This is a research note that was circulating today–that I didn’t get around to discussing–due to the face ripping market I was enjoying throughout the day.
The banks sold their clients structured products (God I hate that phrase) that gave them exposure to Chinese stocks traded in Hong Kong, aka “H-shares.” If you recall, everyone was sucking the skin off China’s knee caps just 1 year ago. Boy have circumstances changed.
Apparently, there is a “knock-in” feature that triggers if the H-shares fall below 8,000, with a notional value of $13.6 billion and another $16.8 billion between 6,000-7,000.
Banks have purchased futures on the gauge of so-called H shares to hedge exposure to structured products that they’ve sold to clients, according to Chan. Many of those products have a “knock-in” feature at the 8,000 level that will spur banks to cut futures positions to maintain the effectiveness of their hedges, he said. Additional pressure points may also come at lower levels, Chan said.
“As the market goes lower from here, the downward move may accelerate,” he said. “There will be a large amount of hedging in futures which dealers need to unwind.”
Guess where the H-shares are trading now?
Pray for a rally.
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The never ending cycle of selling structured products in low vol environments and having them blow up when markets fall – it happened during the Asian currency crisis, in the Asian mini-crash in 2005ish or so, and of course 2008.
Presumably these are variants of the accumulator products, clients keep getting burned by them but they always come back for more. Each time, I always think that will finally end interests in those products, but even with margins getting compressed, I guess the profits are too big for banks to give up on them.
What banks?
Currencies will lead the derivatives crisis…but not by much or for long.
So, the H-bomb is about to drop. Everybody get under your desks in the tuck position.
I’m going to guess Deutsche bank is over exposed. Those fuckers are cursed.
The U.S. futures are well up at the moment, although, of course, that means nothing.
With the H shares trading where they’re trading, perhaps China or some other country is about to pump some dough into the market.
Do they have to end the trading day below 8000 for these to trigger? Google Finance says this index was below 8000 around 1 PM yesterday, but they barely closed above.
Holy fucktits. We’re so screwed.
Just went under 7900 even after the injection…hold onto your butts?
$13.6 billion, is that all? I thought it was going to be something scary.
tick tick tick tick tick tick tick