GTHT released a research report stating that while the derivatives business of securities firms has previously experienced a period of rapid development, the current renewed focus stems from its increasingly critical role in differentiating the operational performance of broker proprietary businesses. As proprietary business models evolve, the growth certainty provided by derivatives operations will be the key factor for future divergence. The firm expresses greater optimism for high-quality leading brokers with advantages derived from scale effects, specifically recommending CICC (03908) and Huatai Securities Co., Ltd. (601688.SH). GTHT's main viewpoints are as follows:
The derivatives business of securities firms previously underwent a phase of high-speed growth, with changes in client demand and regulatory policies being the two pivotal factors driving business development. 1) From 2018 to 2022, the over-the-counter derivatives business of securities firms expanded rapidly, with the industry's total notional principal surging from RMB 346.7 billion to RMB 2,086.8 billion, achieving a compound annual growth rate (CAGR) of 57%. Corresponding to this scale expansion, the contribution of derivatives business to broker performance also increased swiftly during the same period. Taking CICC as an example, its equity derivatives business revenue grew from RMB 890 million to RMB 5.62 billion, a CAGR of 58%, and its share of the group's net revenue rose from 7% to 22%. 2) Reviewing history, China's OTC derivatives business, since its inception in 2012, has progressed through four significant developmental stages. The gradual refinement of regulatory policies and shifts in client demand driven by the capital market environment have been the two key factors influencing its trajectory. Since 2023, the capital market and securities industry have entered a new era of high-quality development. Concurrently, with profound changes in the capital market's superstructure, the regulation of derivatives business has undergone deep adjustments.
The significant reason for re-examining the derivatives business lies in the fact that, as securities firms' proprietary business models iterate, the growth certainty offered by derivatives operations will become the crucial factor differentiating among brokers. 1) Under the previous development model characterized by "simple expansion of fixed-income proprietary trading and stagnation in equity proprietary development," the differences between brokers' proprietary businesses were not pronounced. This was because derivatives business contributed more to the stability of returns rather than to the extent of balance sheet expansion or the level of returns (during a bond bull market, fixed-income proprietary trading could contribute more significantly to balance sheet growth and revenue generation). 2) However, the present situation is different. With changes in the stock and bond environment, partial balance sheet contraction and uncertainty in returns for broker proprietary businesses have already emerged. Brokers capable of steadily expanding their balance sheets by leveraging their derivatives business possess stronger certainty for expansion and more stable investment returns. This will be the key differentiator for the future profitability of broker proprietary businesses.
In the long run, the steady development of the derivatives business is an inevitable trend, and greater development potential is seen for high-quality leading brokers. 1) Regulation of China's derivatives business is gradually becoming more standardized. The recent "15th Five-Year Plan" proposal to "steadily develop futures, derivatives, and asset securitization" indicates that the steady long-term development of the derivatives business is the general direction. 2) Both international experience and the domestic situation show that the derivatives business tends to expand with market activity and is characterized by relatively stable models and strong scale effects. As a business direction with high concentration and long-term growth potential, the firm is more optimistic about leading brokers that can leverage advantages such as client base, first-mover status, and professional capabilities to establish commercial barriers. Furthermore, China's trader grading system further reinforces these business advantages.
Risk warnings: Uncertainty in regulatory policies; Significant fluctuations in the capital market.
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