Thorsten Michalik, director of investment product group, warrants at Deutsche Bank in Hong Kong, says the bank has been developing the 'warrant supermarket' concept in Singapore since listing rules for warrants were amended about three years ago.
“The supermarket concept has been successful in countries such as Hong Kong, Germany, Switzerland, Italy and many more where it was introduced. With the amendment of the listing rules in Singapore, we decided by the beginning of 2004 to introduce the supermarket concept which we developed in Germany,” Michalik says.
SGX made changes to listing rules which took effect from January 2, 2004, which essentially waived the requirement for third-party issuers of structured warrants, if they act as market makers, to have to place out at least 75% of an issue to a minimum of 100 warrant holders. For these market makers, the minimum size requirement for warrant issues was also lowered to S$2 million (US$1.2 million) from S$5 million.
“The amendment of the listing rules was a turning point for the Singapore warrants market, because if you have this upfront placing requirement, you cannot issue on everything. Let’s say for example you want to issue a call and a put. It’s very difficult to find 100 people that are bearish on the stock, and 100 people that are bullish on the stock. If you have this requirement, a warrant supermarket cannot work. With the amendment to the warrants listing rules about 3 years ago, it was possible to introduce the warrant supermarket concept in Singapore,” Michalik adds.
Delta risk is hedged by buying or selling stocks, and volatility risk is hedged either trading listed options, through OTCs or using other warrants, he notes.
Michalik adds that Deutsche Bank has used the warrants supermarket concept to issue a variety of calls and puts warrants. “We do not take directional view on individual warrants but hedge and manage Deutsche Bank's risks in all warrants sold to investors whether they are puts or calls. Warrant trading is done in the same manner as risk management of any other types of derivatives. Potential profits or losses can be incurred and this depends on Deutsche Bank's ability to manage the risks, including price, interest rate, volatility, of the build up hedge positions associated with warrants."