The Taiwan Stock Exchange Corp (TWSE, 台灣證交所) said yesterday brokerage houses and investment banks would soon be able to start issuing “callable bull/bear contracts” (CBBCs), which it hoped would boost derivative volume on the local market.
The TWSE said it expected to complete preparations for the market’s launch by July 15.
The announcement came days after the Financial Supervisory Commission approved on Tuesday the issuing of the derivatives in the country, based on Hong Kong’s experience with CBBCs.
According to the World Federation of Exchanges, Hong Kong had turnover of US$533.9 billion in securitized derivatives (including warrants and CBBCs) last year, by far the most of any market in the world and far ahead of Taiwan’s US$6.6 billion.
Similar to stock warrants but issued by third parties such as investment banks and brokerage houses, CBBCs follow the performance of an underlying asset or stock, and, as a Wall Street Journal blog put it, appeal to the gambling instincts of retail investors.
They are leveraged instruments, meaning investors need only pay a fraction of the cost of the underlying asset or stock to get a contract, and as such are sometimes described as being similar to buying or shorting shares on margin.
Investors who buy callable bull contacts tend to hold a bullish view on the underlying asset or stock and attempt to capture an anticipated rise in its price, while buyers of callable bear contracts bet that the asset’s value will fall.
To limit risks, the investor sets “call prices” — the point where they can cash out or stop the bleeding before the contract reaches maturity — and if the call price is hit, the contract immediately expires.
The TWSE said that while any investment instruments bear certain risks, CBBCs could become good short-term money-making products for investors.
The product would be introduced at a time when local interest in warrants appears to be growing. As of the end of last month, about 35,800 investors had traded warrants on the local bourse, up 54 percent from the same period a year earlier, according to the TWSE.
In the first half of this month, the number of warrant investors rose 16,200 to a total of about 52,000.
So far this year, the number of applications for warrant issuance had reached 4,185, which represented 43 percent of the total applications for all of last year, the TWSE said, adding that the value of warrant issuance so far this year was NT$69 billion (US$2.37 billion), up more than 50 percent from a year earlier.
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