In China, you can "fake" everything, even structured products.

Being that I do business in China, I think I’ve seen it all in terms of faked goods.  Fake Gucci bags, fake iPhones, you name it.  I think I even saw a fake BMW once.  But when I asked a treasury saleperson what he is selling most in China, his reply was “fake structured products”, even I was taken aback.  So I asked him more about it and found that it’s not really “fake” per se, but more like “fixed”.

The structure he was talking about is a Range Currency Deposit with the embedded USDCNY double no touch (DNT) option.  It has become one of the best selling structured products in China today

Firstly is because DNT are relatively simple option.  Asia classifies barrier options as “vanilla” and what the treasury sales are telling me is that products embeded with as FX accumulators and target redemptions were once selling like hot cakes, but now they are like kryptonite. 

Secondly, due to the collapse of Lehman, many Chinese investors are unwilling to leave their money in the banks for too long.  Very seldom do they invest anything beyond a 3M tenor.  So barrier option like a DNT is the right game to play.

But third and I think the best reason why DNT is so popular in China is because the Yuan, being a controlled currency, is very much predictable.  This is where the fixed or “fake” part comes in.  Given today’s economic conditions and China’s roadmap for growth one can predict, with pretty good accuracy, that the government will not let the Yuan fluctuate wildly, if at all.  It is like betting whether the car will go left or right, with the car’s signal on.

Here’s an example:  On a 3M USDCNY DNT product, an investor can make a 20% return at maturity setting the lower and higher trigger at 98% and 102% of spot.  We back test this structure and find that historically, over the past year, that chances that such structure will payout at maturity is nearly 100%!! 

Simple options thrive in risky world

In a recent interview with Reuters,  SuperDerivatives' Head of Equities Mikael Benquiqui explained why after the collapse of Lehman Brothers investors are shying away from the more complex options that was such a money maker for the investment banks.

Full article

Five Economic Trends for China

Monetary Policy to be relaxed even further than 2011

2011 was a rough year for many businesses in China.  However, this year businesses are anticipating a bit of an easier time. The People’s Bank of China has already lowered the bank’s reserve twice this year signaling a more relaxed control of the money supply.  Add to that, the decline in the rate of economic growth suggest that further monetary loosening should be expected.

Reduction of Inflation

2011 the big problem was 2011 with the Chinese government doing everything in its power to keep it from blowing up.  But even though January’s CPI was more than expected, many experts are pretty confident that February and March numbers will show a reduction.

RMB losing momentum

Despite the whining from the politicians from the west, RMB has actually risen in value for past few years.  But signs are showing that RMB is losing some momentum.  This is mainly due to the global economy being in complete mess so the demand for China’s goods have reduced dramatically.  This may cause investors to start looking into other currencies in the FX market.

A better stock market

Most experts believed that the worst time has past for the stock market.  They believe the market have gotten used to the good news/bad news rotation coming out from Europe and the US.  Volatility has reduced and the prices have reached their bottom.  Many bankers are anticipating a pick up in stock investments by their clients.

Real estate is dead

Compared to the stock market, the real estate market is dryer than the Sahara desert.  Although property prices have not seen any further drop recently which would suggests that the market may have hit bottom, neither do people see prices going up any time soon.  The control put in place by the Chinese government have nearly put all the speculators out of business.

SuperDerivatives Voted Top for FX Pricing and Analytics

Banks, Hedge Funds and Corporates Vote SuperDerivatives Top for FX Pricing and Analytics

22-Dec-11

London, 22 December 2011: SuperDerivatives (SD), the derivatives benchmark and multi-asset front office solution, has been voted as the best provider of FX pricing and analytics by clients on the buy- and sell-side in an annual ranking of technology vendors, carried out by Risk Magazine.

SD’s front office solution is more than just an accurate pricing system, and comes equipped with pre and post-trade analysis capabilities, trade suggestions and execution, risk analysis and many other tools designed to boost customers’ profitability.

The SDX platform is driven by SD’s award winning market data, which is drawn from the widest range of sources, including inter-dealer brokers, banks and third party specialised data vendors.

Russel Levi, Executive Vice President, Global Head of Sales, comments: “This is a welcome reflection of the satisfaction levels amongst our clients that our system is the best available for managing and pricing FX derivatives in these unprecedented volatile market conditions. We would like to thank our clients for choosing SD, and look forward to unveiling further enhancements to our pricing and analytics systems throughout 2012.”

Risk Magazine is a financial risk management magazine dedicated to the business of all aspects of financial risk management and the global derivatives markets. The publication established its annual technology rankings to recognise best practice and innovation in the risk management industry by software vendors.

Deal-X (DLX), the world's first multi-bank FX Option trading platform

FXCM and SuperDerivatives (SD) have partnered to develop Deal-X, a multi-bank electronic trading platform for FX options that connects buy-side market takers with liquidity providers on a single global platform.

In contrast to other platforms that only support typical exchange-traded products, for the first time the Deal-X platform allows bespoke FX options to be traded electronically, following OTC market conventions.

The offering combines SD’s innovative and proven technology with FXCM’s global reach and network of price providers to deliver fast and efficient trading on superior pricing.

The intuitive web-based platform supports price discovery, negotiation and execution, all the way to option expiration, powered by the industry benchmark SD options pricing model.

Deal-X enables:

• Users to trade both vanilla and bespoke instruments on G20 currency pairs and selected emerging markets
• Efficient price discovery – the best bids and offers from all liquidity providers on one electronic trading venue
• Simultaneous delivery of fast and secure options pricing from multiple banks via APIs, and anonymous trading to level the playing field for all participants
• Simplification of the option expiry process with a revolutionary central settlement mechanism
• All trading and settlement services, including central counterparty clearing, to be carried out through a prime broker, thereby minimising operational and counterparty risk
• Multi-participant request-for-quote/request-for-stream (RFQ/RFS) trading sessions, with published market-depth pricing for all parties
• Market participants to meet with and exceed forthcoming regulatory requirements and satisfy the need for greater transparency and reporting.
• Compliance with MiFID best execution and the SEC’s RegNMS regulation by clearly displaying the full depth of the market, with post-trade compliance reports available

A comprehensive range of post-trade services is also available, including a built in option-exercise facility that provides customers with added life-cycle management capabilities and reduces operational risk.

The platform is underpinned by the same specialised high-performance technology and infrastructure that is at the core of SD’s award winning system, which was launched in 2000.

Find out how Deal-X can enhance your FX options business by requesting a free trial or speaking to our expert team.

Investment banks layoff an opportunity for regional banks

Last week one of my colleagues visited the Hong Kong trading desk of an European investment bank.  She visits them quite frequently on support visits in the past and has befriended with many of the traders on the floor.  That is why she was in a bit shocked to see half of the trading desk emptied on her last week’s visit.

The investment banking land in Hong Kong, much like the rest of the world, is experiencing an earthquake right now.  But while the large investment banks scaling back, the regional banks are seeing an opportunity for them to play a bigger role in the market, and this round of layoffs has produced a pool of talents that can help put in place the proper procedures and infrastructure.

Some of the regional banks I’ve visited have said that they do have plan to expand and many of them have added a few former IB’ers to help with the expansion.  The key now is for the senior management and the board members of these regional banks to have the courage to take action on their ambition and follow through to the next steps.

China adds AUD and CAD trading against CNY

On Nov 28^th, China Foreign Exchange Trade System (CFETS) issued a statement saying that it will now allow interbank trading of AUD and CAD against CNY, joining the ranks of USD, JPY, EUR, GBP, MYR, RUB, and HKD.

This is a good sign but China must move a bit faster than this if they ever want to be taken seriously as a candidate for an international trade currency (if that is even possible).

Notwithstanding the opaqueness of China’s banking and political system.   At this point, options on CNY currency pairs can only be brought but not sold, so even simple strategies such as a synthetic forward or a risk reversal are still not possible.  With these strict restrictions, interbank trade volume is still minimal.  Banks would much rather focus their business that has more flexibility and can actually attract some interests.

Dipping your foot into the pool is fine, but no one will ever learn how to swim until he gets his head under the water.

CFETS should take a little bit of a risk and actually let the market start providing some better liquidity and transparency.