OREANDA-NEWS. SGX currently offers investors a choice of 208 structured warrants, of which 131 are call warrants and 77 are put warrants. These structured warrants offer investors an alternative avenue to participate in the price performance of an underlying asset at a fraction of the underlying asset price. They can also be used as hedging tools to reduce or diversify investors’ portfolio risks.

In the month-to-date, the five most active structured warrants listed on the Singapore Exchange are four index warrants – two call and two put warrants on the Hang Seng Index – and one call warrant on the shares of DBS Group Holdings.

The most actively traded warrant – the Hang Seng Index Call Warrant with a 22,200 strike price and 29 September expiry – generated a total turnover of 29.9 million in the month through 22 September. The second most actively traded warrant – a Hang Seng Index Put Warrant with a strike price of 20,800 and 29 September expiry – posted total turnover of 24.9 million in the month thus far.

The call warrant on DBS Group Holdings with 1 February 2016 expiry registered total turnover of 16.9 million in the month-to-date.

Warrant Name Total turnover in MTD as at 22 Sept
HSI 22200 MB ECW150929      29,877,620.80
HSI 20800 MB EPW150929      24,866,809.20
HSI 22800 MB ECW151029      17,295,196.80
DBS MB ECW160201      16,861,979.40
HSI 21600 MB EPW151029      12,388,184.40
HSI 21800 MB ECW151029      12,302,542.20
FTSECHINAA50 10500 MBECW151127      11,857,570.00
HSI 19600 MB EPW151029      11,708,711.70
UOB MB ECW160111      11,661,393.90
OCBC BK MB ECW160111      11,143,145.70

Structured Warrants vs. CFDs

Contracts for difference and warrants are both derivatives, meaning that they derive their value from some underlying financial security or stock but are not actually ownership of it. Trading in either financial instrument allows you to gear up the power of your money, taking some sort of financial interest in the underlying that does not cost as much as buying it outright. In that way they are similar, but in many other ways they are different. The biggest differences can be found in the amount risk (only premium for structured warrants vs unlimited risk for CFDs), the counterparty risk (CFDs are not centrally cleared) and the costs of the trade (time decay for warrants vs financing fees for CFDs).

Despite risks involved, using leverage to invest has been one of the most popular growth strategies for more risk taking investors. Gearing will magnify the possible gains, as well as the losses - as many have seen especially during more (recent) volatile periods.                                  

  Structured Warrants CFDs
Maturity Fixed Expiry date, therefore affected by time decay No expiry date, therefore no time decay
Price Price determined by option pricing models, i.e. Black Scholes.  Variables in this pricing model aren’t readily available to investors, so they may not be able to calculate the price on their own Price of CFD tracks the price of the underlying asset.  Investors can calculate the price of the securities themselves
Issuer-led product, so pricing is dependent on the issuer. Broker-led product, so pricing is dependent on the broker.
Fees On top of the brokerage commission, investors pay clearing and trading fees of a total of 0.5bps of the trade value.  CFDs are also subject to broker commission and Investors are required to pay when they open and close the CFD position.
Additionally, depending on the broker and the CFD underlying, investors can pay financing charges ranging from 300 to 800 bps. 
Risk Risk limiting, as loss is capped at the initial capital outlay. Marginable product, therefore loss can be unlimited and greater than capital outlay. 
Central counterparty guarantee after trade No central counterparty clearing, therefore subject to the brokers’ credit risk. 
Broker Flexible, with the ability to buy via one brokerage firm and sell via another broker.  Can only open and close the CFD with the same brokerage house.
Trade & Settlement Traded on SGX; Deposited into CDP account Traded OTC; Not deposited into CDP account. 

While the structured warrant pricing model is complex, these products are already required to have standardized features as per the SGX Listing rules.

Gearing is one of the biggest benefits of warrants, but the difference between warrants and many other forms of leverage is that the risk is limited to the initial payment.  This means an investor can increase their exposure, due to the leverage factor, while limiting their capital at risk.  Although structured warrants are derivative in nature, they are securitized and non-marginable.  Investors’ risk and maximum loss will therefore be limited to the amount paid for the warrant, or the premium.  This sets structured warrants apart from the derivatives and OTC market with marginable products.

Put warrants can also provide investors with a hedging tool against a possible decline in the price of the underlying asset.  Should the market fall, losses can be partially or even fully offset by the appreciation of put warrants.