What is the "snowball" derivatives? And why are the risk of going on?

In the midst of the scene of the current markets, the snowmilles in China have emerged as a tool that combines seduction and controversy at the same time. These are investors with attractive periodic returns that exceed traditional deposits and effects, but they hide major risks that can cause huge losses. This contradiction has made it the focus of the attention of markets and organizational parties around the world. What is the “snowball” derivatives? Snowballerivates are known as financial instruments that give investors periodic returns in the form of coupons similar to mortgage vouchers, provided the reference indicator remains within a specific price range (usually between 75% and 105% from the beginning of the contract). During the index, the investor remains a periodic (return) coupon. But the contracts include two basic conditions, the first: Knock-in, where the decline in the index leads to a minimum extent agreed to the loss of capital protection and the investor losses incurred equal to the rate early. Also read: The rich of China returns to the “snowball” derivatives in search of higher yields in this structure. These derivatives are similar to automatic subpoena products distributed in some markets. It is often provided with higher yields than traditional tools; The company “China International Capital” estimated that the general copies of the “Snow Ball” contracts achieved about 20% annually, while some rare cases reached 71%. As far as his name is concerned, it came as an analogy of the accumulation of returns for investors with every coupon, as long as the loss requirement is not achieved, in a similar snowball that gradually grows up during the roll. What are the dangers of “snowball” derivatives? Despite his attractive returns, “snowball” derivatives are high -and the regulatory authorities and analysts warn them for a variety of reasons. It poses a threat to the individual investor; It can lose a large part of the capital if the basic asset falls below the level of activation of the loss. Fears are also raised about the design of these derivatives, as the upper limit of the contract is reviewed to see if the index exceeded only once a month, or 12 opportunities annually to terminate the contract early and pay the returns. On the other hand, it explores the extent of the activation of the loss daily, which gives hundreds of opportunities during the year to bring about losses. Although these derivatives are marketed as fixed income products thanks to periodic coupons, the actual risks lie in the hedging mechanism used by the mediators. They buy futures associated with the same indicator, but if they break the “snowball” contracts to the border of loss, they must quickly liquidate these centers, which double the sales pressure and lead to the exacerbation of the market decline, according to what “Bloomberg” explained. The extensive control of individual investors on the market also increases the complexity, it is more likely to panic and sell against any decline, unlike institutions. In the year 2024, there were live examples of these risks, including a picture distributed on social media to hold a ‘snowball’ with a financial lever in which the investor lost all his capital. The risks do not stop at the individual investor, but rather extend to the financial system as a whole. In the case of severe decline, a group of qualifiers can lead ‘snowball’ for decades to a rotary of an exacerbation of losses on the market. The image remains vague due to the absence of accurate data on the actual size of the contracts sold, which makes the overall risk raming very difficult. Where do these derivatives spread? China dominates the global market market market, because it has promoted individual and wealthy investors to become a profit source amid the scarcity of assets that achieve big profits. Contracts focus on local inventory indicators such as “CII 500” (CSI 500) and “CSI 1000” (CSI 1000). Investors with great wealth have been pumping ten billions of Yuan in modified copies of these derivatives since the beginning of this year in a low interest rate environment. For example, since the beginning of 2025, the China Merchants Bank has issued more than 30 billion yuan (about $ 4.2 billion) of these products issued by mediation companies. Although the latest versions are marketed as less risk, they are still about 20%with annual returns, and rare cases have been recorded 71%. The ‘China International Capital’ is estimated at the total market size of snowball and changing effects of about 100 billion yuan in 2025 (half its level at the beginning of 2024). What makes “snowball” derivatives attractive to investors? Despite the high risks, “snowball” derivatives still attract parts of investors thanks to their high returns compared to traditional deposits and effects in an environment that characterized investor capital. The continuation of the question is also attributed to psychological factors and market expectations. Many investors believe that the acute crashcenario is unlikely. In China, it is believed that any correction will not be sufficient to break the loss barrier, in light of the government’s commitment to support the market. This conviction makes the risks “relatively limited”, and encourages investors to pursue high coupons. In 2024, the Chinese Securities Regulatory Committee (CSRC) sharpened its grip on “Snow Ball” products, raised the minimum investment from one million yuan to 10 million yuan and imposed a ceiling on the existing versions of these derivatives to reduce their distribution in the market. Parallel issued the Chinese Capital Association (SAC) in 2024 new instructions that prohibit security companies from issuing unprotected structural notes, including “Snow Ball” structures, which actually limited the issue of banks.