SRP China 2021 Personality of the Year: TANG Jun

As a native of the former Chinese capital Nanjing, Tang Jun (pictured) began his career as an equity derivatives trader assistant at Société Générale in Paris in 2007 and earned his second master’s degree from CentraleSupélec on the job. He moved to London for BNP Paribas in 2009 before returning to China to join the equity derivatives team at Citic Securities, the biggest Chinese securities house by assets, in 2015.

China’s derivatives market has a history of over a decade, which can be summarised into three stages – exploration, gradual maturity and rapid growth

With a 14-year track record, Tang was tapped to lead the growing equity derivatives business at Shenwan Hongyuan Securities (SWHY) in early 2020 – the securities house which has state-owned China Jianyin Investment as its main shareholder and has assets under management close to CNY600 billion (US$93.5 billion). It is among the 10 largest securities houses in China. Tang became a member of the executive committee at the firm in 2021.

Under Tang’s leadership, the derivatives manufacturer traded 2,198 options over-the-counter (OTC) with a total notional amount of CNY456.8 billion in 2020, an increase of 175.3% year-on-year and translated to a market share of 18.2%.

The expansion came also after SWHY was granted a cross-border license in July 2020, enabling the firm to offer offshore securities-linked products and became a tier-1 OTC option dealer in December 2020.

On the retail side, the securities house issued a total of 820 structured notes in 2020, amounting to CNY13.5 billion in notional. The 2020 issuance included the debut of products with exotic payoffs in China including snowball autocallable notes and principal-protected index enhancement notes – both were linked to the performance of CSI 500 index.

In an interview with SRP, Tang reflected his career path in structured products and shared his observations and outlook on the Chinese market, which is “filled with potential”.

You studied bachelor’s degree in computer science. What brought you to the financial market?

Tang: Back in 2007, the derivatives business in the European and American markets were booming. The application of technology in derivatives models and the pricing of structured products was fascinating to me.

As a leader in global equity derivatives, Société Générale had invested heavily in model development, architecture, product design and trading with a technology team of nearly 2,000 people in the headquarter. It already applied what’s nowadays known as "graphics card computing" to the development of derivatives models.

There was no concept of “fintech” yet, but I had a hunch that the combination of finance and technological innovation would become the trend.

What changes have you observed in the Chinese market following your return in 2015?

Tang: China’s derivatives market has a history of over a decade, which can be summarised into three stages – exploration, gradual maturity and rapid growth.

During the exploration, the A-share market was fairly active back in 2015 when Chinese and foreign securities companies were generally in a period of vigorous development. Many securities houses began to lay out their derivatives business driven by regulatory schemes, although the business was insignificant in terms of income generation. At that time, the firms were gradually striving for the pilot qualifications for OTC derivatives trading and for cross-border business where vanilla options and income swaps were dominant. The model pricing, risk indicators and business frameworks were just established in the derivatives segment. And there were very limited talents available.

As a result, the proprietary trading was mostly carried out through a traditional research approach based on stock fundamentals. Securities houses started to expand to actively managed wealth products, derivatives, and quantitative businesses from their traditional investment banking and brokerage business.

After 2016, the linear income swap business gradually scaled down while the OTC options business expanded. For the securities firms with preparation, they continued to improve the capabilities in transaction pricing, risk management and product design.

The experience was leveraged to the highly volatile A-shares market over the next few years, which also delivered innovation in the products linked to H-shares.  A typical example is the snowball option. Following its debut in the market in 2016, the autocallable product has been welcomed by institutional investors and high-net-worth (HNW) clients.

Thus, a growing number of manufactures jumped on the bandwagon, enabling investors to have a better understanding about derivative instruments. The popularity of barrier options featuring the snowball payoff translated to the gradual maturity level for the OTC derivatives business in China.

In 2020, OTC options represented by snowballs had attracted unprecedented attention from market players. A number of hedge funds and bank’s wealth management arms started to carry out in-depth research on autocallable products. On one hand, the increasing use of derivatives indicated the reformation of the approach to wealth management or equity asset allocation.

On the other hand, it shows that the derivatives business entered the stage of rapid development – it was deployed to continuously widened scenarios, turning volatility into investable assets. Thus, traditional fund managers were able to choose longer-term investment through market timing, rather than simply taking bearish and bullish views on individual stocks.

In view of the overall decline of A-shares in 2022, derivatives have further proved their value in risk management as there are structured products led by the snowball notes delivering stable returns for investors. At SWHY, the repurchase rate of such products is around 90%. According to our estimates, the current assets under management for snowball products has surpassed CNY111 billion on the streets.

Why did SWHY begin to bolster its derivatives business from 2020? What are the goals for the firm following the breakthroughs it had made in licensing?

Tang: Our expansion is actually a process of accumulation. As mentioned, the derivatives business in China posted a relatively rapid growth from 2020. Whether based on research reports of securities companies or the outlook of domestic and foreign analysts, it’s generally believed that the capital intermediary business represented by derivatives will be the profit engine of securities companies in the next 10 year.

SWHY made an early and good start in the space. As a subsidiary under China Investment Corporation, we need to undertake certain social responsibilities and have adhered to a stable development in the derivatives business. Our infrastructure investment in staffing, system, model, capital scale, risk management, pricing and transaction management played a critical role during the past two years.  

We overcame many difficulties and challenges in the early stage of the business layout and infrastructure construction. As an emerging business, equity derivatives involve various volatility models and system applications. There were certain technical barriers as the infrastructure doesn’t comprise a set of systems that can be easily built by pure technology or financial engineering theory. Taking the snowball payoff as an example - its continuing development dated from 2016 is a reflection of the trend in exotic derivatives as the pricing, risk management and customer management of such payoffs require brokers to have certain professional talents and the capabilities of model iterative development.

One of the typical difficulties was volatility pricing, which was the core of my work for a long time. The leading securities houses must learn to handle volatility pricing professionally when managing hundreds of billions of Yuan of derivatives hedging positions. This process comes with continuous trial and error. Securities houses that trade derivatives must learn to take stress tests under varying market conditions, especially in the highly volatile environment.

If I may describe the structured product business back in 2015 with a Chinese poem, it’ be “the lotus just buds (小荷才露尖尖角).” However, I am confident that business will one day “connect to the sky with infinite lotus leaves (接天莲叶无穷碧)” as China’s capital market opens up and the derivatives begins to serve the national strategy.

In recent years, the derivatives business has accounted for 15% to 20% of the top brokerage's revenue and profit. I also believe the derivatives business will be a driver to SWHY’s capital intermediary business and contribute to the transformation of the entire company accordingly.

In terms of team building, we have a very clear long-term plan. We have reformed the organizational structure and established sales, structuring, quant and operation for the equity derivatives division by learning from major foreign investment banks.

The current team size is around 100, and we hope to expand to about 200 by end of 2022. At the same time, system and model construction remains the core of team building. We have specially built up a quant research team to increase the use of financial technology in the business.

Overall, SWHY has invested an average of CNY50 million per year in the system construction in 2020 and 2021, including the purchase of domestic and overseas databases, fintech equipment and staffing. This year, the investment is expected to double and we aim to achieve a 30% revenue growth from equity derivatives compared with 2020.