The research report of SSE suggests to create a mechanism to escort covered warrants

A report entitled "Research on the Creation Mechanism and the Pricing Efficiency of China's Warrant Market" (see A10 for details) was completed by the Innovation Laboratory of Shanghai Stock Exchange a few days ago. The report points out that when China will introduce covered warrants in the future, it is necessary to retain the creation mechanism while introducing the continuous issuance mechanism and free issuance mechanism.

The report points out that empirical research shows that although the creation mechanism has improved the pricing efficiency of related warrants, the pricing efficiency of China's warrant market is still very low in general, which is related to the existence of some defects in the creation mechanism and the failure of primary dealers to play a full role. The report believes that the creation mechanism has dual functions of arbitrage and short selling. In the absence of other effective means (such as market makers with correct pricing ability), the creation mechanism is essential to improve the efficiency of warrant pricing.

The report also points out that in the international market, covered warrants issued by securities companies and others occupy an absolute dominant position, which is also the future development direction of warrants in China. However, when China will introduce covered warrants in the future, it is still necessary to retain the creation mechanism while introducing foreign continuous issuance mechanism and free issuance mechanism. If there are three mechanisms at the same time, namely creation, continuous offering and free issuance, the market will choose when to adopt which mechanism to balance supply and demand, which will most help to improve the pricing efficiency of warrants.

In order to improve the creation mechanism and the pricing efficiency of warrants, the report recommends further improving the creation mechanism and enhancing the flexibility and convenience of creation transactions. These include establishing a real-time creation mechanism similar to Shanghai ETF products to reduce the uncertainty of arbitrage transactions; Expand the scope of founders; Establish a mechanism for creating cash alternative guarantees. (Huang Ting)