Major derivatives houses plan to start offering equity derivatives on Chinese A shares in the coming months. Citigroup and Morgan Stanley received licenses to trade the liquid A shares last week, following the granting of licenses to UBS and Nomura Securities last month. The licenses enable the firms to offer international clients exposure to China through equity derivatives, such as equity-linked notes, because the derivatives houses can now delta hedge derivatives positions via the underlying cash market. Previously they had been permitted to trade only B shares, which are illiquid. Firms have offered similar so-called market access products on other restricted markets, such as India, Taiwan and Korea for several years. "Access products will be a main driver for this market," said Justin Kennedy, managing director of Asia Pacific equity derivatives at Citigroup in Hong Kong.
Morgan Stanley will likely offer products such as equity swaps and Luxembourg-listed warrants that would provide synthetic exposure to A-share stocks, according to an official.
Calum Graham, director of portfolio management at Govett Investments in London, said, "We would certainly look at this. We have bought similar notes in Taiwan and India." Govett, which has GBP6 billion (USD10 billion) under management, takes exposure to China through Hong Kong. Access to A shares would hugely increase the investment universe.
"This is very much a big first step," said Nicole Yuen, head of China equities at UBS in Hong Kong, commenting on the liberalization of the Chinese financial markets. "Products such as ELNs will pass through the economic benefits without the restrictions of repatriation or currency risk," she added.
"As our final strategy has not yet been determined, we will not be commenting," said Clifford Levy, spokesman at Nomura International in Hong Kong. Equity derivatives staff at the firm also declined comment.