BEIJING, Sept. 28 (Xinhua) – Chinese securities regulator-guided Securities Association of China (SAC) released the over the counter (OTC) option management rules for securities firms to forge ahead sector development on September 25, reported Securities Times on Monday.
Compared with similar rules in the past, the OTC option rules widen the scope of traders and the scope of underlying securities, which, as industry insiders hold, is likely to significantly improve market demand for OTC options.
In 2018, SAC kicked off multi-layer management of OTC option transactions for securities firms and there are primary and secondary traders, with the latter restricted only to bourse-based underlying stock hedging business with primary traders.
Upon debut of the new rules, qualified securities firms rated Type A with higher than A rating and those rated Type B with above BBB rating in the past year can apply to China Securities Regulatory Commission (CSRC), the sector watchdog, to be secondary traders and such securities firms with sound business operation and no big risk event in the past year can apply to be primary traders.
According to CSRC's securities company classification for 2020, there are 32 securities firm with A rating, much more than the seven primary traders revealed in SAC's five batches of OTC option business trader lists during 2018 and 2019.
Apart from GF Securities, which was downgraded to BBB earlier this year, other primary traders for OTC option business listed in SAC's list for 2018 all maintained their AA ratings this year, including Guotai Junan Securities, Huatai Securities, China Merchants Securities, China International Capital Corporation, China Securities and CITIC Securities.
By far, there are overall 15 AA rating securities brokers qualified for the OTC option business, with the past secondary traders but now AA-rated Essence Securities, Everbright Securities, Sinolink Securities, Guosen Securities, Haitong Securities, Ping An Securities, Shenwan Hongyuan Securities, China Galaxy Securities and Zhongtai Securities likely to become primary traders.
The OTC option business is rather lucrative to AA-rating securities brokers as a license holder can extend to a series of businesses such as stock return swap or securities lending, said a researcher with a Beijing-based securities broker.
After the rating requirement loosened, there will be more securities brokers qualified to participate in the OTC option business, good to improve their overall profitability, added the researcher.
In his opinion, small- and medium-sized securities brokers may have huge room for growth if they perform well in the OTC option business as after all, demand for hedging for securities and commodities trading keeps increasing and after the future internationalization brings more foreign investors in, it is more convenient for institutions to use OTC options to invest and hedge risks.
The new rules also provide that the underlying stocks for securities brokers' OTC option business shall stay within the scope of underlying stocks for margin trading and the underlying stock indexes shall be within the required scope of SAC.
Statistics with Wind show that there are overall 1,809 underlying stocks for margin trading on China's Shanghai Stock Exchange and Shenzhen Stock Exchange, up noticeably from the 1,045 stocks available for margin trading in 2018.
The expanded scope of underlying securities amplifies greatly client demand and will likely to spur market development, noted the afore-mentioned researcher.
According to SAC, newly added initial nominal principal for OTC option surged 44.85 percent month on month to 233.781 billion yuan in July. (Edited by Duan Jing with Xinhua Silk Road, duanjing@xinhua.org)
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