Market players have voiced support for the Hong Kong's Financial Services Development Council (FSDC) report calling for increased diversity in the listed structured products segment on the Hong Kong Exchange (HKEx).

"Expanding the listed structured product range available on the Hong Kong Exchange (HKEx) is something we've been discussing on an ongoing basis with regulators, the exchange and the Asia Securities Industry & Financial Markets Association (Asifma), and it is something we would welcome," said Johnny Yu (pictured), head of public distribution Asia at UBS, adding that demand for new types of products would be hard to project, but a more diverse range of investment tools will be appreciated by investors.

According to the FSDC report, the HKEx and the Securities and Futures Commission (SFC) should include yield enhancement, capital protection and participation products, as well as non-leveraged products, namely discount certificates and bonus certificates, to the listed segment.

However, while there is certainly room for more products, callable bull-bear contracts (CBBCs) and warrants, which account for virtually the whole listed structured products market, already satisfy a large portion of client needs, so new products would likely not generate as much interest, according to a senior Hong Kong-based investment banker. "Some of the smaller issuers on the leveraged products market in Hong Kong will appreciate a wider product spectrum from which to source revenue in such a highly competitive market," said the banker. "[However] reaching a level of diversity such as in Germany would be very difficult and not necessarily healthy."

The executive welcomed the report's suggestions, and pointed that the question now is how long it would take for the exchange and regulators to review, and "potentially implement these recommendations". The HKEx said in an emailed statement that it will "study the FSDC's suggestions and consider them".

Cedric Cheung, executive director, head of listed structured products sales, Asia at JP Morgan noted that the conclusions from FSDC's report are not surprising, because "from time to time we receive similar feedback from clients about lack of product spectrum and inefficiency in product issuance in the market".

"The review essentially points out the improvements needed in the listed structured product market in Hong Kong as a response to investors' demand that we've been aware of and raised to relevant bodies," Cheung said. "We're glad that a government advisory body has conducted an in-depth analysis of the market and recommended the necessary improvement required. We hope this independent governmental research can provide a much stronger voice to the regulators and we're happy to work with the regulators on the next step to implement the recommendations."

According to Cheung, since not all the retail investors bear the same risk profile, it cannot be expected that clientele on warrants/CBBCs could significantly broaden in a normal market. New types of products, however, would cater to a wider set of investment needs and views, and "as long as the regulators agree the direction of broadening products spectrum in terms of risk-reward profile, we're supportive on this diversity... not only limited to bonus/discount certificates".

Notably, a stronger and more diversified listed structured products market would also enable over-the-counter (OTC) market-makers to accommodate wider investment views more easily, with expanded hedging supply from the listed structured products market, said Cheung.

"The recycle of volatility between listed structured products and OTC marketplace in Hong Kong is more balanced and healthy," said Cheung. "When we see the warrants market become active like previously Geely (175.HK) and recently AAC Technologies (2018.HK), the trading activities in the listed option and OTC market, which are traditionally quiet on these names, becomes lively."

FSDC's report also highlighted the issue of home bias on the listed structured products market in Hong Kong, noting that the eligibility criteria for listed products is 'very different to the SIPS Code which sets out detailed eligibility requirements for reference assets to which unlisted structured products may be linked'.

"It makes sense that Hong Kong-based investors will trade Asian underlyings as those are within their time zone," Yu said. "Hong Kong stocks are traditionally more volatile than most other regional markets, so the focus on HK blue chips and indices is mostly a demand-driven phenomenon."

According to Cheung, there are things the market could do on investor education to increase the awareness on overseas names. "Although stock market has been relatively more dependent on geopolitical uncertainties this year, we have not seen an increased demand on oversea indices, FX and commodities warrants," said Cheung.

The market has been on the up in recent months, however. Over HK$366bn (US$47bn) worth of warrants and CBBCs changed hands on the Hong Kong Exchange (HKEx) during March, after HK$368bn was traded in February, which was the highest monthly figure since March 2016, when turnover totalled HK$384bn.

"This year market sentiment has improved," Yu said, while Cheung pointed that on an annual basis "net notional flow on single stocks is increasing in relation to that on Hang Seng Index in both Warrants and CBBCs," as investors are seeing more upside potential from stock picking, in light of sector rotation following Trump's electoral win in the US and likely growth in southbound flow on Hong Kong small caps via the expanded Stock Connect scheme.

The Hang Seng Index accounted for 14% of warrant turnover in the year-to-date, up from 22% for the same period in 2016, while CBBCs, traditionally dominated by the Hong Kong benchmark, saw the index's share drop four percentage points on an annual basis to 92% over the observed period, according to HKEx data.

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