Retail traders in Hong Kong experienced a setback as $1.55 billion worth of leveraged derivatives, particularly structured notes, were wiped out during the recent stock market downturn. This event intensified market volatility and underscored the risks associated with these popular structured products. Exchange data from January 17 to 22 revealed the termination of trading in hundreds of predominantly bullish contracts, causing investors to lose the premiums they paid and prompting banks to unwind their hedge positions. The bulk of these losses occurred on January 17, coinciding with the Hang Seng Index’s most significant decline since October 2022.
These leveraged derivatives, commonly known as callable bull or bear contracts and sold by Hong Kong’s major investment banks, enable investors to make leveraged bets without directly purchasing the underlying assets. However, their popularity has often been criticized for contributing to increased market volatility during previous downturns.
The recent Hong Kong stock rout saw the elimination of 633 contracts, primarily tied to the Hang Seng Index, over four sessions, according to exchange data. Soujit Ghosh, Bloomberg APAC Lead for Equity Derivatives, calculated their notional value to be over $1 billion on January 17 alone and nearly $500 million over the following three sessions. Investors likely lost a significant portion, if not all, of the premium they paid for these contracts.
Uncertainties surrounding China’s growth trajectory and Beijing’s policy decisions have contributed to the hammering of equities in Hong Kong, where a majority of listed firms are mainland-based. Despite China’s recent efforts to stabilize markets and trigger a rebound, investor skepticism remains regarding the sustainability of these gains.
Structured derivatives known as “snowballs” have also been identified as a driver behind volatility in mainland China’s stock market. Hong Kong faces a key trigger level at 14,700 points, tied to 1,369 outstanding bullish Hang Seng Index contracts as of early Thursday, representing a potential 9% decline from current levels, according to Societe Generale SA data.
Hong Kong holds the title of the world’s largest market for listed structured products, with an average daily turnover of approximately HK$11.8 billion ($1.5 billion), constituting about 11% of the value traded in the cash market, as per exchange data.
