Citigroup Global Markets Holdings yesterday suspended trading on the Hong Kong Stock Exchange (HKEx) of 23 derivative warrants and 81 callable bull/bear contracts (CBBC), according to London newspaper The Standard.
According to the report, the move has fuelled rumours that Citi wants to exit the local warrants and CBBC markets, despite the popularity of its product range among retail investors.
GEO Securities chief executive Francis Lun Sheung-nim was quoted by the paper as saying he believes Citi will retreat from this sector due to fierce competition and its modest market share.
“Citi is not a big player in Hong Kong’s warrants and CBBC market compared with UBS and Société Générale. Thus it has to pay higher costs to make a profit,” Lun told The Standard. He also forecast the number of warrants players to fall to about ten as a result of a saturated market.
KGI Asia director Ben Kwong Man-bun was also quoted as saying that costs in the warrant and CBBC business are high, including those for product design, risk management, maintenance, promotions and advertisement.
According to Kwong, demand for these instruments has also fallen recently due to the appeal of other derivatives products, such as options. “Retail investors used to be crazy about warrants, but they have realised the high risk and become conservative after the financial crisis,” he said.
According to the report, the trading volume of warrants in Hong Kong fell to HK$1.78tr ($2.1bn) last year from a peak of more than HK$4tr ($5bn) a few years earlier.
As reported by SRP, Hong Kong Exchanges and Clearing released a new set of rules governing listed structured products in 2012 in a move to enhance internal controls and the standardisation of listed documents, the improvement of liquidity provision standards and management of issuers’ credit risks.
Despite stricter liquidity requirements for providers, HKEx reported in November 2012 that the average daily turnover of these listed structured products accounted for almost 25% of total stockmarket activities.
According to Kwong, who said Citi’s decision was purely commercial and not due to any concerns over regulation, the stricter regime has enabled issuers to put more resources into internal monitoring, thereby increasing costs.
According to the newspaper report, Merrill Lynch International suspended trading of 38 warrants due to limited profit, raising speculation in the market that it would pull out from this sector just as Rabobank has chosen to do.
Related stories:
HKEx appoints head of structured products
Hong Kong exchange issues new rules for listed structured products
Listed structured products thrive in Hong Kong despite stricter regulatory guidelines