INDEX FUTURES AND BUSINESS INNOVATIONS OF SECURITIES COMPANIES
Currently, the business revenue of domestic securities companies has two main characteristics: operating incomes depend too much on brokerage while asset management business and principal business are affected significantly by market fluctuations. The emergence of a series of derivatives such as stock index futures has contributed to the balanced development of various businesses of foreign securities companies.
Insurance companies and large state-owned enterprises are the main components of the customer base of asset management business in China. With a high requirement on the security of funds, they can hardly accept the existing asset management that cannot guarantee their principal. With stock index futures, however, securities companies could control risk and expand the scale of asset management, introduce conservative products with ensured profits or aggressive products with high risks and profitability. In this way, securities companies would only charge for portfolio services, transferring risks to customers. Thus, revenues of this business will be solely determined by the research and innovation capability of securities companies.
The emergence of stock index futures as an investment instrument will greatly change the existing profit making mode and operational measures of principal business.
Firstly, the introduction of stock index futures will enable arbitrage, presently unfamiliar to everyone, to become a pillar of principal business. Arbitrage, in practice, is the way to earn steady investment profits by taking advantage of the slim spread among different markets. Arbitrage opportunities, which may be obvious or concealed, put high requirements on the imagination of researchers, the insight of operators, as well as the software and hardware of the computer ordering system of securities companies.
Secondly, stock index futures will become an important instrument for hedging during drastic falls of stock market for securities companies. If the position held by a securities company is relatively high, the securities company may find it hard to sell out the stocks during the fall of the stock market. If stock index futures is introduced, it can offset most of the risks by selling short stock index futures equivalent to the position it hold.
Stock index futures can avert the systematical risks caused by market fluctuations during the stock issuing. Besides, practices in western countries show that the introduction of stock index futures can promote the development of other derivative instruments, which is of significance for the development of new investment banking businesses.
With the introduction of stock index futures, most position adjustment will be handled by futures transactions instead of spot transactions. While decreasing the commission income of securities brokers severely, it will raise the efficiency of the whole market. And the price campaign in brokerage industry will be replaced by the competition of professional and customized services.
Finally, since every business department is more or less in need of this risk management instrument, if each department uses stock index futures independently to hedge risks, there might be a waste of resource as to the whole company. Therefore, an efficient risk management department is necessary for securities companies to deal with futures positions of the whole company, so as to control operating risks and save operating costs.
(by Dr. Xie Jianjun, Deputy
Director, Research Institute, Guotai Junan Securities Co., Ltd.)