Following Vontobel's agreement with Bank of Singapore in 2017 and the bank's debut in the Hong Kong warrants market which includes plans to release more than 500 structured warrants in just a year, SRP spoke to Simon Yung (pictured), head of financial products public distribution at Vontobel in Hong Kong, about the drivers of activity in the market and the bank's plans in the short term.

In the past twelve months, demand in the Hong Kong warrants market has been increasing and compared to the same period last year, the overall money flow more than doubled, according to Yung. "We have seen more money going into the market," said Yung. "Additionally, the Hang Seng Index has been on an upwards trend throughout the year."

Yung notes that most people usually take a bullish view and buy call warrants to make a profit when the market is on rallying, and as a result investors will be more likely to reinvest the money back into the warrants market. "We have noticed this trend during 2017 and even though the market has been on the down at the beginning of 2018, we also see that quite a lot of people are still trying to buy low using the call warrants," Yung said.

The majority of the flow on the warrants market is speculative and Hong Kong investors, in general, prefer to hold the products for one to three weeks, according to Yung. "Some people would do only day trading and in fact there are a lot of day traders on the Hong Kong warrants and CBBCs market," he said. "We have seen that especially on the index products such as products on the Hang Seng Index for which the majority of the flow is on the very short term of less than a week."

However, people hold products on some single stocks slightly longer, ranging from one to two months, Yung noted. "Those people are still looking for leverage, but they are not looking for some very short-term speculative leverage," said Yung. "They use the characteristics of the warrants to save some stamp duty and also use the leverage to save some capital."

The main driver of activity in the Hong Kong market is related to cash management because not every investor in Hong Kong has a large capital to invest and the warrants market in the region actually allows retail investors to leverage their investments. "The Hong Kong warrants space allows people who would not be able to afford some very large capital investments, which can be pretty expensive, to actually participate on the market," Yung said.

In the next six to twelve months, the volatility on the warrants market is expected to increase which will open up new opportunities and attract new investors, according to Yung. "When the market remains volatile, more people are expected to join the warrants market," Yung said.

Since September, Vontobel has issued more than 300 products in Hong Kong and the expansion is happening at a pretty fast pace, according to Yung. "In my experience, not too many warrant issuers can have 300 products in the first six months," he said. "We have launched mostly on the more popular names like the Hang Seng Index and the Tencent, for example. Our products have been very well received and though we are still pretty new to the market, we had a very good start and people are starting to be aware that we are really serious about this market and that we put on very good market making."

By the end of August, Vontobel expects to double its offering in the warrants market and is currently seeking to increase its underlying coverage, according to Yung. "We will look into commodities, overseas stocks and also Forex, with the goal of expanding our products range in the region," said Yung, adding that the bank will leverage the liquidity it provides to the market as a differentiating factor from its competitors in Hong Kong. "It is not just about whether we offer the cheapest products. It is about whether people can buy and sell easily."

The major challenge in the market for warrants in Hong Kong, however, remains investor education, Yung explained. "Every year there would be some new investors joining the market. However, warrants are not very simple products," he said. "Therefore, we have to keep educating the investors as they need to be aware of the risk involved when they trade such products."

At the beginning of 2018, Vontobel reported an increase of 29% in pre-tax profit for the full year of 2017 following its international expansion in France, the Netherlands and Hong Kong. The Swiss bank is among the leading market participants in the European structured products market with net sales of €9.7bn (US$11.98bn) for 2017, according to SRP data.

According to SRP data, Vontobel issued a total of 177 structured products worth HK$377m in Hong Kong, of which 164 warrants and 13 CBBC. Year-to-date, only in Hong Kong the Swiss financial company issued 319 structured products worth HK$203m, with warrants being 149 and CBBCs - 170.

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