The "Snowball" Of 500 Billion Internet Celebrities May Become The Next "I Kill U Later" With No Return For Money

Snowball products that are killed by seconds on line are ushering in a comprehensive self-examination.

Recently, the regulatory authorities have issued a document to securities companies to strengthen the risk control of "snowball" products, reminding securities companies to continuously strengthen risk awareness and effectively strengthen the construction of compliance risk control system of relevant business lines.

The full name of "snowball" products is "snowball type automatic knock in and out securities trader's income voucher", which is a kind of OTC option model and a star product sold out of stock in the market since this year. "Annualized coupon 15% - 20%," low risk of loss "or" you can quit when you make money "are the first impressions of snowball products for investors.

However, with the drastic fluctuation of the market, some investors have experienced the "knock in" risk, and the quotation and quota of snowball products have also begun to reduce.

Net red "snowball"

Since the beginning of this year, the sales of snowball products are very popular.

On the one hand, the general tone of major research institutions on the stock market this year is to shock the market. Snowball products can allow customers to obtain higher coupon rates without a sharp drop in the market.

On the other hand, snowball products are like snowballs. As long as there is no pit, the snowball will roll bigger and bigger. Its attribute attracts the attention and configuration of many qualified investors.

In fact, snowball products are OTC derivatives issued by securities companies, trust institutions or wealth management institutions, and the underlying assets are for qualified investors.

There are mainly two kinds of products, small snowball breakeven and income floating, which are usually issued in the form of income voucher; Big snowball is a kind of exotic put option, which is popular in the market.

A financial manager from China Securities Construction Investment Corporation told the reporter of the 21st century economic report that the essence of snowball products is the process of investors selling strange put options to securities companies and obtaining the option fees, "just like the securities companies bought a special insurance from investors, and the annualized income is the premium paid by the securities companies.".

Specifically, snowball products are mainly divided into three types of income: first, the rise triggered knock out, get the income of knock out time point.

Take the snowball products of a securities company linked to China Securities 500 as an example. As long as the CSI 500 index rises by 3%, then you can get the return and principal during the holding period.

Second, if there is no knock in and no knock out event occurs, the principal and the income of the product with a two-year term can be obtained.

Third, knock in but not knock out, that is, the CSI 500 has dropped by 30% within two years, that is, "knock in". When the product matures, it will not only have zero income in two years, but also bear the part of the decline in the CSI 500 index.

From the design of snowball products, it can be seen that once the price is broken down, investors need to passively knock in and hold them to maturity in accordance with the contract, which means that in the market with unilateral decline, there is no stop loss point for investors.

Yu Mingming, an analyst of Cinda securities, backtested the snowball contract linked to the China Securities 500 index. During the period from March 2013 to July 2021, if the daily rolling investment snowball products took 4.56 months, the winning rate could be as high as 82.88%, but the average profit in this case was only 5.36%, while the average loss was 20.9% in the case of loss after knock in.

Therefore, she believes that snowball products are more suitable for the market environment with low fluctuation or moderate rise, and investors need to bear large losses in case of extreme market conditions.

The scale has reached 100 billion yuan

When snowball products are booming, many securities companies have begun to make efforts in this kind of over-the-counter derivatives business with heavy assets.

According to the notice on Further Strengthening the supervision of over-the-counter option business of securities companies issued by the CSRC in 2018, the Securities Industry Association divides securities companies into primary dealers who can link individual stocks and indexes and secondary dealers who only link to indexes.

It is reported that at present, the main force for the issuance of snowball products is eight first-class OTC option dealers designated by the CSRC, including GF Securities, Guotai Junan, Huatai Securities, China Merchants Securities, CICC, CSCI, Shenwan Hongyuan and CITIC Securities.

Wang Ning, an asset allocation strategy analyst at Societe Generale research, said snowball products can be registered in income certificates or over-the-counter options.

According to the data of the Securities Industry Association, as of the first quarter of 2021, the scale of income certificates in existence totaled 411.61 billion yuan, of which 35% were non fixed income, and the estimated scale of snowball products was about 72.03 billion yuan.

In addition, the over-the-counter financial derivatives continued for about 811.76 billion yuan, of which 47.58% were stock indexes. Assuming that about 20% were snowball products, the scale was about 77.28 billion yuan, totaling about 150 billion yuan. Given a more radical share assumption, the current maximum market size of "snowball" products is about 500 billion yuan.

However, the scale of "snowball" market may be about 2 trillion yuan based on the fact that the income voucher does not exceed 60% of the net capital of the securities company (the net capital of the securities industry is about 1.8 trillion yuan by the end of 2020), and the scale of self operated equity securities and derivatives corresponding to the OTC individual stock option business shall not exceed 50% of the net capital (the business has been carried out for three consecutive years and continued compliance).

As an institutional investor of snowball products, a private fund personage in South China told the reporter of the 21st century economic report that securities companies generally provide two kinds of products: customized and standardized snowball structure.

On the threshold of investment, investors need to meet the qualification requirements of qualified investors, with a single customer of more than 1 million. In terms of payment fees, in addition to subscription fees, there are also other fees such as management fees.

He believes that securities companies act as "counterparties" and share the risk of holding positions with investors. The income of securities companies mainly depends on their trading ability, volatility prediction ability and product pricing ability, especially in terms of pricing ability of products (i.e. the risk hedging cost they are willing to bear), the stronger the ability, the higher the profit of securities companies.

Double risk

Some institutional sources revealed that one of the reasons for the popularity of snowball products is the existence of margin trading mode.

This means that in the margin trading mode, the margin rate is usually set at 20% - 30%, and the participants buy snowball structural options directly, which is equivalent to increasing the leverage of funds. Under the same initial capital conditions, if the margin rate is 20%, the coupon income can be 5 times. When the market falls, investors will bear heavy losses.

In fact, in the early stage of the market volatility, some securities dealers said that there are individual snowball products linked to single bills, which indeed lead to the risk of knock in.

Industry insiders said similar products had been launched in Hong Kong before.

Before the 2008 financial crisis, financial channels in Hong Kong launched accumulator products to some high-end customers (usually more than US $1 million, mature / professional investors).

The risk of this product comes from the profit cap, that is, when the stock rises to the preset price, the contract will be terminated automatically; However, the loss is not guaranteed, that is, after the stock falls below the exercise price, it has to absorb the stock twice (or more times) every day. During the period from the end of the contract to the end of the contract, the customer has to bear the loss of the stock decline.

Later, with the outbreak of the financial crisis, the stock market plummeted, and investors who bought this product lost their money. The product was also known as "I kill you later".

In this regard, regulators pointed out that snowball products have certain risks for investors and securities companies.

For investors, it is the risk of sales appropriateness, because snowball structure has the characteristics of high coupon but non breakeven. When the linked index falls sharply and continuously, investors may face a large loss of principal, which belongs to a kind of products with high risk.

For the securities companies, there may be risks of insufficient hedging and on balance sheet losses. The volatility exposure of securities companies is lack of good hedging tools, and the overall volatility hedging is rough. At the same time, when the linked target price is close to the knock in price or knock out price before and after the observation day, the risk exposure of securities companies such as delta and gamma will jump violently, which puts forward higher requirements for hedging accuracy and trading ability of securities companies.

Moreover, with the continuous rise of snowball issuance scale, the negative basis of CSI 500 stock index futures converged to a certain extent, and the market volatility has declined. Considering that the applicable environment of snowball structure has strong periodicity, if the market trend tends to decline, along with the lower volatility of linked targets and the sharp convergence of negative basis of stock index futures, the hedging cost of securities companies will increase significantly, which may lead to substantial losses of securities companies in extreme cases.

Therefore, the regulatory requirements of securities companies should continue to strengthen risk awareness, and effectively strengthen the construction of compliance risk control system of relevant business lines.

The first is to strengthen investor access and proper management, establish a white list access system for counterparties, and prohibit the use of words such as "break even" and "steady profit" to induce investors to buy or unilaterally emphasize income in the process of selling asset management products whose underlying assets are snowball products. Second, securities companies need to strengthen the overall risk management.

In the next step, the supervision will strengthen the inspection on the sales and risk management level of snowball products issued by securities companies. For companies with insufficient risk control, strict regulatory measures will be taken in accordance with the law, and the relevant responsible persons will be held accountable.

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