Key investment points
Large development space of derivatives market
Late start, small scale and few types: China’s derivatives market started in 1990. After 30 years of development, the scale of derivatives in both on-site and off-site markets has achieved great growth. In the floor market, the trading volume and turnover of China’s futures market (including options) in 2021 were 7.5 billion hands / 58.1 billion yuan respectively, with a compound growth rate of 22% / 16% over the past decade, but the trading volume is still only about half of that of the United States. In terms of types, there are few types of financial derivatives in China, mainly futures products, while options products in the United States and Japan are rich.
In the over-the-counter market, the nominal principal stock of over-the-counter derivatives of Chinese securities has a compound growth rate of 34% in recent five years. The proportion of nominal principal in the market value of domestic listed companies has increased from 0.8% at the beginning of 2018 to 2.3% at the end of October 2021, while the proportion of over-the-counter equity derivatives in the United States in the total market value is about 6% – 8%, which is compared with the mature overseas market, There is still much room for improvement in China’s derivatives market.
Product expansion and frequent positive policies: from the perspective of products, the number of OTC option stock targets will increase from 1045 to 1809 in 2020; In 2019, the capacity of stock index options was expanded. Shanghai and Shenzhen stock exchanges listed CSI 300 ETF options, and CICC listed CSI 300 stock index options. The trading volume increased rapidly after the launch of new option products. In 2019, the trading volume of Shanghai and Shenzhen 300 ETF on Shanghai Stock Exchange was only 8% of 50 ETF, and increased to 52% in January 2020. From the perspective of policy, since 2017, CICC has relaxed the binding of stock index futures four times, adjusted the regulatory standard of “over trading”, reduced the margin rate and handling rate, and promoted the increase of trading volume; In 2020 / 2021, China Securities Association launched the management measures for over-the-counter options and over-the-counter income swap business respectively, strengthened the management of dealer qualification, investor suitability and target scope, and guided the healthy development of the industry.
Benefits of developing derivatives business
Contribution income: the main income sources of derivatives business include quotation for specific contracts and trading with investors to earn bid ask spread, commission income and commission income obtained by trading related products instead of customers, option fee income and swap spread, etc. the company can disperse risks by holding contract linked targets and huge counterparty network, Therefore, under non extreme market conditions, the risk is controllable and stable returns can be obtained. Taking Goldman Sachs as an example, the global market sector (derivatives related business) is the company’s largest source of revenue and profit. From 2017 to 2020, the proportion of global market business revenue remained at about 40%, and the proportion of net profit in 2020 was as high as 65%.
Improve leverage: top investment banks have strong ability to serve customers with tables, and their high leverage comes from capital consuming businesses such as derivatives. Take Goldman Sachs as an example. In 2020, the company’s global capital market sector assets accounted for 73% of its total assets, and the sector leverage ratio was about 20, higher than the company’s overall leverage ratio of 11. It can be seen that the growth of derivatives business demand is a major driving force for the company to expand its statements and increase its leverage.
Who can stand out in the competition
Competing in the complex and risky derivatives business field, companies with business qualification, strong financial strength, huge customer network, leading information technology and excellent talent team are more likely to win. We recommend Citic Securities Company Limited(600030) , China International Capital Corporation Limited(601995) (H), Huatai Securities Co.Ltd(601688) and other leading securities companies with leading comprehensive strength.
Risk tips
The supervision of derivatives business has been greatly strengthened; Market trading activity fell sharply
