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□ Li Fang
Recently, several senior market personages said, "Warrants have come out again this time, and have experienced several storms in half a year. The current operation situation is still stable, and we need to continue to strengthen research and learn from the experience of the international market." At present, the domestic warrant market is about to develop again. It is particularly important to review the development of warrants in the international market.
Let's go back to nearly 100 years ago, since it was founded in the U.S. market in 1911 (at that time, an American light and power company issued warrants for financing), today, based on the transaction amount, five warrant markets have been formed in the international market, including the Hong Kong Stock Exchange, Germany, Italy, Switzerland, and Taiwan; According to the number of warrants listed, the world's five major warrant markets are: German Exchange, Euronext, Swiss Exchange, Italy and Luxembourg. It can be seen from the regional distribution that the European warrant market is more mature, with Germany taking the lead, followed by Italy, Switzerland and Austria. In the Asia Pacific region, warrant markets in Hong Kong and Singapore have also emerged.
As the first company to create warrants, it is the most developed American market at present, but its warrant market has not developed, mainly because American options have developed first, and the role of warrants has no room to play, so warrants have not developed in the United States. London, UK and Tokyo, Japan have hindered the development of warrant market due to unfriendly policies.
Although warrants appeared early, they were paid more attention later. In the 1960s, many American companies used stock warrants to finance mergers and acquisitions of other enterprises. Due to the relatively low price of warrants, some warrants were even used as a means of promotion, somewhat like "buying computers and giving insurance". In the United States at that time, when bonds were difficult to sell, they often gave stock warrants as "inducements". The rapid development of warrants in risk control, speculation and other aspects occurred after the 1970s.
From the perspective of type, the warrants popular in the international market can be divided into American warrants and European warrants. American style warrant holders have the right to require performance on any trading day before the final maturity date; The holders of European style warrants can only require performance on the last due date.
Theoretically, there are many uncertainties in the pricing model of derivatives such as warrants. The famous "Black Scholes Formula" is usually used to estimate the theoretical price of warrants, which mainly considers the current price of stocks, exercise price, holding time, bank interest rate in the same period, and fluctuations in the past period. This was once considered to be the most scientific option pricing method so far. Another economist, Merton, also used this formula to estimate the pricing of convertible bonds.
However, if the volatility of the stock market is underestimated, the theoretical price of warrants calculated by the formula will be either too high or too low, leading to miscalculation. There are many other defects. Ironically, Scholes and Merton both won the Nobel Prize in economics for the formula. The American long-term capital management company they share in also used the formula for option valuation for a long time. As a result, they just underestimated the market fluctuations, leading to the overall loss of valuation and operation of options trading, and the company had to go bankrupt.
As a high leverage investment transaction, the warrant price may fluctuate violently if the underlying stock price changes slightly. In addition, many other factors will have a significant impact on the price of warrants. The high risks and returns attract more market participants who are inclined to speculative investment. In the short term, the company can make huge profits and lose all money in the twinkling of an eye. The leverage effect of warrants really makes investors, especially small and medium-sized investors, fascinated.
Drawing on the development of the international warrant market, we can draw several conclusions: 1. Covered warrants will be the main warrant product. 2. A large proportion of small and medium-sized investors in Hong Kong participate in the trading of warrant products, indicating that this high-risk and high-yield variety is suitable for small and medium-sized investors to participate in the trading. 3. Warrants and options are substitutive to a certain extent: if warrants are well developed, options will not develop significantly; If options are well developed, warrants are difficult to develop. 4. Foreign investors, including small and medium-sized investors, participate in both full speculation and portfolio investment in warrants, which has become a very important investment product. 5. If warrant products want to develop greatly, they must be supported by the market maker system. It can be said that the introduction of warrant products forced the birth of the market maker system. 6. The continuous creation of warrant products will enrich the investment banking business.
Warrants can be divided into two categories according to the issuer: equity warrants and covered warrants, which are called derivative warrants in Hong Kong. Equity warrants are usually issued by listed companies themselves, or by securities companies, investment banks and other financial institutions. The underlying assets are usually shares of listed companies or their subsidiaries. The equity warrant usually gives the warrant holder the right to purchase the shares of listed companies at the agreed time and price. At present, most of the equity warrants are European call warrants. When the agreed time arrives, if the current market price of the stock is higher than the exercise price of the warrant, the warrant holder will request to purchase the stock from the issuer, and the issuer will meet the demand of the warrant holder by issuing additional shares.
Covered warrants are warrants issued by a third party other than the issuer of the underlying assets (usually reputable securities firms, investment banks and other large financial institutions). The underlying assets can be individual stocks, a basket of stocks, indexes and other derivatives. The covered warrant can be European or American, and the holder's right can be to buy or sell the underlying assets. The exercise operation of covered warrants is basically the same as that of equity warrants. The difference is that the delivery method can be either stock or cash spread. In the case of stock delivery, when the holder exercises the right to purchase shares, the covered warrant issuer needs to purchase shares from the market or sell its original shares to the warrant holder; When the holder exercises the right to sell shares, the issuer must buy the shares at the exercise price. Therefore, the issuer of covered warrants bears risks and needs some hedging instruments to avoid risks.
According to the definition of the American Stock Exchange, an option is an agreed right to buy and sell the underlying assets at a specified time or price within a specified time. It can be seen from the definition that warrants are essentially options, and the American Stock Exchange defines warrants as options. Except for some differences in operation mode, warrants are almost the same as options in general.
Requirements for Warrant Issuance in Taiwan
There are only covered warrants in Taiwan, which requires the warrant issuer to operate underwriting, brokerage and proprietary businesses at the same time, and also requires the issuer to have shareholders' equity, credit rating and performance bond; For the underlying securities, there are requirements for issuing share capital, number of holders, etc.
The warrant market in Taiwan has developed after fully referring to the development experience of the Hong Kong market, so it abandoned equity warrants from the very beginning and only issued covered warrants. Since the issuance of the first covered warrant in August 1997, the development of the warrant market in Taiwan has also experienced ups and downs.
At the beginning of the opening of Taiwan's warrant market, investors flocked to the warrants issued by securities companies at the peak of the stock market. However, as Taiwan's stock market fell into a bear market in the Asian financial turmoil, almost all of the more than 10 warrants were issued at a historical high point, and investors lost confidence in warrants, a new financial instrument.
With the recovery of the stock market in 1999, the warrant market became hot again with the bull market. In 2003, 19 securities issuers issued 321 warrants in total, more than double the 100 warrants issued in 2002; The issuance amount of warrants also increased significantly from NT $12.149 billion in 2002 to NT $30.984 billion. At present, warrants have become the main way for Taiwan's securities companies to develop new financial products.
Taiwan requires covered warrant issuers to operate three businesses at the same time: underwriting, brokerage and proprietary business, and meet one of the following conditions: (1) shareholders' equity reaches NT $3 billion, and there is no accumulated loss; (2) The capital is more than NT $1 billion and the shareholders' equity of its guarantee institution is NT $3 billion; (3) The shareholders' equity of the head office of a foreign institution is more than NT $3 billion, and the net worth of its branches in Taiwan is more than NT $300 million.
Similar to the Hong Kong market, Taiwan also has credit rating requirements for covered warrant issuers. Only financial institutions with a long-term credit rating of twBBB or above are eligible to issue covered warrants.
The issuer shall issue more than 20 million units of covered warrants each time, or more than 10 million units of covered warrants each time, but the total issue value is more than NT $200 million. The issuer of covered warrants shall also pay the performance bond to the Stock Exchange before the listing of warrants, and the issuer must set up a special account for hedging or performance to conduct hedging operations.
In order to prevent manipulation in the warrant market and strengthen the liquidity of warrants, the Taiwan Stock Exchange stipulates that the number of warrant holders shall not be less than 80, and the total number of units held by them must exceed 20% of the total number of listed warrants. The unit held by a single holder shall not exceed 10% of the listed unit, and if it is the issuer, it shall not exceed 15%. The number of units held by the issuer and its related parties and employees shall not exceed 20% of the total number of listed units. When issuing warrants, the issuer shall limit the number of shares subscribed by the directors, supervisors, managers and major shareholders holding more than 10% of the shares of the underlying securities company due to the exercise of the warrants to not exceed the number of the underlying securities held by such persons themselves.
For the underlying securities, the Taiwan Stock Exchange requires the market value of the securities to be more than NT $15 billion, and the equity is decentralized. The total number of shareholders is more than 10000, the number of shareholders with 1000-50000 shares is not less than 5000, and the number of shares held by them reaches 20% of the total capital stock or more than 100 million shares. The number of shares traded in the past three months accounted for more than 20% of the total issued shares. Recent experience of the target company audit There is no loss in the financial statements of. (Provided by Weihe)
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