CHINA’S securities regulator has tightened scrutiny on a popular derivative product dubbed Snowball, sources said, as regulators seek to rein in risks in an opaque, US$60 billion market.

Snowball, which offers a risky bet on stock market volatility and delivers double-digit, annualized returns barring a market tumble, has gained popularity among yield-hungry investors.

The China Securities Regulatory Commission (CSRC) recently sent a notice to brokerages, urging them to strengthen their risk controls on Snowball products and to fully disclose the related risks to investors, said a source with direct knowledge of the matter.

“Snowball products are often marketed as a type of fixed-income products, and investors are not fully aware of the risks. This worries regulators,” a source said.

Brokerages, which design Snowball products using options and complicated models, have also been urged to simplify the products, said another source.

The CSRC’s guidance comes amid concerns over China’s economic slowdown which has put downward pressure on the stock market. The small-cap CSI500 Index, the underlying index of many Snowball products, has already climbed 11.4 percent this year to 5-1/2-year-highs.

A Snowball product being marketed by China Industrial Securities Co. allows investors to make an annualized return of 12.85 percent, if its underlying index, the CSI500, fluctuates within a set range, according to a snapshot of the product prospectus.

But if the index falls more than 25 percent, investors would suffer losses.

Some rival products offer annualized returns of as high as 20 percent. The benchmark Shanghai Composite Index has gained 1.49 percent so far this year.

Chinese brokerages sold a total of 469.6 billion yuan worth of Snowball derivative products in the first half of 2021, according to the Securities Association of China. (SD-Agencies)