OTC options have the characteristics of high leverage and high volatility, and its greatest value lies in risk management
Wen | "Caijing" reporter Zhang Xinpei special correspondent Wu Su
Edited | Wang Lifeng and Lu Ling
A rumor has made the unfamiliar financial derivative instrument of over-the-counter options begin to attract public attention.
OTC options refer to non-standardized option contracts carried out in non-centralized trading venues, which are financial derivatives that are traded according to the needs of both parties according to the negotiations between the two parties on the counter. Unlike exchange-traded on-exchange options, OTC options have no terms or specifications and can be freely determined by both parties to the option.
An Qingsong, president of the Securities Association of China, said in May: "Derivatives are not only an investment product, but also a risk management tool, with complex financial and market attributes. ”
Due to the high leverage attribute, options are used improperly and are also prone to risk. Recently, many media reported that a number of public fund managers were suspected of being taken away by the police for investigation due to their illegal participation in over-the-counter options trading. However, the authenticity of this rumor has yet to be confirmed.
In the eyes of industry insiders, a normal financial derivative instrument is being demonized.
"OTC options have the characteristics of high leverage, and this is just one of the characteristics. Its greatest value lies in risk management, which plays a role in hedging risk. But now people are focusing too much on high leverage and ignoring the role of risk management. Lian Minwei, general manager of the financial derivatives department of Industrial Securities, told the "Finance" reporter that if the leverage ratio is reduced, the effect of risk management tools will be greatly invalidated.
According to the "Finance" reporter, the success probability of building a rat position through over-the-counter options is not large. "The subject of OTC options is mainly large votes, not small and medium-sized enterprises that are easily manipulated. It is not easy to manipulate the market, and it is not something that can be leveraged with a little money. A senior brokerage source in Shanghai said.
Overlooked risk management attributes
What is an OTC option? An easy-to-understand case is: suppose an investor uses a 100,000 royalty to buy a call option contract for a stock with a nominal market value of 1 million, and the market value of the stock rises by 50% during the exercise period, the investor will make a profit of 500,000, minus the premium and the fee is the investor's final profit. The larger the increase in the underlying, the more the investor makes a profit. The risk exposure faced by investors is the deficit of the royalty.
OTC options are characterized by "small and large, high leverage", and even called "limited risk and unlimited profit" by some institutions. But this kind of publicity clearly ignores the difficulty of profit.
An over-the-counter options trader told Caijing that the winning rate of the over-the-counter options business is actually not high. Of the 10 contracts, investors may only make a profit or two. "There are many factors to consider when hedging, the intrinsic value of the target, volatility, general trend, etc., it is difficult to judge. The probability of finally taking profit is not large. ”
The sales of derivatives business outside a certain level of trading malls also told the "Finance" reporter that not every customer can make money. Taking a one-month option product as an example, to cover the premium, the target must achieve a large increase, and if the increase is low, it will also face losses.
In the view of Lian Minwei of Industrial Securities, it is a very irresponsible behavior to publicize "limited risks and unlimited profits". "First of all, there are many types of OTC options, and the well-known call options are only the most common and common structures. When it is generally believed that the risk is limited and the profit is unlimited, investors may invest more money, which is speculation or even gambling. Lian Minwei said.
Lian Minwei further explained that there is a big difference between over-the-counter options and financing. "The cost of option premiums is much higher than that of two financings or capital allocations. If the client goes to leverage, he may end up taking on a lot of losses and risks. It is not advisable from this point of view. It violates the nature of risk management. It's about taking risks, not managing them. ”
OTC options were created with the purpose of hedging risk. But in the process of development, there are some people who use high leverage to speculate and even gamble.
For example, by taking advantage of the behavior of some domestic securities companies to buy spot hedging, shareholders of listed companies may leverage over-the-counter options to increase their stocks in disguise. "If public company executives or institutions get good news from the company in advance, they may buy call contracts through over-the-counter options. This is equivalent to an open-book exam, and the possibility of profit is very high. The above-mentioned trader told the "Finance" reporter.
On the other hand, some individuals with a higher risk appetite may also participate in OTC options through the channel. Since 2017, the regulation has explicitly prohibited individuals from participating in the OTC options business. However, the huge profits brought by leverage still attract individual investors. With the help of some so-called "institutional channels", they take a detour to participate.
"There are private equity institutions that can borrow, and the cost is about 200,000." The above-mentioned senior securities company person revealed to the "Finance" reporter. In fact, the concealment of individual borrowing is very strong. "Nominally a private equity firm buys option contracts from brokers, but behind it may be different individual investors. From private placement to brokerage, two shells are embedded, and the concealment is relatively high. Prior to the New Asset Management Rules, there would be more layers nested. One OTC options person said.
These speculations are negatively labeling OTC options. In the eyes of industry insiders, the outside world now only focuses on speculation, and ignores its own greater role, that is, risk management.
"For example, the new energy held by private fund managers has risen a lot, on the one hand, they are worried about the drawdown, and on the other hand, they are not willing to give up the upside. At this time, you can use over-the-counter options. He would make a profit and take part of the money he earned to buy a call option. When it comes to the exercise period, the new energy continues to rise, he can continue to profit, if it falls, he does not have to bear the risk of falling, only the loss of the premium. ”
Lian Minwei introduced that this is a good application case of over-the-counter options. It both leverages the nature of leverage and plays a role in risk management.
How do brokers do options business?
OTC options trading is mainly conducted by securities companies as traders. From the perspective of securities companies, the dimensions they consider are more complex and richer. Risk management is accompanied by ultimate profitability.
Brokers need to hedge their risk by dynamically adjusting their underlying and using a variety of option tools.
"Securities companies need to bear relatively large market risks to carry out derivatives business. If the risk is large, but there is no reasonable return, the business is difficult to carry out. Lian Minwei told the "Finance" reporter.
"Brokers, as counterparties, will use the royalties paid by customers as hedging. Brokers need to buy and sell stocks to manage risks, dynamically adjust the purchased stocks, and dynamically adjust their positions to make the broker's own risk reach a neutral. Get yourself close to zero exposure to this stock. The royalty is only a part of the funds hedged by the broker, which may actually be insufficient, and the broker itself will hedge with some of its own funds. ”
Currently, buying spot for hedging is the most common way.
"Traditionally, an option is a warrant. After the warrant expires, according to the agreement between the two parties, the settlement is carried out and the delivery is completed. But in practice, China's OTC options involve risk hedging operations for spot buying. For example, if a customer buys an individual stock option contract with a market value of 10 million A shares, some brokers will directly buy spot. A person engaged in over-the-counter options trading told Caijing reporters.
The operation of buying spot can even help brokers to obtain additional income. "The contract has a certain period of time, and the broker can pledge these stocks during the period, or lend them as a source of bonds and make additional money through other means."
"If it is a vanilla option (a type of OTC option), it generally does not melt out, because the daily repositioning of vanilla options is very large. But when the business is large and there are various options, it may precipitate some stocks, and the brokerage company may take these stocks to provide margin services and increase additional income. Borrow in some way to increase additional income. But such a proportion is relatively small. If the proportion is too high, once the customer terminates early, the trader has no coupons in his hand to sell, and the risk is relatively large. Lian Minwei said.
An over-the-counter options trader also said that when the option target fluctuates sharply, it is difficult to control the position, and the internal risk control of the broker must be particularly in place.
The hedging method of brokers buying spot is used at home and abroad, but in contrast, foreign derivative hedging tools are more abundant. "Domestic financial derivatives tools are very lacking, and mechanisms for hedging risks between institutions are not well established. In this context, there are higher challenges for the professionalism of traders and the entire derivatives team. Lian Minwei told the "Finance" reporter.
Competition has intensified and regulation has been strict
OTC options have developed rapidly in China in recent years. According to data from the China Securities Association, as of the end of January this year, the number of over-the-counter option contracts of securities companies reached 22,300, corresponding to a nominal principal of 1.09 trillion yuan, of which the size of individual stocks was about 111.217 billion, accounting for about 10.19%, so securities companies benefited a lot. In 2021, the total revenue of the top 20 securities companies in the net income of the OTC option business reached 11.2 billion yuan, an increase of 59.46% year-on-year.
The ranks of traders are also growing. According to the latest list released by the China Securities Association on August 5, there are currently 8 primary dealers and 36 secondary dealers in the whole market to provide over-the-counter options trading. Only primary traders can open a special account for hedging transactions of individual stocks on the Shanghai and Shenzhen exchanges to directly carry out hedging transactions; Secondary traders can only hedge trades with tier 1 dealers on the floor, and may not carry out hedging transactions of individual stocks on the floor on their own or with counterparties other than those of tier 1 dealers.
Brokers are also paying more and more attention to the derivatives business. The "Caijing" reporter learned that some securities companies have newly established an over-the-counter options investor department, and some securities companies have set up this department as a first-level department.
But as more and more traders joined, the competition became more intense.
"While the competition between brokers is intensifying, everyone hopes to maintain a certain profit margin through their own risk management. However, as traders expand, market volatility intensifies, leading to increased difficulties in hedging risks. The competition in this area is intensifying, the cost performance is decreasing, and it is not as good as before. Lian Minwei said.
With reference to foreign developed international financial markets, the domestic financial derivatives market is still in the initial stage of development. From the perspective of product scale, richness and participants, China is still in its infancy, but there is a lot of room for development in the future.
On the one hand, competition is intensifying, and on the other hand, supervision is also being comprehensively tightened.
In the first half of this year, the CSRC issued fines related to the over-the-counter options business against three securities companies, Huatai Securities, CICC and CITIC Construction Investment. The problems are mainly concentrated in the management of the target and contract, the management of investor appropriateness, and the irregularities in systems and processes, reflecting the company's inadequate compliance management and imperfect internal control.
Regulators have also publicly expressed their support for the development of the derivatives business on many occasions, but at the same time emphasized self-regulatory supervision.
On May 9, the China Securities Association indicated at the collective study meeting of the OTC Market and Derivatives Business Professional Committee that in the next step, the association should take the implementation of the Futures and Derivatives Law as an opportunity to further improve the self-discipline rule system and self-regulatory framework for over-the-counter derivatives, strengthen the construction of over-the-counter financial infrastructure, continuously improve the function of the China Securities Quotation Transaction Report Library and the level of business standardization, and truly achieve the derivatives business "can be seen clearly, clearly explained and managed".