Despite the notable suspension of trading of over 150 products coinciding with the market drop, industry sources say it's housekeeping.
Over 100 listed structured products have been suspended from trading on the Hong Kong Stock Exchange (HKEX) as the market’s Hang Seng Index (HSI) benchmark tumbled to a 14-month low earlier this week.
Most of these delisted [or to be delisted] products are HSI-linked bear CBBCs where the barrier level is really high or far away
Documents from HKEX show that since Monday (15 January), seven listed structured product issuers including Citi, Société Générale and J.P. Morgan, have suspended trading some of their product offerings including derivatives warrants (DWs) and callable bull/bear contracts (CBBCs). The total amount reached around 166 products, according to documents – 85% of which are CBBCs.
The majority of these are bear contract-focused CBBCs, a leveraged product listed on the exchange where the call price must be equal to or below the strike price. Many of the suspended CBBCs and DWs are linked to the HSI, while some are linked to stocks such as shares of Tencent and Alibaba.
Citi withdrew those suspended products from listing on Thursday, and other issuers are also expected to delist these in the coming week, according to the documents.
The move coincided with a disappointing performance from Hong Kong equities, with the HSI falling 5.8% to 15,308 points at today’s (19 January) close which according to traders and analysts quoted by media reports was probably exacerbated by the triggering of automatic sell orders on structured products. On Wednesday alone, it closed at 15,282 points, its lowest since November 2022. Both the shares of Tencent and Alibaba also dropped by six percent each, this week.
While markets may jitter over what to make of the suspension and upcoming delisting, industry sources said it was an operational, clean-up move for those products unlikely to get traded.
“Most of these delisted [or to be delisted] products are HSI-linked bear CBBCs where the barrier level is really high or far away,” one senior trader who works at one of the issuing banks told SRP. “Retail investors are not interested in this.”
According to HKEX data, the JP#HSI RP2503K, a two-year HSI-linked bear contract CBBC issued by J.P. Morgan and listed in February 2023, had a strike level of 21,900 points and a call level of 21,800 points.
The trader noted those to-be delisted products are issued by large issuers that usually have a lot of products in the market whose terms are no longer attractive. They want to clean up their product offerings and withdraw those which have no outstanding.
“Once [issuers] announce delistings, they can stop providing liquidity, ie now,” explained the trader.
A senior salesperson who works at an issuing bank that suspended products earlier this week said that products set to be delisted must have no outstanding due to the conditions HKEX imposed.
According to the source, the bank issued those CBBCs – usually with one- or two-year tenors – early last year when the HSI was at 21,000 points. Yet, as the market headed south over the past months, it had to issue more products to fill the gaps.
“That’s how we have accumulated so many bear products on one computer,” said the source.
This computer, commonly known as the Gateway, is a hardware system operated by HKEX that allows issuers to communicate and input structured product liquidity orders. Each server can handle a maximum of 500 products, and it is now almost 80% full, said the source.
It has nothing to do with market sentiment – we do the delisting when the market is up; we do the delisting when the market is down
As such, suspension of trading and delisting are “general housekeeping” from an operational standpoint as the bank has done such monthly checks over the past few years.
“It has nothing to do with market sentiment – we do the delisting when the market is up; we do the delisting when the market is down,” said the salesperson.
HKEX declined to comment on the latest suspensions and subsequent delistings, but in a document released in January 2021, it emphasised the delistings will not have a “material adverse impact” on Hong Kong’s structured products market.
“Listing termination of these structured products is the issuers’ decision and they are doing so legally, pursuant to the terms of the products,” it read. “The issuers have volunteered to conduct a buyback arrangement in order to reduce the impact of termination to investors and the market,” it added. “HKEX is facilitating the buyback arrangement, by providing a waiver from compliance with certain listing rules to support this process”.
Another senior salesperson from the sell-side noted that issuers delist those products “for maturity replacement on their newly-issued products”.
“Issuers use the A to Z to name the product expiration in the same maturity month, [which means] you get 26 products at maximum every expiry month,” the sales said.
“If you want to issue new products in the same month but you already have 26 products, you need to de-list those deep in-the-money products, which get less market interest to leave space for new ones,” added the source.
Generally speaking, one of the only possibilities of seeing potential market selling pressure happens in the case where issuers have to unwind futures positions when a bull product is knocked out, according to Martin Wong, head of exchange trade solutions sales, APAC at BNP Paribas.
“Hedging can be conducted both via buying and selling futures, depending on directions of trades, i.e. when clients buy bull or bear products as well as when barriers are triggered,” Wong told SRP.
“The position published on HKEX is an overnight snapshot and often will change as soon as market is open, so the actual position before a CBBC knock-out is only known to each issuer,” he said.
Wong also pointed out that the HSI futures daily trading liquidity is “much higher” than the CBBC positions and its daily trading which is not limited to knock-outs.
Declining market
Last year was tough for listed structured products in Hong Kong SAR.
The latest HKEX report shows that as of December, the market value of structured products held by investors decreased to HK$2.3 billion (US$294m), a 6.8% drop compared to November.
SRP data shows that in Hong Kong SAR, there were 14,715 CBBCs issued across 2023, a 34% year-on-year drop in issuance amount, as 2022 saw 22,337 products issued.
Last year’s league table is driven by Société Générale, which issued 3,324 products worth US$935m and UBS with 3,234 products worth US$863m. J.P. Morgan (2,680 products at US722m), BNP Paribas (1,921 products at US697m), and HSBC Bank (1,523 products at US338m) closed the top five.
The HSI is the most widely used underlying for CBBCs, with 8,547 associated CBBCs issued last year, followed by the stock shares of Tencent (1,441), Alibaba (H Shares) (812), and Meituan (705).