Haitong Taps Hong Kong Derivatives Hunger Fueled By Chinese Link

Haitong International Securities Group Ltd., the offshore unit of China’s second-largest brokerage, plans to expand its equity derivatives business after the linking of the Hong Kong and Shanghai stock markets spurred demand.

The unit’s 16-strong team, formed less than two years ago, is poised to almost double in number by year-end as the firm predicts a similar growth in sales, according to Duke Du, the head of equity derivatives at the securities house. Privately placed structured note sales by the Hong Kong arms of Chinese brokerages have doubled so far in 2015 compared to a year earlier, according to law firm King & Wood Mallesons.

Demand for derivatives that can be tied to share performance is surging after Hong Kong investors were allowed to buy Chinese-listed equities through their local bourse, and vice versa, from November as the mainland opened further access to its capital markets. The Hang Seng China Enterprises Index of mainland companies traded in Hong Kong surged to a seven-year high last month amid record turnover in the city.

“In the past 12 months, we’ve seen a significant increase in Chinese securities houses setting up their structured products platforms in Hong Kong,” said Minny Siu, a partner who specializes in structured securities at King & Wood Mallesons in Hong Kong. “We anticipate this trend will continue to grow.”

Hong Kong-based Citic Securities International Co., a unit of China’s largest broker by market value, has sold $137.5 million of structured notes since its debut offer in November, according to data compiled by Bloomberg.

Rules, Pricing

Brokerages such as Haitong are well placed to compete on pricing and availability of structured products tied to China-listed equities, known as A-shares, when compared with global investment banks, according to Haitong’s Du.

“If you want to go long on the Chinese stock market, you buy A-shares. But if you want to short, you can’t because rules over derivatives are very strict and the inventory is very limited,” Du said. “With a large, diversified client base that has different views of the market, there will be more room for brokers to design appropriate products to serve demand from different sides.”

Haitong offers products mainly tied to Chinese and Hong Kong-listed shares. The firm plans to use more than half of the proceeds from a $1.2 billion rights offer to expand brokerage and margin-finance operations, and 20 percent for fixed income, currency trading, commodities and derivatives.

While major Chinese brokerages have an advantage in offering some structured products, global investment banks also have niche capabilities, according to Thomas Fang, the head of equity derivatives structured sales for Asia at UBS Group AG, which has an onshore securities unit in China.

For products linked to A-shares, “major Chinese brokerage houses can be more aggressive on some structures as they face slightly different risk transfer mechanism and regulatory framework from global investment banks,” Hong Kong-based Fang said. “For offshore-listed Chinese shares, global banks like UBS shall have a lot stronger capability given our global platform and broader client reaches.”

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