Securities Times reporter Wang Rui
Recently, the "Futures and Derivatives Law" was officially implemented, and various institutions and even regulatory agencies have come to the forefront to discuss how to use this "Basic Law" as an opportunity to promote and regulate the development of the industry and the market.
As one of the main risk hedging and income-enhancing tools in the financial market, OTC derivatives business is customizable, flexible and leveraged, which can not only meet the investment needs of institutional customers, but also bring systematic development to the development of other businesses of securities firms. boosting effect.
Industry insiders believe that with the development of derivatives business, securities companies are expected to break through in the homogeneous competition.
Last year, the cumulative increase in nominal principal of the OTC derivatives business in securities markets across the country reached 8.4 trillion yuan, a year-on-year increase of 76.56%. In 2020, the increase is as high as 162.41%. The rapid development of China's OTC derivatives market is evident. .
Some institutions predict that by 2030, the derivatives business may contribute 15% of the profits of securities companies.
Safe-haven demand pushes up the scale of derivatives
An industry insider told the Securities Times reporter that with the implementation of new asset management regulations, funds, securities companies, asset management institutions and other demand for risk hedging are constantly strengthening, especially in the current international geopolitical risks are intensified and market uncertainty has risen sharply. In the context of significantly increased volatility, institutional customers need more customized risk hedging tools, and derivatives have a significant effect in serving institutional long-term investment.
Among them, with the further improvement of the scale of management and the degree of specialization, the demand for derivatives business by private equity funds has become more and more diversified and personalized in recent years.
According to data from the China Securities Association, private equity fund clients accounted for 15.84% of the newly added OTC options in December 2021; private equity fund clients accounted for 73.41% of the new income swap business scale.
On average, private equity clients, as the largest counterparty, accounted for 44.62% of the new nominal principal of OTC financial derivatives.
There is a view that domestic private equity funds' demand for securities companies to provide customized services will become one of the major highlights of securities companies' business in 2022.
In this regard, China Merchants Securities believes that a sign of the maturity of the domestic market is that mainstream investors have gradually transformed from non-professional retail investors to institutional customers such as insurance, public offering, and private placement. user group.
Since 2022, the market has shown a unilateral downward trend. As an effective tool for risk management, derivatives are in strong demand from asset management institutions.
"Looking back at the derivatives business in the past few years, especially the demand side of the customized derivatives business of private equity funds, the demand for private equity funds to hedge their positions has always been triggered after major market adjustments." The person in charge of the relevant business of Shenwan Hongyuan Securities told the Securities Times reporter. , After the callback and huge fluctuations at the beginning of the year, private equity funds have derived a lot of demand in terms of hedging market risks and reducing product volatility, while OTC derivatives are essentially products with trading volatility due to their high degree of customization. It can correspond to meet the needs of such customers.
In actual business operations, front-line practitioners have also found that in the past, long-only private equity funds have retreated greatly during this market correction, and gradually realized the necessity of derivatives for private equity fund management and risk control, and increased the Customized inputs for derivative products.
According to reports, the valuations of many high-quality stocks in the current market are already at historically low levels, but opening positions on the left side requires certain downside risks.
To this end, some private equity firms will choose over-the-counter options with airbag structures, which are linked to individual stocks whose valuations have fallen to a reasonable range.
This not only avoids the downside risk to a certain extent, but also takes the lead when the market rebounds.
"Demands like this are expected to increase with the further improvement of the degree of specialization of market participants." said the person in charge of related businesses of Shenwan Hongyuan Securities.
Building a diversified business against cycles
Going back to the brokerage itself, the core application scenario of the OTC derivatives business is to provide “insurance” for investments. The brokerage makes profits by trading volatility and hedging risks. In theory, it can make money under any market conditions.
However, unlike the traditional capital intermediary business, the larger the scale, the higher the risk. The OTC derivatives business’s own transaction intermediary, matching and hedging business attributes make the more counterparties, the richer the risk instruments, and the larger the business scale, risk transfer can be The stronger the control.
The above characteristics make the OTC derivatives business a powerful weapon for securities companies to hedge against market fluctuations and break strong cycles. Therefore, they have been valued by securities companies in recent years.
However, there is no mandatory requirement for the disclosure of derivatives business-related indicators in the regular financial reports of listed securities companies. The income from derivatives business can only be counted in investment income and gains and losses from changes in fair value, which are combined with investment income from other businesses. The overall contribution of the OTC derivatives business to the earnings of securities firms.
Cao Haifeng, a non-bank financial analyst at UBS Securities, previously predicted that derivatives may become a new engine for brokerage growth in the next 10 years.
The derivatives business of domestic securities companies may develop to a mature stage in 2030. At that time, the relevant profits of the derivatives business will contribute about 15% of the total profits of the industry under the benchmark scenario, while the profit contribution ratio of this business in 2019 is only 4.4%.
The person in charge of the relevant business of China Merchants Securities also said that from the perspective of the whole industry, the contribution of derivatives business to the profits of securities companies is still relatively small, but in the long run, there is a trend of gradual increase.
It is worth noting that most of the over-the-counter derivatives business carried out by securities companies is based on risk-neutral strategies, which play a great role in reducing the performance fluctuations of traditional directional proprietary business.
"The essence of OTC derivatives is to realize the exchange of time, space, views, qualifications, and endowments between the two parties, break down various barriers such as policies, regions, industries, indicators, etc., to optimize their own conditions, and to achieve balance and mutual understanding between the two parties. Win." Industry insiders analyzed to Securities Times reporters that with the continuous expansion of OTC derivatives business, when multiple businesses and OTC derivatives are combined, new catalysts will be formed to further promote the development of various businesses.
For example, in the brokerage business, it can improve the investor structure, attract institutional investors, meet the diversified transaction and risk management needs of customers, and avoid homogeneous price wars; in the proprietary business, it can expand the scope of proprietary investment, enrich the Profit model, improve risk control ability; in the two financing business, it can broaden financing channels, reduce financing costs, effectively supplement the types and quantities of securities lending, and provide risk management value-added services; in investment banking business, it can help enterprises achieve balance sheet management , Provide equity incentives and help market value management.
At present, securities companies focus on providing comprehensive financial services to customers, and OTC derivatives and wealth management, investment banking, securities lending, asset management, research institutes, futures and other business lines can form a synergistic effect, which is an important aspect of comprehensive financial services for securities companies. Grasp.
For example, in 2021, Shenwan Hongyuan Financial Innovation Headquarters has issued a total of over 30 billion products through the wealth management line, and the repurchase rate of customer products is high. It has successfully introduced customer assets to the company and formed an effective deposit; derivatives business hedges asset deposits generated by trading positions The formation of a stock pool can be used as a source of securities for the securities lending business, improve the asset turnover rate, expand the balance sheet, and enhance the profitability of the derivatives business.
It should be noted that the leverage effect of the over-the-counter derivatives business has played a pivotal role in the expansion of securities companies' balance sheets in recent years.
Xia Changsheng, chief non-bank analyst at Tianfeng Securities, believes that since 2000, domestic securities companies have experienced three rounds of balance sheet expansion. Mainly contributed by tradable financial assets and trading liabilities driven by over-the-counter derivatives business, the speed and scale of scale expansion of individual leading brokerages is astonishing, and the scale of assets has doubled in the short term.
Coincidentally, Shenwan Hongyuan Securities Research Group's "Research on Leverage and Risk Monitoring of OTC Derivatives Business of Securities Companies" has compared the financial indicators of primary dealers and other securities companies around 2018, and found that OTC derivatives business can improve securities companies. The level of financial leverage can also have synergies with traditional businesses, thereby increasing the income of traditional businesses, which in turn helps securities companies to improve ROE.
Leading brokerages occupy a larger market share
Derivatives business requires securities companies to have strong capital strength and risk pricing capabilities. Leading securities companies have large assets and have the first-mover advantage of pilot projects, and their competitive advantages are relatively obvious.
According to the data of the China Securities Association, in October 2021 (since the China Securities Association will no longer disclose the concentration data), from the perspective of the newly added initial nominal principal, the top 5 securities firms in the income swap business accounted for as high as 87.09%. ; The proportion of the top 5 securities companies in the newly added OTC options also reached 64.08%.
At present, domestic OTC derivatives traders are classified according to primary and secondary categories. Primary traders can carry out all over-the-counter derivatives businesses such as individual stock options, index options, and income swaps. Secondary traders cannot carry out dynamic hedging transactions of individual stock options. , can only seek back-to-back hedging from primary dealers.
Up to now, the number of OTC options dealers has increased to 45, including 8 primary dealers and 37 secondary dealers.
With the continuous expansion of secondary dealers, the concentration of over-the-counter derivatives also shows a slow downward trend.
In this regard, China Merchants Securities told the Securities Times reporter that although the concentration of OTC derivatives is slowly declining, with stronger product innovation capabilities and risk management capabilities, the market position of leading securities companies will not decline.
"China Merchants Securities is a primary dealer, and the development focus of OTC derivatives business is to maintain a leading position in the industry, constantly create new trading models, develop new product structures, and fully meet the risk management and asset management of mainstream institutional customers in the market. configuration requirements".
In addition, according to the relevant business person in charge of the Financial Innovation Department of Huatai Securities, the company's derivatives business layout mainly focuses on multiple aspects, and continues to promote the construction of OTC derivatives platform operation.
Shenwan Hongyuan Securities revealed that its over-the-counter derivatives business focuses on individual stock options and cross-border business (cross-border income swaps), aiming to help market players manage market risks, which is also a development direction clearly encouraged by supervision.
In the view of a relevant business person of a listed securities firm, with the successive implementation of new regulations on OTC options and new income swaps, the dominant position of leading securities companies in OTC derivatives will be further enhanced.
On the one hand, leading brokerages have significant advantages in capital strength, talent reserve, product creation, etc., and have an early layout, and have a first-mover advantage in the supply side of OTC derivatives.
On the other hand, relying on the ability to provide comprehensive financial services, leading securities companies also have significant advantages in connecting with the demand side of customer wealth management.