Chou: Yuanta Futures hopes to take a share in China’s futures market

One firm that stands out in Taiwan’s overcrowded financial sector is Yuanta Futures, which has maintained its top position in futures proprietary trading for the past 12 years.

The company, ranked 18th globally in terms of trading margin, has leveraged on its local and international product trading capability, deep integration with the securities sector and Greater China access to an increasing number of investors.

In Taiwan, about 52% of investors are individuals, 38% represent the dealing houses of futures companies, 9% are institutions (including private banks) and the remaining 1% come from securities, investment trusts and other financial entities.

However, in terms of assets under management (AUM), institutions account for over 50% of the market value. Yuanta Futures, with AUM of US$12.7 billion as of 2013, accounts for 33% of the market value.

The company has a number of high net worth clients, according to vice-chairman and general manager Carolyn Chou. “Most of the clients come to us directly,” she tells The Asset. “Many of them buy overseas futures or commodity trading advisor services as part of their portfolio for hedging.”

Yuanta Futures accounts for nearly 24% of Taiwan’s overseas futures products market. Using a 24-hour, 365-day global trading platform, it deals in eight major sectors, namely energy, precious metals, base metals, agriculture, stocks, bonds, interest and currencies. It is a member of at least 13 international exchanges, including the CME Group, Chicago Board of Trade, New York Mercantile Exchange, Eurex Exchange, Intercontinental Exchange and Tokyo Commodity Exchange.

Locally, it has 235 outlets across the island, making it 2.6x bigger than the second largest player.

Flourishing industry

Because of intense competition, Taiwan’s banking sector has seen net margins fall to 1.3%-1.4%, one of the lowest in the world. In 2006-2007, some of the biggest private equity firms worldwide such as Carlyle Group, SAC Private Capital and TPG Capital as well as hedge funds, bought stakes in Taiwan banks, betting on the island’s growing economic and trade ties with mainland China. But they later realized that prospects in the sector were not as bright as they had imagined, and are now struggling to sell off their holdings.

By comparison, the futures market has steadily flourished over the past 17 years. The Taiwan Futures Exchange (TAIFEX) was established on September 9 1997 and the first stock index futures was launched in 1998.

In 2001, Taiwan’s first stock index options product was launched on the island, reaching 1.6 million lots in the first year and 109 million lots in 2013, making a name in the global options arena.

The market outlook appears even better now. Taiwan’s march towards internationalization reached a milestone with the launch of the Eurex/TAIFEX Link on May 15 this year. Through the link-up, TAIFEX futures and options become available after trading hours in Taiwan and during European and US core trading hours. By extending the trading hours for the TAIFEX products, international investors and traders are given hedging opportunities for TAIFEX positions and an opportunity to take advanced positions in the volatile global trading market.

In 2012, Taiwan opened shorter-term products such as weekly futures and options which helped increase TAIFEX trading volume by 13% in August from a year earlier.

The market is expecting more new products, including commodity futures exchange traded fund (ETF), leveraged and inverse ETF and mainland China stock index futures in the second half this year.

Being the first futures company listed on the Taiwan OTC exchange in 2007, Yuanta Futures has benefited enormously from the market’s development. As of last year, it has taken up 22.51% and 10.42% of the total trading volume in futures and options respectively in Taiwan.

“We have a very strong financial background with over NT$2.5 (US 8 cents) earnings per share in the past few years and with no bank loans,” says Chou. As of 2013, Yuanta Futures’ capitalization has reached NT$2.3 billion and total assets NT$37.1 billion. Profit before tax for the year was NT$776 million.

As a result of the agreement with Eurex, Taiwan securities companies can start offering overseas futures to clients directly in the first quarter of 2015 if the trading volume through the Eurex/TAIFEX Link reaches a certain level this year.

This will enable Yuanta Futures to better serve its clients by leveraging the integration it already has with the group’s securities arm. To accelerate the integration, the group has appointed Ted Ho, former chairman of the futures firm, as Yuanta Securities chairman while the securities firm’s former president Tien Fu Lin was named the futures company’s chairman.

January - December 2013 customers’ margin AUM of Taiwan futures companies(Click to enlarge)

Mainland opportunities

On March 10 2014, Yuanta Futures became the first Taiwanese firm of its kind to acquire a business license to operate in the Greater China region. The company is now preparing to take advantage of the upcoming Shanghai-Hong Kong Stock Connect programme which will allow

foreign investors to trade in China’s A shares in Hong Kong.

“We have finished the linking test in Hong Kong and will organize briefings to our clients in Taiwan about the programme,” informs Chou.

Yuanta plans to produce research reports aimed at introducing clients to underlyings based on stocks from the mutual access scheme. It will also provide front-desk account opening and back-office customer services for the new business.

Meanwhile, the company is looking at new opportunities as China welcomes communication and cooperation with Taiwan in developing its futures market. The mainland is making remarkable strides in commodity futures and is now planning to develop new areas such as options, hedging and price discovery.

Chow notes that Taiwan has unique advantages – sharing a common language and similar market mechanisms with the mainland, to profit from this opening.

Yuanta, in particular, can offer its vast experience in the business, such as introducing the market maker mechanism, enhancing risk management and training for retail investors.

The company, however, has no plans yet to tap the private banking market in China in view of the regulatory barriers, Chou says. She also adds that local connection is very important in the business.

Instead, Yuanta is focusing on an important aspect of the futures business in the mainland, namely information technology.

On June 18 2013, the company set up a subsidiary of its SYF Information in Shanghai, which, through its Super 888 trading platform, could link to 17 international exchanges. The platform has been installed in 80 of the mainland’s 160 futures companies, either for simulation test or real trading.

Taiwanese companies can only take up to 49% of a mainland futures company, which is not attractive enough. But by providing technology solutions and charging service fees, Yuanta Futures can realize financial returns from the development of the country’s futures market, remarks Chou.

Another business opportunity in China is for Yuanta to help link small and medium-sized mainland futures companies that have overseas futures demand to offshore markets through its Hong Kong subsidiary.

As the first Taiwanese futures company to set up an IT subsidiary in the mainland, Yuanta Futures has not yet faced a noticeable competitor in the technology arena. Other futures companies may take different strategies. When China opens up further to allow trading of overseas futures, Yuanta’s platform can play a bigger role.

Despite all the advantages, Chou admits that Yuanta Futures still faces major challenges. These include maintaining its leading position in the market, attracting talent, and taking full advantage of its Hong Kong subsidiary to enhance business integration in the Greater China region.