CBBC structure
Aug 11, 2023
CBBC is modern derivatives that limit stakeholders risk with several finance scheme. Before CBBC there is unlimited liability in leveraged trade but after CBBC there is limited liability in leveraged trade.
※This article is not intended to recommend any financial products.
1.Underlying security holder
e.g. Alibaba stock 10k unit
-earning
Stock loan interest
dividend income
No need to sell stock for additional income and
liquidation
-paying
renting stock and cannot sell stock in loan term
2.CBBC sellside security underwriter/issuer
e.g. BNP, citi, JP morgan
-earning
issuing commision of CBBC
-paying
stock borrowing interest to holder
operational risk (if there is miss culcuration in CBBC there may be huge loss)
trading risk(If no call and ending spot price surpass
strike price there is risk but usually CBBC is traded
until ending date that risk is covered by Traders and market makers)
3.HKstockExchange
rending infrastructure of stock market. same as ordinal stocks
4.CBBC buyside security broker
e.g. HSBC, citi, JP morgan
-earning
Loan profit margin
brokerage fee
No downside risk(already have collateral from traders)
-paying
infrastructure rending cost to stock exchange
mobile app trading infrastructure and relationship management cost
5-#Traders
e.g. Indivisuals buy/ sell CBBC
Maximam down side risk of 100%
Upside return probability is theoretically infinite
6.Market maker/liquidation provider
e.g. IMC buy/sell CBBC
-earning
earn margin by contorolling bid ask spread narrower as liquidity provider
-paying
spread risk
collocation server costs
7.Central bank/ Monetary authority
call loan render
Pro for CBBC
CBBC and Warrent shows market expectation and sentiment for future of underlying stock.
-Gearing effect
-Low entry cost; stamp duty exempted because there is no acctual stock trade; as straightforward to cash(ordinary stock trade have 3 days transfer period)
-Maximum loss will be limited to initial investment; No margin calls
Con for CBBC
The issuer of CBBCs still carries some credit risk. While it is true that the issuer’s risk is limited compared to the traders and market makers, there are still potential risks involved:
1. Counterparty risk: The issuer is exposed to the risk of default by the counterparty, i.e., the underlying security holder. If the counterparty fails to fulfill its obligations, the issuer may face financial losses or challenges in meeting its own obligations to CBBC holders: find another stock holder and pay even higher stock interest.
2. Operational risk: The issuer may face operational challenges in managing the CBBCs, such as errors in pricing or settlement processes, which can lead to financial losses or reputational damage.
3. Market risk: Although the issuer is not directly exposed to the price change risk, extreme market conditions or unforeseen events can impact the overall market and potentially affect the issuer’s financial stability. Market risk is basically transferred to traders and market makers.
4.Liquidation risk
If outstanding share volume or CBBC out in Market (%) is small or trader volume is too small, then there will be more risk to market maker and trader. In such case there is limited merit of CBBC but currently CBBC is only used for large popular stock so this demerit is not realized.