Citi becomes latest bank squeezed out of HK warrants and CBBCs

Citi’s decision to suspend 107 of its Hong Kong-listed warrants and callable bull bear contracts (CBBCs) as a result of shrinking margins is part of a trend that has seen a number of foreign providers turn their backs on the domestic listed derivatives space.

Citi is the latest casualty of a competitive environment that has seen Bank of America Merril Lynch (BAML), Deutsche Bank, Royal Bank of Scotland (RBS), Barclays and Rabobank stopping the issuance of warrants or CBBCs in recent times.

“Market consolidation has benefited the leading players [in this space] who have taken market share from the less prominent ones, squeezing some small players out of the competition,” Johnny Yu, managing director for equity derivatives sales at UBS, told SRP.

According to Hong Kong Exchange’s (HKEx) data, there were 15 active warrants providers in October, with the five leading providers taking up 68% of the market share and the remaining 32% of the market shared by the other ten players.

According to the HKEx data, Citi accounted for 4.3% of the total market in October, but its trading volumes kept on falling before the suspension. The US bank hasn’t launched any new warrants or CBBCs since the end of October.

The new guidelines launched by the regulator in 2012, said Yu, have set up stricter requirements for the trading process, compliance, documentation, as well as the required continuous price quotation, which has increased the cost and decreased margins in a very competitive market.

“Some small players may have even incurred in net losses from operating the warrants and CBBCs business,” said Yu.

Further consolidation
Ivan Ho, head of Hong Kong warrants and CBBCs sales at Credit Suisse, believes there will be more small players exiting the market in the near future.

“Since 2008, some banks have gradually closed down their [listed] structured products business in Asia and stopped offering related products to private banking and institutional investors,” he said. “Without the support from the structured products desk, it is difficult to do the hedging for warrants alone and banks will need to absorb additional costs if hedging is outsourced externally.”

In contrast, exchange-traded funds (ETFs) have become a popular item in the retail market recently as they provide access to equities or bonds but at a low cost, despite the advantages of warrants and CBBCs.

“Investors prefer simple products – that’s why warrants and CBBCs satisfy their needs,” said Yu. “Also, there are no inverse ETFs in Hong Kong so far, so investors can’t hold current ETFs as short positions, which adds inflexibility to the investment.”

According to Ho, the warrants and CBBCs market remains an attractive business as the upside potential in the stockmarket will inject volatility into warrants and CBBCs trading. As a result, Ho expects warrants linked to single blue-chip H-shares to increase in popularity.

Citi declined to comment on the suspension.