The CSRC has instructed brokerage firms to tighten risk controls on Snowball derivatives and ensure their risks are fully disclose to investors.
The CSRC (China Securities Regulatory Commission) has reportedly sent a notice to brokerages urging them to strengthen their risk controls on a popular derivatives products that allows investors to bet on stock market volatility.
According to Reuters, the CSRC has tightened scrutiny on Snowball derivatives, whose value is based on an underlying asset and the ideal payoff is conditional upon the asset’s price remaining within a certain range.
A Snowball product being marketed by China Industrial Securities, for example, allows investors to make an annualised return of 12.85 percent if its underlying index, the CSI500, fluctuates within a set range. If the index falls more than 25 percent, investors would suffer losses. Rival products offer annualised returns of as high as 20 percent, Reuters said.
Snowball products are commonly designed using options and complicated models, though they are often marketed as a type of fixed-income products. “Investors are not fully aware of the risks. This worries regulators,” a Reuters source said.
The CSRC has instructed brokerage firms to tighten risk controls on Snowball products, simplify their design, and ensure that the risks of such products are fully disclose to investors.
Chinese brokerages sold a total of CNY 469.6 billion worth of Snowball derivative products in H1 2021. The outstanding size of such products stood at CNY 385.8 billion at the end of June.