China Selloff Threatens $27 Billion of ‘Snowball’ Derivatives

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The outstanding size of snowball derivatives onshore was around $27 billion at the end of July, according to Securities Association of China data. Photo: Bloomberg

(Bloomberg) — Another 10% decline in a major Chinese equity gauge may trigger a wave of selling in index futures tied to structured products, adding fresh risks to the slumping stock market.

Investors face losses in complex “snowball” derivatives at maturity when a benchmark falls below a so-called knock-in level. For those tied to the CSI Smallcap 500 Index, the average threshold is 4,865, according to estimates by China International Capital Corp. Ltd. The gauge traded at around 5,417 as of 9:52 a.m. Friday.