The creation of warrants has attracted the attention of senior management. The new reform plan has been reported to the State Council, and the era of risk-free arbitrage of securities firms is coming to an end
Our reporter Li Delin/Wen
Just by paying the margin, securities companies can create warrants at almost zero cost, thus obtaining huge profits without risk. However, while curbing excessive speculation in warrants, the number of warrants created by securities firms exceeded the number of underlying stocks.
The Securities Market Weekly learned that the specific plan for the reform of warrants has been submitted to the State Council. The era of securities companies obtaining huge profits from the warrant market at zero cost is coming to an end. However, the risk control of third-party covered warrant issuance has become a thorny problem to be solved urgently.
Profiteering
On November 25, 2005, 10 innovative securities companies created the put warrants of WISCO, opening the prelude to the risk-free creation of securities companies.
In June this year, securities companies started to create a large number of put warrants of China Merchants Bank and China Southern Airlines. Taking the put warrants of China Merchants Bank (580997) as an example, from the "5.30" put warrants boom to June 28, securities companies created 3.789 billion put warrants of China Merchants Bank, up from 2.241 billion China Merchants Bank (600036) 1.69 times of the original warrant distribution.
In March 2006, China Merchants Bank put warrants were listed, and securities companies could implement the creation. However, due to the stable price of warrants, as of May 30 this year, only 360 million warrants were created. Since then, CMB's put warrants have climbed all the way. On May 31, Guotai Jun'an and Changjiang Securities took the lead in creating warrants, which triggered a wave of securities companies, creating nearly 3.8 billion warrants in a month.
So far, the put warrants of China Merchants Bank plunged from 4.9 yuan to 1.4 yuan on the last trading day in June. Brokers thus made huge profits. Taking June 15 (Friday) as an example, the announcement on that day said that they had created 470 million CMB put warrants. If they were sold at the average price on June 18, the profits of the brokers would exceed 1.3 billion yuan. Apart from the temporary pledge of margin, the brokers had little cost.
Risk free windfall profits continuously stimulate the creation passion of securities traders. From June 29 to July 20, the put warrants of China Merchants Bank fell continuously. One important reason was the creation of unlimited number, which led to the continuous increase of the total market volume. The total number of put warrants of China Merchants Bank exceeded the total number of tradable positive shares of China Merchants Bank. The creation of such excess is regarded by the Shanghai Stock Exchange as a means to combat speculation in put warrants.
A CMB put warrant holder believed that under the banner of cracking down on warrant speculation, securities dealers created a large number of put warrants in Wuhan Iron and Steel Group, CMB, China Southern Airlines and other companies, "resulting in the destruction of market order."
What kind of logic is it that Shanghai Stock Exchange encourages securities companies to create and arbitrage from ordinary investors? " A researcher of financial derivatives questioned.
According to the Interim Measures for the Administration of Warrants and other relevant documents, securities firms can implement the creation of put warrants as long as they deposit sufficient performance bonds in the registration and clearing companies. Since the exercise price of CMB's put warrants is 5.45 yuan and the exercise period is August 27-31, at present, China Merchants Bank's share price has reached nearly 30 yuan, and it is only theoretically possible to fall below 5.45 yuan. The possibility of the exercise of the put warrants is extremely small, and the risk created by securities firms is almost zero.
citic securities (600030) In the first half of this year, the net profit increased by more than 5.5 times over the same period last year. The net profit is expected to reach more than 4 billion yuan, of which the profit contribution from the creation of warrants is not small. CITIC Securities created 512 million CMB put warrants in a centralized manner within half a month, earning 765 million yuan.
"Most of the existing warrants are the products of the share reform. They are paid to investors as consideration. Due to the small amount of warrants, the market is over hyped. Brokers have created the same type of warrants without the consent of shareholders, which is undoubtedly a trick of using waste paper to cash in under the guise of maintaining the market."
Game of creation warrant reform
Securities Market Weekly learned that the reform plan has been reported to the State Council. The specific scheme and even the risk hedging method of the third-party equipment warrant have entered the design process.
An authoritative report obtained by this magazine pointed out that share reform warrants are a kind of consideration paid by the holders of non tradable shares to the holders of tradable shares in order to obtain the right to circulate their shares. Its underlying shares are restricted shares of the holders of non tradable shares. These warrants are allowed to be issued only after the unanimous consent of the shareholders' meeting. The underlying stock of the warrant created by the securities firm is the stock that has been circulated in the current market, and does not need to be approved by the shareholders' meeting of the listed company of the underlying stock.
The created warrants have the same terms and transaction codes as the original warrants, so the created warrants have the same characteristics as the share reform warrants. In this way, the creation achieves the purpose of restraining the price, but also harms the interests of other warrant holders. The warrant creator has the right to voluntarily cancel the warrants, and can decide whether and when to cancel the created warrants from his own interests, so as to realize certain arbitrage. However, other warrant holders can only passively accept the sharp increase or decrease in the supply of warrants in the market due to the creation or cancellation of warrants, and suffer losses caused by the drastic changes in the price of warrants due to the creation and cancellation of warrants.
The report also pointed out that the system of the Shanghai Stock Exchange on the creation of warrants was unreasonable, and more consideration was given to the interests of securities companies, while ignoring the interests of ordinary investors. For example, on November 25, 2005 (Friday), 10 innovative securities companies applied to the Shanghai Stock Exchange for the creation of 1.127 billion WISCO put warrants. The next day (Saturday), the Shanghai Stock Exchange disclosed information about this, and allowed the newly created warrants to be listed and traded on November 28 (Monday). As the newly created warrants greatly exceeded the original shares, the warrant prices fell sharply and investors suffered losses, The same experience can be seen in the creation process of CMB's put warrants.
"Tianliang Creation is a warning to the management." An insider of the management said that if an enterprise like Yinguangxia issued put warrants in the same year, the securities firm had carried out excessive creation, but just before the exercise period, the company had undergone earth shaking changes, and the holders would not be able to exercise their rights because there were not so many positive shares, which is a financial fraud.
It is revealed that since the creation of securities companies involves many interests, the CSRC has solicited opinions from many parties. It is hoped that the Shanghai Stock Exchange, like Shenzhen Stock Exchange, will require warrants to be created on the T day and sold after the T+2 day, so as to give investors a certain time to deal with the creation of warrants; At the same time, if the initial issuance of warrants is less than 600 million, the number of warrants that can be created on that day should not exceed 300 million; If the initial issuance of warrants is more than 600 million, the number of warrants that can be created on that day shall not exceed 50% of the initial issuance. The sum of the created warrants and the same type of warrants of the same underlying stock multiplied by the exercise ratio shall not exceed 100% of the underlying stock with unlimited sales conditions. Unfortunately, this change has not been realized.
"The number of warrants is less and the price rise needs to be curbed. The number of warrants is more and the price falls. Investors have no money to return, but the management is silent. Just because the intrinsic value of these put warrants is zero, should we hit the investors who have held them all the time?" A CMB put warrant holder lost 40% of the market value in one day, "the speed of decline simply makes me unable to sell".
Our reporter learned that after the gradual formation of the derivatives market, it is no longer possible for securities companies to create the same warrants as those distributed by listed companies. Next, securities companies will issue third-party covered warrants. In order to solve the problem that the total number of warrants distributed by listed companies is small, listed companies can issue additional warrants. As long as the shareholders' meeting votes, equity registration is conducted through the trading system, and according to the placement plan formulated by the shareholders' meeting, warrants can be distributed to all shareholders registered on T day on T+1. If the additional warrants are directly sold by the listed company in the market, the proceeds can eventually be included in the profits and shared by all shareholders. Of course, the newly issued warrants can still be sold or cancelled by the issuer according to the existing regulations, and the number of exercisable warrants that finally expire will not be less than the number of initially issued warrants.
Change warrant risk hedging
The warrant market has soared and plummeted. Under the condition that the overall risk control ability of the securities companies is not high, investors speculate blindly, and the warrant market lacks effective supervision with credibility, the introduction of covered warrants still has greater risks.
The reporter learned that in the reform plan submitted to the State Council, securities companies have drawn more experience from Hong Kong in issuing warrants. In order to avoid risk-free arbitrage by securities companies in the name of curbing speculation, securities companies can participate in the warrant market by issuing covered warrants, distinguish them from warrants issued by listed companies, and use independent trading codes to list on the exchange. Even warrants issued by different issuers for the same underlying stock may differ in terms of transaction codes due to different issuers. At the same time, different issuers are allowed to issue additional warrants on the same warrant, while the issuer needs to appoint a liquidity provider when issuing warrants, which has stimulated competition among issuers to a certain extent, ensured active market transactions and promoted the stability of the warrant market.
The introduction of covered warrants also faces risk control problems. At present, for the creation of warrants in China, the exchange fully mortgages the underlying stocks or cash in order to control the risk, which has resulted in the reduction of tradable underlying stocks in the market, and may lead to abnormal price fluctuations of underlying stocks due to insufficient supply, and affect the change of warrant prices. As the risk management mechanism of domestic securities companies has yet to be improved, if the covered warrants are launched following the rules of the Hong Kong warrant market, how to hedge the risk of securities companies is a very important issue under the current level of risk management of securities companies.
It is understood that it is more feasible to hedge warrant risks in the domestic market in the future by allowing the issuer to hedge by means of Delta (the sensitivity of warrant price to the change of underlying asset price) dynamic adjustment of position. However, Delta risk hedging is based on the change of Delta value, buying corresponding stocks when the underlying stock price rises and selling corresponding stocks when the stock price falls, To achieve Delta risk neutrality.
The Exchange raised its own concern about the Delta hedging method adopted by covered warrant issuers, and believed that the Delta risk hedging activities would cause abnormal fluctuations in stock prices and lead to drastic changes in warrant prices. At the same time, it would also play the role of "helping rise and fall" in the volatile market, making the market volatility tend to expand.
A research report pointed out that in view of the weak overall risk management ability of securities companies, if they want to launch covered warrants or other structured products linked to domestic stocks, indexes, etc., domestic securities companies can only realize Delta risk neutrality in stock and futures markets in order to hedge the risks of covered warrants or structured products, For Vega risk caused by volatility and Gamma risk caused by second-order change of position to stock, warrants or over-the-counter options and other derivatives should also be used to hedge.
According to the report, if securities companies hedge risks by selecting covered warrants launched by other securities companies, they cannot effectively control the risks of covered warrants due to their limited risk management capabilities. At this time, they just transfer "risks" between different securities companies, and do not realize real hedging.
The Exchange suggests that if there is a market for floor options in China, and floor options are under the settlement margin system of the Exchange and the Options Clearing Center, Vega risk and Gamma risk can be effectively controlled from the system, and securities companies can use floor options to hedge the risks in their covered warrants or other structured products without transferring the risks to other securities companies, thus promoting the healthy and stable development of the domestic option derivatives market.
Related reports:
Liu Xiaodong: Warrant Creation will not implement limit management
Expert: warrant creation is a risky and costly market behavior
Relevant departments said they had not heard of the reform plan for the creation of warrants
Shanghai Stock Exchange Seminar: Warrant Creation Protects the Interests of Most Investors
