Securities house of the year: Shenwan Hongyuan Securities

Asia Risk Awards 2022

Jun Tang, Shenwan Hongyuan Securities

Shenwan Hongyuan Securities (SWHYSC) is a Chinese securities house with a rich history, formed out of two major mergers, one in 1996 and the other in 2015. But until very recently, its structuring capabilities paled in comparison with larger derivatives houses on the market.

That changed a few years ago when the firm’s investment in technology and talent started to pay off, reflected in its ability to nab one of the very few (and highly sought after) licences from the China Securities Regulatory Commission (CSRC).

Overnight this turned the securities house from a tier-two player into a significant contender for the market share of China’s lucrative structured products market.

“As a leading securities house in China, SWHYSC shoulders our corporate social responsibility by applying structured products in serving the bricks and mortar of the economy. Leveraging our expertise across asset classes and structures, we help corporate clients to effectively hedge risks in the commodities/equities markets, and provide them with comprehensive corporate solutions,” says Jun Tang, head of equity derivatives. “We also work closely with banks and other financial intermediaries to bring to the market a wide range of structured products to help households preserve and grow their wealth.”

Receiving the licence from the CSRC was a huge recognition of SWHYSC’s prudent risk management and strong capital adequacy. Only eight firms in China currently have this licence, with SWHYSC being the latest addition.

He Yuanning

Offering single names enables more flexible structures, and has helped SWHYSC introduce more sophisticated volatility-based trading strategies. This has allowed clients to get fairly decent returns in current market conditions. Many of these structures also include buffers when the market retraces.

This has proved particularly valuable for equity market investors.

Single-name structures can also benefit corporate clients, too, by helping them risk-manage share repurchase and employee stock ownership plans.

As a result of its new structured products capability, the firm’s OTC trading revenue with institutional counterparties has soared a staggering 1,483% – from just 65 million yuan ($9.5 million) in 2019 to more than one billion yuan ($147 million) in 2020. This revenue further increased by 83% in 2021, to 1.9 billion yuan.

Structures on offer

SWHYSC’s focus on talent has been critical to ramping up its business.

Many of the staff the securities house has recently hired have worked overseas and come from the large international financial houses that have created many of the structures that are now finding their way over to China.

Tang himself began his career at Societe Generale in Paris in 2007 before moving over toBNP Paribas in 2009. SWHYSC’s head of trading for equity derivatives Yuanning He, spent a number of years at both BNP Paribas and Credit Suisse. The firm’s head of cross-border trading, Xioqing Zhang, worked for some time at a multi-strategy fund in the US and is a graduate of Columbia University in New York. Other global financial institutions that members of the team have worked for include JP Morgan, UBS and TDSecurities.

As a leading securities house in China, SWHY shoulders our corporate social responsibility by applying structured products in serving the brick and mortar of the economy. Leveraging our expertise across asset classes and structures, we help corporate clients to effectively hedge risks in the commodities/equities markets, and provide them with comprehensive corporate solutions. We also work closely with banks and other financial intermediaries to bring to the market a wide range of structured products to help households preserve and grow their wealth

Jun Tang, SWHYSC

Zhang Xiaoqing

“You have very frontier strategies being invented every year, and so we need people with a global vision and the ability to speak the right language,” says Xiaoqing. “Our team offers the perfect balance between the ‘art’ and ‘science’ of structured products.”

The result of this talent investment can clearly be seen in SWHYSC’s ability to offer products that easily rival those of the more established derivatives players in the country.

Snowball structures – a type of autocallable product typically embedded with a high-risk barrier option – remain popular on the market, despite a regulatory crackdown mis-selling last year. Over the past 12 months, SWHYSC has introduced a suite of snowball variations.

These include step-down structures (where the barrier levels decrease each month to increase the odds of the product knocking out); parachutes (which offer a ‘soft landing’ for the product, by significantly reducing the levels in the last observation day of the product’s life); and enhanced snowballs (in which the client not only receives a fixed coupon when the product knocks out, but can also participate in the underlying stock’s rally).

SWHYSC also pays close attention to pricing efficiency.

“We have built a top-notch sales coverage, serving a wide range of institutional clients both onshore and offshore,” says Wei Wang, deputy head of equity derivatives. “It’s a perfectly competitive market, so ultimately the ability to win market share comes down to our core competencies: structuring, pricing and trading. We trade with the most sophisticated institutional clients on a daily basis, so even subtle differences could make a huge difference in winning the deal.”

This is why SWHYSC has placed technology firmly at the heart of its business, and over the past few years spent tens of millions of yuan on its in-house platforms (although the firm prefers not to disclose the exact amount). In 2021, the firm launched a proprietary model library that incorporates a wide range of pricing engines, including Monte-Carlo simulations, partial differential equations and integral equation methodologies. The firm has also developed a matching distributed computing platform to support high-performance parallel computing.

“Many of our structures require millions of calculations to be run at each point in time, and that requires a huge amount of computing power. Hence, we restlessly invest in trading infrastructures and fintech to maintain our competitive edge. Technology-driven structuring and trading capabilities are also the backbone of our growing QIS (quantitative investment strategies) business,” says He.

International aspirations

While SWHYSC’s push into China’s structured products market is impressive, the securities house would not have won this award without being able to demonstrate its international credentials.

SWHYSC has long had a derivatives trading desk in Hong Kong and recently obtained an asset management licence in Singapore. The firm also has representative offices in London, New York and Tokyo, which SWHYSC could now leverage off in order to push into international markets.

“SWHY is a brand name with a rich legacy in China,” says Tang. “I want to showcase to the financial community globally that we have a very strong derivatives franchise in China, in order to pave the way for more proactive overseas growth in the future.”