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MORE investors in the Chinese index-linked derivatives known as snowballs are cashing in, reaping gains just as regulators are trying to rein in the popular but potentially risky products.
Gains in the underlying indexes triggered payouts for 64 snowball products in May, more than double the total in the first four months of the year, according to data compiled by Galaxy Technologies. That’s what’s known as a knock-out – if the underlying index rises above a predetermined range, many around 103 per cent of the initial level, the investor gets his investment back plus a coupon payment, and the contract terminates.
The latest round of knock-outs boosted the year’s tally to 94, with a combined contract value estimated at nearly 20 billion yuan (S$3.7 billion), according to the company.
It’s a reversal from earlier this year, when indexes fell enough to threaten most existing products’ coupon payments and, in some cases, investors’ capital. Most have recovered since, and the CSI 1000 Index, up 23 per cent from this year’s Feb 5 low, has passed the trigger point for some linked products issued this year.
While the growing payouts promise to stoke investor interest, almost no new high-yield snowball products were issued last month, according to GalaTech, which also provides derivatives pricing and risk management tools to financial institutions.
The market for snowballs took a hit in late April. Regulators instructed brokerages to cap their net exposure to snowballs and some other derivatives, after some offered coupons of more than 40 per cent to woo buyers.
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Days later, new rules governing hedge funds limited their snowball investments to 25 per cent of fund assets unless investors each put in at least 10 million yuan, tenfold the previous threshold for retail investors.
Retail investors are now limited to lower-return versions such as phoenix derivatives, which pay a monthly dividend as long as the underlying index stays within its specified range, or fixed-coupon notes with a similar underlying structure, according to GalaTech. BLOOMBERG
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