CHINA ‘SNOWBALL’ DERIVATIVES WORTH $13 BILLION NEAR LOSS LEVELS

China’s relentless stock market rout is putting pressure on $13 billion worth of snowball derivatives, threatening to raise market volatility as brokerages are pushed to liquidate hedge positions. About 30 billion yuan ($4.2 billion) of those structured products tied to the CSI 1000 Index are near levels that trigger losses at maturity, according to Guotai Junan Futures Co. Another 60 billion yuan of the derivatives are 5%-10% away from their knock-in thresholds, the brokerage said. Snowballs promise bond-like coupons as long as the underlying assets trade within a certain range. While that has attracted China’s institutional and wealthy investors over the past years, a seemingly bottomless decline in the stock market has exposed the risk of those derivatives hitting levels that trigger losses. The equity slump continuing into 2024 has set off concerns over risks stemming from such securities. Brokerages hold on to index futures to hedge the exposure that comes with selling snowballs, and the triggering of knock-in levels by some of them has been behind the closing of long positions in equity futures, wrote Guotai analysts including Yu Kan.

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