the debut of exotic option embedded products like CSI 500-liked snowball autocallable notes, they soon became a door crasher across all distribution channels, especially among retail investors and onshore private banks,” Tang said. Subsequently the securities house launched index enhancement notes and bullish notes linked to the CSI 500 offering full capital protection. “The SWHY-Voyage series of CSI 500 bullish note immediately became our flagship principal-protected product after its debut in April 2021,” said Tang. The one-year note had a 110% participation rate with the payoff deployed through a fixed-coupon bond and a CSI 500 vanilla call. “It offered a worry-free way for the risk averse investors to participate in the midcap equity market,” he said. The launch resulted from a surging demand for snowball autocallable products linked to the CSI 500 at the beginning of 2021, with investors selling exotic CSI 500 put options and trading desks taking on large CSI 500 volatility positions, reaching risk limits on Greeks. “The trading desk naturally sought to balance its volatilities positions by pricing the CSI 500 vanilla structure, which was
a volatility short. The 12-month CSI 500 index call option was priced at an almost 40% discount where the premium could now be covered by the 12-month bond,” said Tang. The SWHY-Voyage series was issued twice a week and raised a total notional of more than CNY300m as of December 2021. TRANSFORMATION The structured product market in China has been heavily shaped by regulatory action over the past four years. In 2018, the landmark asset management regulations were released with a one-year grace period to break the “rigid redemption (刚 兑)” by adopting the net-asset-value (NAV) model for wealth management products (WMPs), under which WMPs are valuated mark-to-market and shall no longer guarantee an expected return in an explicit or implicit way. “Over the past two years, we’ve seen onshore investors increase their allocation of equity securities while gradually lowering that of real estate or fixed income securities. The shift brings great opportunities for equity derivatives and equity-linked structured products,” said Tang. The former Société Générale trader and his team have been working to provide a more diverse product shelf in the current high volatility environment as a derivative manufacturer serving banks and asset managers. “Structured products can play a critical role in such market based on my experience at foreign investment banks, such as by providing more choices with non-linear payoffs,” he said.
