The continuous decline in China’s stock market is putting pressure on the value of $ 13 billion. snowball derivativesthreatening to raise market volatility As Brokerage Hedging positions are induced to be liquidated.
About 30 billion yuan ($4.2 billion) of those structured products linked to the CSI 1000 index are near levels that would lead to losses at maturity, according to Guotai Junan Futures Co. Another 60 billion yuan of derivatives are 5%-10% off them. Knock-in threshold, the brokerage said.
Snowballs promise bond-like coupons as long as the underlying assets trade within a certain range. While it has attracted institutional and wealthy investors from China in past years, the seemingly bottomless decline in the stock market has exposed the risks of reaching levels in derivatives that could lead to losses.
The equity meltdown continuing into 2024 has raised concerns over the risks posed by such securities. Guotai analysts including Yu Kan wrote that brokerages are holding on to index futures to prevent the risk that comes with snowball selling, and knock-in levels are being triggered by some of them closing long positions in equity futures. Is lagging behind.
China’s CSI 300 benchmark has fallen about 4% so far in 2024, extending last year’s 11% decline. The CSI 500 and CSI 1000 indexes, to which most snowballs are linked, closed on Wednesday at their lowest since April 2020 and April 2022, respectively.
Similar to autocallables in other markets, a snowball investor loses money if the underlying index falls below a pre-determined level and does not bounce back. Derivatives have grown into a $27 billion market in China, although regulators have tightened their grip to prevent them from being marketed as fixed income products to retail investors.
Losses from structured notes linked to Chinese stocks have also become an issue in South Korea, where the regulator is stepping up a crackdown against potential misconduct by brokers.
While the extremely bearish scenario of reaching the snowball knock-in level of 200 billion yuan within a week would trigger a selloff in futures, equivalent to about 2% of the average week’s turnover, the CICC said. Still, the broker warned that the episode could deepen market pessimism.
Bearish sentiment remains strong as market watchers see few catalysts for China stocks. Economic data continues to point to a weak economic recovery, while geopolitical tensions continue to rise and the policy roadmap remains unclear. The market weakness has also been attributed to selling and redemption pressure by mutual funds.
About 30 billion yuan ($4.2 billion) of those structured products linked to the CSI 1000 index are near levels that would lead to losses at maturity, according to Guotai Junan Futures Co. Another 60 billion yuan of derivatives are 5%-10% off them. Knock-in threshold, the brokerage said.
Snowballs promise bond-like coupons as long as the underlying assets trade within a certain range. While it has attracted institutional and wealthy investors from China in past years, the seemingly bottomless decline in the stock market has exposed the risks of reaching levels in derivatives that could lead to losses.
The equity meltdown continuing into 2024 has raised concerns over the risks posed by such securities. Guotai analysts including Yu Kan wrote that brokerages are holding on to index futures to prevent the risk that comes with snowball selling, and knock-in levels are being triggered by some of them closing long positions in equity futures. Is lagging behind.
China’s CSI 300 benchmark has fallen about 4% so far in 2024, extending last year’s 11% decline. The CSI 500 and CSI 1000 indexes, to which most snowballs are linked, closed on Wednesday at their lowest since April 2020 and April 2022, respectively.
Similar to autocallables in other markets, a snowball investor loses money if the underlying index falls below a pre-determined level and does not bounce back. Derivatives have grown into a $27 billion market in China, although regulators have tightened their grip to prevent them from being marketed as fixed income products to retail investors.
Losses from structured notes linked to Chinese stocks have also become an issue in South Korea, where the regulator is stepping up a crackdown against potential misconduct by brokers.
While the extremely bearish scenario of reaching the snowball knock-in level of 200 billion yuan within a week would trigger a selloff in futures, equivalent to about 2% of the average week’s turnover, the CICC said. Still, the broker warned that the episode could deepen market pessimism.
Bearish sentiment remains strong as market watchers see few catalysts for China stocks. Economic data continues to point to a weak economic recovery, while geopolitical tensions continue to rise and the policy roadmap remains unclear. The market weakness has also been attributed to selling and redemption pressure by mutual funds.
