Everbright Securities plots to become derivatives force in China

Domestic securities companies in China can increasingly rely on their own know-how when conducting derivatives structuring and proprietary trading,
particularly when based on Chinese equities. The development of the Chinese securities markets, notably the launch of China’s first stock index futures, based on the CSI 300 index, has enabled local market participants to develop their risk management and structuring capabilities to such an extent that they are breaking the previous stronghold on the market held by major global equity dealers – at least that’s the view of James Yang, deputy head of the international business department of Everbright Securities, a Shanghai-based securities firm.

Yang, who has a doctorate in finance from Manchester Business School in the UK and has worked in the equity derivatives divisions of both Prudential Financial Group in the US and Société Générale in Hong Kong, says Chinese commercial banks are becoming independent of ‘suitcase’ bankers who work for international banks in Hong Kong and fly into China to do business.

In the past, due to a combination of regulatory constraints and a shortage of talent, Chinese commercial banks have distributed structured products to corporates and wealthy individuals via back-to-back arrangements where they sourced the products from foreign investment banks. But this exposed local firms to reputational damage when Chinese corporates lost billions of yuan in 2008 from constant maturity swap range-accrual steepeners, among other transactions, linked to euro interest rate curves structured by foreign investment banks.

The losses, combined with the downturn in international markets following the advent of the global financial crisis, made domestic investors more cautious towards complicated products linked with offshore underlyings. Yang says any renewed appetite could flow towards local equity-linked products – and the ability to short the CSI 300 stock index futures by fund managers, means market-neutral strategies such as index futures arbitrage is possible today. “Our mission is to be the leader of onshore structured products and sophisticated trading
business, and to try to get on a par with leading European houses. This is just the beginning for Chinese brokerages,” says Yang.

That’s a bold statement from a 34-year-old leading a small team comprising three traders, two structurers/salespeople, a risk manager, information technology officer and a quant analyst. But Yang says China Everbright Group distinguishes itself from other financial conglomerates such as Citic Group and China Merchants Group in China as it received approval from the State Council to restructure into a financial holding company in 2008. This is widely attributed to chairman Tang Shuangning, who was previously the vice-chairman of the China Banking Regulatory Commission and a director-general of the central bank. As a result, the group’s activities straddle not only securities/investment banking, but also commercial banking (China Everbright Bank); asset management (Everbright Pramerica Fund Management); and insurance (Sun Life Everbright Life).

“In the past, China’s onshore securities companies’ business model gravitated mostly towards fee-income generating securities brokering business or investment banking for underwriting initial public offerings,” says Wang. “We are the investment banking arm of the whole universal bank.”

Since launching its structured product business during the second half of last year, Everbright Securities has offered call spreads and auto-callable instruments, mainly through its sister commercial bank, China Everbright Bank. Yang says the wealth management business in China is a minimum 5 trillion yuan ($765.9 billion) annual market and currently, only a fraction of this is accounted for by structured products linked to equity, foreign currency or commodity underlyings. He adds that Everbright Securities’ international division is aiming for at least a 2–10 billion yuan share of the entire market.

By the second half of this year, which will mark the international business division’s first full-year of operation, Yang estimates “a couple of billion” in notional value worth of equity-linked structured products will have been sold to banks and a number of fund managers.

Since its launch in April 2010 to the end of last year, total trading of CSI 300 stock index futures contracts on the China Financial Futures Exchange was 45.9 million, with opened positions at 29,805, making it the fourth most actively traded equity index futures contract in Asia, according to the Futures Industry Association.