Equity derivatives house of the year: Citic Securities

Asia Risk Awards 2023

Li Deng, Citic Securities

Range-bound stocks and collapsing volatility have made it a rough ride for equity derivatives houses over the past 12 months. Some investment banks and securities houses have been laying off staff in their Asia-Pacific equity derivatives divisions. Most, right now, are certainly not in a hiring phase.

Citic Securities is one house that is bucking the trend. Over the past year the Chinese securities firm has been busy expanding its equity derivatives franchise across the region through Citic CLSA, its Hong Kong-based overseas brokerage arm.

“This expansion has been supported through new hires,” says Li Deng, head of equity derivatives in Citic Securities. “Citic Securities’ EQD business has experienced strong growth over the past few years and is recognised as a leading derivatives trading platform. Citic Securities’ EQD is very committed to the overseas market in spite of the market downturn this year.”

The equity derivatives headcount at Citic Securities has increased by 6% year on year in 2023, compared with 2022 year-end.

Citic Securities is the largest over-the-counter equity derivatives house in onshore China by revenue, offering a full spectrum of flow derivatives as well as exotics such as the popular snowball structures. But Citic has long aspired to move beyond its mainland dominance and go toe-to-toe with the largest international investment banks in markets outside China. Leveraging the global client network of CLSA, which it acquired from Crédit Agricole back in 2013, has been key to that.

Although Citic Securities still has a long way to go to match the global scale of the largest investment banks, in Asia’s equity derivatives markets the firm is without doubt establishing itself as a serious competitor to those big global players. In the past year, Citic CLSA has been seen entering into new markets and presenting new competition to US and European investment banks for the business of private bank and wealth management clientele across various structured products and OTC derivatives segments.

“Supported by the strong balance sheet of the parent company, Citic Securities offers a wide range of products and solutions to clients, meeting different needs such as risk management, investment return enhancement, financing and cross-border market access,” says Deng.

There have also been technological advances this past year. The launch of a new whole life-cycle online portal and one-stop-shop solution allows private bank clients to place orders, monitor and manage positions for both prime service and structured products. Citic Securities is the first Chinese-run brokerage to offer such a platform to clients, and the automation this platform offers clients has contributed to a 196% surge in structured note volumes year on year compared with 2022.

James Xu, Citic Securities

The firm now has a structured products platform that provides a level of automation matching that of its leading international investment bank rivals. In addition, the securities house can quote clients the same range of US and European product underlyings as those international rivals, but with the bonus of additional underlyings – namely Chinese A-Shares – that others sometimes cannot. This has proven to be a big draw for private bank and wealth management clients in the region.

“This is special,” says a trading desk head at a Hong Kong-based wealth management firm. “Because if I ask for certain A-Share names from, say, a firm like Goldman, either they cannot quote it because of regulatory reasons or they don’t have the risk appetite.”

Growing with AMCs

This year, Citic CLSA’s equities structuring and trading capabilities are exemplified by the introduction of new products, such as actively managed certificates (AMCs), to cater for the family office and high-net worth investor clients of private banks in the region.

“This really requires front- and back-end collaboration in order to offer AMCs,” says James Xu, head of equity derivatives and prime brokerage at Citic CLSA. “We need to have dedicated salespeople structuring people at the front-end. And on the backhand, we have to have a very strong trading team and operations team to make this product work.”

AMCs are investment securities issued by investment banks or their special purpose vehicles that represent a portfolio of assets actively managed by an investment manager, and with their value tied to the underlying assets’ performance. The certificates can include securities from a variety of different asset classes – including equities and derivatives – into a single managed portfolio.

The products are already well established in Europe but, as a relative novelty in Asia, they represent “a blue ocean market” for Citic CLSA, says Xu.

One reason AMCs have been gaining increasing traction with private bank clients in recent years is that they combine the benefits of actively managed funds and structured products. Like any actively managed fund portfolio, AMC portfolios can be tailored to meet specific investment needs of clients, such as diversification, and adjusted to align with prevailing market conditions. But they are also easier, quicker and much cheaper to set up than their fund equivalents.

“When we’re pitching this to clients, we usually compare it with fund offerings,” says Xu. “A fund can require more than six months and maybe $100,000 in legal costs to set up. Instead, they can come to us for an AMC, and we can set it up within one week, and the cost is minimal.”

That makes the products good entry points for family office clients considering an actively managed fund. Down the line, if the AMC’s performance is good and assets under management are increasing, the client might look at establishing a fund using the AUM to offset for the set-up costs, He adds.

Citic CLSA is the only Chinese-run institution to offer AMCs, but also has a leading edge in issuance solutions compared to international investment banks, says Xu. Compared to its competitors, Citic Securities AMC offering is flexible and tailor-made to meet different clients’ needs, in terms of execution and strategies, he adds.

Citic Securities has also carved out niche in Quantitative Investment Solutions (QIS), which are uniquely for the QIS space, focused on China A-Shares. These are particularly valued by high-net-worth clients, asset managers and insurance companies looking for exposure to China equities. For now, many of the investors in these strategies, even offshore, are Chinese or have Chinese backgrounds with a smaller number of pure international investors. But the firm is now beginning to think about marketing these strategies to a broader international investor base as well.

“Citic Securities offers a unique combination of local expertise and global access,” says Xu. “Our sales, trading and structuring teams work closely with global clients to create solutions that meet their needs in risk management, yield enhancement, financing and cross-border market access. For example, asset managers run various strategies with us, fundamental strategies, quantitative strategies, long short strategies, and others. We provide handy instruments and execution platforms so that they can monetise their research and strategies with the least friction.”

Warrant winners

Citic Securities is now also working on a potential move into Hong Kong’s fiercely competitive market for retail listed structured products. These products are principally derivatives warrants and callable bull and bear certificates (CBBCs), both of which are listed on Hong Kong Exchange.

Derivatives warrants are a form of securitised options contracts that give investors the right – but not the obligation – to buy or sell an underlying asset, such as the Hang Seng or one of its constituent stocks. CBBCs, meanwhile, are leveraged instruments similar to warrants, but are immediately called if the underlying price reaches a specified level.

Hong Kong’s derivatives warrants and CBBC market is the largest listed retail structured product market in the world, with average daily turnover on the instruments in Hong Kong of $12.6 billion in the first half of 2023, according to Hong Kong Exchange data. The market’s size, along with its large number of instruments referencing Hong Kong-listed Chinese stocks, clearly makes for an ideal expansion opportunity for an equity derivatives house like Citic Securities.

There are currently 17 warrants and CBBC issuers on HKEX – including Credit Suisse, which is currently in the process of being incorporated into UBS, another Hong Kong retail structured products issuer.

Setting up a retail warrants business in Hong Kong could also help make Citic Securities equity derivatives franchise more complete, says Xu. It would offer risk management benefits by offering an avenue for recycling some of the risk generated from structured product flows in other parts of its equity derivatives business. It would also be beneficial in terms of sales and client presentation – clients will be able to come to Citic Securities as a one-stop shop.

“The Hong Kong warrant business is another example of CITIC Securities’ commitment to the overseas market. It’s a highly competitive space. Leveraging our branding and balance sheet, we will do our best to provide the most efficient products to the retail investors in the region,” says Xu.