Haitong set for warrants wins as China sanctions hit US banks

China securities firm doubles HKEX warrant output as US banks pull listed products on vetoed names


Trump-imposed sanctions on US investments in China are benefitting local securities firm Haitong International, which is ramping up issuance in Hong Kong’s retail structured products market.

Effective January 11, an executive order from the outgoing US president restricts US persons from trading in securities linked to companies believed to have ties to the Chinese military. The move prompted US banks to pull hundreds of Hong Kong Exchange-listed derivatives warrants and callable bull and bear certificates (CBBCs) on vetoed Chinese firms.

Haitong responded by issuing 69 warrants and 61 CBBCs on HKEX last week – more than double the 60 products it listed the previous week.

“In the past few days, we have issued a lot more products, and not only on US-sanctioned names but on other names from US issuers that have big outstandings in the market,” says Kenny Chong, managing director for equity derivatives at Haitong International in Hong Kong.

Three major US banks – Goldman Sachs, JP Morgan and Morgan Stanley – last week said they will delist products, including those linked to target companies in the Hang Seng and Hang Seng China Enterprises Indexes and China Mobile.

A fourth US bank, Citi, has not announced plans to delist its warrants or CBBCs. While its reason is unclear, a Hong Kong-based lawyer at an international law firm says that such decisions are contingent on individual institutions’ risk tolerances and legal structures. For instance, Citi may not be affected by the executive order if its retail structured products issuance in Hong Kong was done through non-US subsidiaries. All four US banks declined to comment.

The US banks’ retreat from activity in sanctioned names leaves a sizeable vacuum in the market for other product issuers to fill. It also means the three US issuers are now providing only limited liquidity, offering to buy back products from investors only. They will cease trading on the affected names altogether from January 22.

The delistings have also eroded investor confidence in the banks’ products linked to so-far unaffected names, issuers say.

“Investors are losing confidence with some products, so we are trying to provide similar terms, so the market has more choices. They fear that this could happen again to other names,” says Haitong’s Chong.

Investors are losing confidence with some products, so we are trying to provide similar terms
Kenny Chong, Haitong International

He adds that Haitong is endeavouring to support HKEX and the market by providing a similar bid/ask spread on the new products to that the three US banks supplied in the delisted products.

“I think the exchange is very happy that we are trying to stabilise the market and trying to give confidence to investors,” he says. “I don’t think about it too much in terms of opportunities; we are just trying to be consistent in what we are doing.”

Derivatives warrants are like options contracts and give investors the right, but not the obligation, to buy or sell an underlying asset, such as the HSI or one of its constituent stocks. A CBBC is similar to a derivatives warrant but has a mandatory call feature that means if the underlying asset hits a predetermined call price, the issuer can call the CBBC, terminating the contract.

Hong Kong boasts the largest market in the world for warrants and CBBCs, with more than 12,000 products listed on HKEX. An average daily turnover for the products listed on HKEX of HK$13.8 billion ($1.75 billion) was reported in December, according to data from the exchange.

In an FAQ document published on January 11, HKEX said that it does not anticipate the delisting of the affected products to have a significantly adverse impact on market liquidity, and that the exchange is “confident that there will be sufficient investment choices to meet market demand”.

Filling the gaps

JP Morgan has long been a leading issuer in the market and currently ranks second for total outstanding products, behind Credit Suisse, according to the Hong Kong listed product data platform DB Power.

Dealers say, however, that the sanctions could mean the bank could face an uphill struggle to maintain a leading position in its Hong Kong-listed products business.

“We are seeing market share for JP Morgan especially drop,” says a source at an investment bank. “They are going to struggle in CBBCs now as a result of this – and that has obviously created an opportunity for other issuers.”

According to HKEX data, of the total 500 products to be delisted, more than half were warrants and CBBCs issued by JP Morgan. 

For Morgan Stanley, a relative newcomer to the market, the sanctions could even pose an existential threat, says one dealer. The firm returned to Hong Kong’s listed products market in 2019, having exited just prior to the 2008 financial crisis because of small trading volumes.

“For newcomers with relatively small market share, management will need to be clear that they can maintain their businesses here because there are a lot of costs,” says a listed products head at a second investment bank.

“I think most of the impact will be on index warrants and CBBCs, but my observation is that Chinese brokerage houses like Haitong are going to fill the gaps.”

DB Power currently ranks Haitong as the eighth largest issuer of Hong Kong warrants and CBBCs measured by total outstanding products.  

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