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and other relevant regulations in respect of the China Connect Securities and China Stock Connect is still subject to development, and
there is uncertainty and risk as to the scope, application, and interpretation of the China Connect Rules and other relevant regulations,
including any new taxes, fees or levies and whether the arrangements contemplated under this Agreement (including Schedule IA) are
permitted under the relevant regulations. The China Connect Markets may request the SEHK to require CMSHK to issue warning
statements (verbally or in writing) to the Customer, and not to extend Northbound trading Service to the Customer. The China Connect
Markets may be closed, or trading on the China Connect Markets may be suspended, whether temporarily or permanently. The
Customer may incur loss in the event that the China Connect Authorities determine that these arrangements are not permitted or in the
event of any change to the China Stock Connect, or regulations in respect of China Connect Securities, the China Connect Securities
available for trading through the China Stock Connect, or the suspension or closure (whether temporary or permanent) of the China
Stock Connect. For example, the Customer may find it is not able to acquire, dispose of or hold certain China Connect Securities or its
entitlements in the event of certain changes to the China Connect Rules, which may affect the investment portfolio or strategies of the
Customer or cause the Customer to incur loss. CMSHK is not liable to the Customer in relation to such determination or change or the
consequences of such determination or change.
The HKSCC, Hong Kong Exchanges and Clearing Limited, SEHK, SEHK Subsidiary, the China Connect Markets and their respective
directors, employees and agents shall not be responsible or held liable for any loss or damage directly or indirectly suffered by CMSHK,
the Customer, special participants and non-clearing participants of the Central Clearing and Settlement System (if applicable) or any
third parties arising from or in connection with Northbound trading, the China Connect Clearing Services (as defined under the General
Rules of the Central Clearing and Settlement System), the China Stock Connect System (as defined under the Rules and Regulations of
The Stock Exchange of Hong Kong Limited), the SEHK/China Connect Markets making, amending or enforcing the China Connect
Rules or the Applicable Regulations, or any action taken by the SEHK/China Connect Markets in discharge of its supervisory or
regulatory obligations or functions including any action taken to deal with abnormal trading conduct or activities. In addition, the
Customer may find that it is not able to execute certain type(s) or category(ies) of transactions contemplated under Schedule IA, such as
margin trading in China Connect Securities via the China Stock Connect or orders with prices beyond the price limits of China Connect
Securities or in respect of China Connect Securities of which trading has been suspended due to price limits.
The relevant regulations of the PRC and may be different from the rules and regulations applicable to Securities listed on the SEHK. The
Customer may find that it is not able to exercise equivalent rights (e.g. right to vote by proxy) as holders of China Connect Securities as
compared with PRC holders of the same China Connect Securities, or as compared with Securities listed on the SEHK. The Customer
may find that it is unable to acquire or dispose of China Connect Securities using the same processes or operational mechanisms as
compared with those used in acquiring or disposing of Securities listed on the SEHK. The Customer should read, understand and
accept all relevant rules and any amendments thereof and seek independent professional advice if needed.
14.
Restrictions on Instructions
In respect of China Connect Securities, the Customer will be subject to the restrictions under the China Connect Rules and rules of the
China Connect Markets in addition to the rules of the SEHK. Instructions of the Customer that are not in compliance with the China
Connect Rules, the rules of the China Connect Markets or other Applicable Regulations may therefore be rejected or cancelled by
CMSHK, and part or all of the Instruction may not be executed. The China Connect Markets may not accept amendments to Instructions,
and any modifications to an Instruction in respect of China Connect Securities may therefore require cancellation of the outstanding
Instruction and input of a new Instruction. The Customer should read and understand China Connect Rules carefully before placing
Instructions with CMSHK to avoid rejection, cancellation, or non-execution of Instructions.
15.
Disclosure obligations
The Customer may be subject to PRC regulations in respect of disclosures of interest in China Connect Securities, and may be restricted
from acquiring or disposing of China Connect Securities under the regulations. For example, in the event the Customer's interest in
China Connect Securities crosses a stipulated threshold under the PRC regulations, the Customer may be required to disclose its details
and interest holding positions to PRC Regulators, and may be restricted from further acquiring or disposing of, or from receiving
proceeds or other returns from acquiring, holding or disposing of, such China Connect Securities within a stipulated time frame or as
prescribed by applicable laws, by-laws, rules and/or regulations from time to time. There is no guarantee that the Customer may be
exempt from the disclosure requirements and the relevant trading restrictions in respect of China Connect Securities and the Customer
is solely responsible for compliance with such regulations. CMSHK is not obliged to determine, advise or assist the Customer in any way
in respect of the disclosure obligations or trading restrictions applicable to the Customer under any such regulations.
16.
Risk of default by ChinaClear
Although considered remote, trading under the China Stock Connect is subject to the risk of default by ChinaClear as the host central
counterparty in the PRC. In an event of default by ChinaClear, the HKSCC will in good faith seek recovery of the outstanding stocks and
monies from ChinaClear through available legal channels and through ChinaClear's liquidation process, if applicable. HKSCC will in
turn distribute the stocks or monies recovered to Hong Kong clearing participants on a pro-rata basis. The Customer may not be able to
recover all or any part of its outstanding stocks and/or monies in an event of default by ChinaClear.
17.
Short Swing Profit Rule
Under PRC laws, rules and regulations, the "short swing profit rule" requires the Customer to give up or return any profits made from
purchases and sales in respect of China Connect Securities of a particular PRC listed company if (a) the Customer's shareholding in
such PRC listed company exceeds the threshold prescribed by the relevant China Connect Authority from time to time and (b) the
corresponding sale transaction occurs within the six months after a purchase transaction, or vice versa. The Customer (and the
Customer alone) must comply with the "short swing profit rule". CMSHK has no responsibility to alert the Customer or otherwise assist
the Customer in complying with the "short swing profit rule”.
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SCHEDULE III
Part III
RISK DISCLOSURE STATEMENTS AND DISCLAIMERS
FOR TRADING IN OPTIONS
This brief statement does not disclose all of the risks and other significant aspects of trading in futures contracts or options. In light of the
risks, you should undertake such transactions only if you understand the nature of the contracts (and contractual relationships) into which
you are entering and the extent of your exposure to risk. Trading in futures contracts or options is not suitable for many members of the
public. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and
other relevant circumstances.
1.
Risk of Trading Futures and Options
The risk of loss in trading futures contracts or options is substantial. In some circumstances, you may sustain losses in excess of your
initial margin funds. Placing contingent orders, such as stop-loss or stop-limit orders, will not necessarily avoid loss. Market conditions
may make it impossible to execute such orders. You may be called upon at short notice to deposit additional margin funds. If the required
funds are not provided within the prescribed time, your position may be liquidated. You will remain liable for any resulting deficit in your
account. You should therefore study and understand futures contracts and options before you trade and carefully consider whether such
trading is suitable in the light of your own financial position and investment objectives. You should also inform yourself of exercise and
expiration procedures and your rights and obligations upon exercise or expiry.
2.
Risk of Margin Trading
The risk of loss in financing a transaction by deposit of collateral is significant. You may sustain losses in excess of your cash and any
other assets deposited as collateral with the licensed or registered person. Market conditions may make it impossible to execute
contingent orders, such as "stop-loss" or "stop-limit" orders. You may be called upon at short notice to make additional margin deposits
or interest payments. If the required margin deposits or interest payments are not made within the prescribed time, your collateral may
be liquidated without your consent. Moreover, you will remain liable for any resulting deficit in your account and interest charged on your
account. You should therefore carefully consider whether such a financing arrangement is suitable in light of your own financial position
and investment objectives.
3.
Variable Degree of Risk
Some Options may only be exercised on an expiry day (European-style exercise) and that other options may be exercised at any time
before expiration (American-style exercise). Upon exercise some options require delivery and receipt of the underlying securities and
that other options require a cash payment.
Transactions in options carry a high degree of risk. Purchasers and sellers of options should familiarise themselves with the type of
option (i.e. put or call) which they contemplate trading and the associated risks. You should calculate the extent to which the value of the
options must increase for your position to become profitable, taking into account the premium and all transaction costs.
The purchaser of options may offset or exercise the options or allow the options to expire. The exercise of an option results either in a
cash settlement or in the purchaser acquiring or delivering the underlying interest. If the option is on a futures contract, the purchaser will
acquire a futures position with associated liabilities for margin. If the purchased options expire worthless, you will suffer a total loss of
your investment which will consist of the option premium plus transaction costs. If the option is “covered” by the seller ho
lding a
corresponding position in the underlying interest or a futures contract or another option, the risk may be reduced. If the option is not
covered, the risk of loss can be unlimited. If you are contemplating purchasing deep-out-of-the-money options, you should be aware that
the chance of such options becoming profitable ordinarily is remote.
Selling (“writing” or “granting”) an option generally entails considerably greater risk than purchasing options. Although th
e premium
received by the seller is fixed, the seller may sustain a loss well in excess of that amount. The seller will be liable for additional margin to
maintain the position if the market moves unfavourably. The seller will also be exposed to the risk of the purchaser exercising the option
and the seller will be obligated to either settle the option in cash or to acquire or deliver the underlying interest.
Certain exchanges in some jurisdictions permit deferred payment of the option premium, exposing the purchaser to liability for margin
payments not exceeding the amount of the premium. The purchaser is still subject to the risk of losing the premium and transaction costs.
When the option is exercised or expires, the purchaser is responsible for any unpaid premium outstanding at that time.
Options can involve a high degree of risk and may not be suitable for every investor. Investors should ensure they understand those
risks before participating in the options market.
4.
Terms and Conditions of Contracts
You should ask the firm with which you deal about the terms and conditions of the specific futures or options which you are trading and
associated obligations (e.g. the expiration dates and restrictions on the time for exercise). Under certain circumstances the
specifications of outstanding contracts (including the exercise price of an option) may be modified by the exchange or clearing house to
reflect changes in the underlying interest.
5.
Suspension or Restriction of Trading and Pricing Relationships
Market conditions (e.g. illiquidity) and/or the operation of the rules of certain markets (e.g. the suspension of trading in any contract or
contract month because of price limits or “circuit breakers”) may increase the risk of loss by making it difficult or impossi
ble to effect
transactions or liquidate/offset positions. If you have sold options, this may increase the risk of loss.
Further, normal pricing relationships between the underlying interest and the futures, and the underlying interest and the option may not
exist. This can occur when, for example, the futures contract underlying the option is subject to price limits while the option is not. The
absence of an underlying reference price may make it difficult to judge “fair value”.
6.
Deposited Cash and Property
You should familiarise yourself with the protections given to money or other property you deposit for domestic and foreign transactions,
particularly in the event of a firm insolvency or bankruptcy. The extent to which you may recover your money or property may be
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governed by specific legislation or local rules. In some jurisdictions, property which had been specifically identifiable as your own will be
pro-rated in the same manner as cash for purposes of distribution in the event of a shortfall.
7.
Risk of providing an authority to repledge your securities collateral etc.
There is risk if you provide the licensed or registered person with an authority that allows it to apply your securities or securities collateral
pursuant to a securities borrowing and lending agreement, repledge your securities collateral for financial accommodation or deposit
your securities collateral as collateral for the discharge and satisfaction of its settlement obligations and liabilities.
If your securities or securities collateral are received or held by the licensed or registered person in Hong Kong, the above arrangement
is allowed only if you consent in writing. Moreover, unless you are a professional investor, your authority must specify the period for
which it is current and be limited to not more than 12 months. If you are a professional investor, these restrictions do not apply.
Additionally, your authority may be deemed to be renewed (i.e. without your written consent) if the licensed or registered person issues
you a reminder at least 14 days prior to the expiry of the authority, and you do not object to such deemed renewal before the expiry date
of your then existing authority.
You are not required by any law to sign these authorities. But an authority may be required by licensed or registered persons, for
example, to facilitate margin lending to you or to allow your securities or securities collateral to be lent to or deposited as collateral with
third parties. The licensed or registered person should explain to you the purposes for which one of these authorities is to be used.
If you sign one of these authorities and your securities or securities collateral are lent to or deposited with third parties, those third parties
will have a lien or charge on your securities or securities collateral. Although the licensed or registered person is responsible to you for
securities or securities collateral lent or deposited under your authority, a default by it could result in the loss of your securities or
securities collateral.
A cash account not involving securities borrowing and lending is available from most licensed or registered persons. If you do not require
margin facilities or do not wish your securities or securities collateral to be lent or pledged, do not sign the above authorities and ask to
open this type of cash account.
8.
Warning to Option Writers
As a writer of an option you may be required at any time before expiry to delivery (pay for) the underlying securities to the full value of the
strike price multiplied by the number of underlying securities. This obligation may be wholly disproportionate to the value of premium
received at the time the options were written and may be required at short notice.
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SCHEDULE III
Part IV
DERIVATIVE RISKS
This brief statement does not disclose all of the risks and other significant aspects of trading in derivatives. In light of the risks, you should
undertake such transactions only if you understand the nature of the contracts (and contractual relationships) into which you are entering
and the extent of your exposure to risk. Trading in derivatives is not suitable for many members of the public. You should carefully
consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant
circumstances.
FEATURES AND RISK DISCLOSURE OF DERIVATIVE PRODUCTS
1.
LISTED EQUITY LINKED INSTRUMENTS (ELI)
ELI are structured products which can be listed on The Stock Exchange of Hong Kong Limited under Chapter 15A of the Main Board
Listing Rules. They are marketed to retail and institutional investors who want to earn a higher interest rate than the rate on an ordinary
time deposit and accept the risk of repayment in the form of the underlying shares or losing some or all of their investment.
ELI are traded in board lots and the minimum trading unit is one board lot. One board lot of ELI equals one board lot of its underlying
security or its multiples. The duration of an ELI ranges from 28 days to two years. ELI are traded scripless in Hong Kong dollars and odd
lots are settled in cash. Investors should note that short selling of ELI is prohibited.
An ELI’s investment returns are often linked to the performance of their underlying stock(s). But for the purpose of increasi
ng the overall
return from that of plain-vanilla ELIs, some issuers may include additional features, such as early call, knock-in and daily accrual coupon.
These features may affect the return of the ELIs in different ways.
TYPES
To match their directional view on the underlying securities, investors may choose from three different types of ELI listed on The Stock
Exchange of Hong Kong Limited: Bull, Bear and Range. Other types of ELI may be traded on The Stock Exchange of Hong Kong Limited
in future.
CHARACTERISTICS
1
Early Call
ELI with early call feature will be terminated early if the closing price of the underlying stock (or
in the case of a basket, that of the worst performing stock) is at or above its call price on a call
observation date.
2
Knock-in/ Knock-out Options Typically a currency and commodity option, a knock-in and knock out options allow the option
writer to set a limit with a view towards minimizing losses from volatile price movements. The
higher the market volatility, the greater is the probability that a knock-in option is triggered.
If the closing price of the underlying stock is at or below the trigger price on any knock-in
observation date, a knock-in event occurs. The observation dates can be set as certain dates
or certain periodic dates (e.g. monthly, quarterly). It also can be each scheduled trading day
from the issue date to the scheduled final valuation date.
A knock-out option expires worthless if the price of an underlying asset crosses the
pre-determined threshold. As the profit opportunity is limited, barrier options such as these are
sold cheaper than standard options. They are suitable only for investors with a strong
directional understanding or premium constraints and in a relatively stable market environment
with little price movements.
3
Daily Accrual Coupon
The daily accrual feature allows an investor to capture daily price movements of the underlying
stock. The ELI with daily accrual features take into account the number of trading days on
which the closing price of the underlying stock is at or above the accrual coupon price during an
observation period.
More than one accrual coupon price may be available. Different coupons may accrue for each
day when the closing price of the underlying stock is above the high accrual coupon price,
between the high accrual coupon price and the low accrual coupon price, and below the low
accrual coupon price. In such case, it is possible that no coupon will be accrued if the closing
price of the underlying stock is below the accrual coupon price throughout the observation
period.
TRADING ARRANGEMENT
When ELI are issued, issuers will indicate on the listing document and launch announcement whether the ELI are to be settled by a cash
payment or physical delivery upon expiry. Once listed, neither the issuers nor the holders are allowed to opt for an alternative settlement
method at expiry.
RISK DISCLOSURE
1
Exposure to equity market
Investors are exposed to price movements in the underlying security and the stock market, the
impact of dividends and corporate actions and counterparty risks. Investors must also be
prepared to accept the risk of receiving the underlying shares or a payment less than their
original investment.
2
Possibilities of losing
investment
Investors may lose part or all of their investment if the price of the underlying security moves
against their investment view.
3
Price adjustment
Investors should note that any dividend payment on the underlying security may affect its price
and the payback of the ELI at expiry due to ex-dividend pricing. Investors should also note that
issuers may make adjustments to the ELI due to corporate actions on the underlying security.
4
Interest rates
While most ELI offer a yield that is potentially higher than the interest on fixed deposits and
traditional bonds, the return on investment is limited to the potential yield of the ELI.
5
Potential yield
Investors should consult their brokers on fees and charges related to the purchase and sale of
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ELI and payment / delivery at expiry. The potential yields disseminated by HKEx have not
taken fees and charges into consideration.
2.
STOCK OPTIONS
It is a contract that involves two parties, a buyer and a seller. An option’s buyer has the right, but not the obligation, to
buy according to
a “call” option from, or sell according to a “put” option to the seller the specified underlying assets.
Option contracts are for an agreed
quantity of an underlying asset, price, and future period. If the buyer (or holder) exercises his right, the option's seller (or writer) has to
settle according to the contract's specifications. An option holder is described as having a long position, while an option writer has a
short position.
CHARACTERISTICS
1
Underlying asset
The assets underlying options can be stocks, market indices, currencies, commodities, debt
instruments, and so on. In Hong Kong, exchange-traded options' underlying assets are mainly
stocks and market indices.
2
Exercise / Strike price
This is the predefined price at which the option's holder trades the underlying asset with the
writer.
3
Expiry day
The last day on which a holder can exercise an option.
4
Exercise style
There are two types of exercise styles. An American-style option can be exercised during any
trading day on or before the expiry date. European-style options can only be exercised on the
expiry day.
5
Settlement method
This is the predetermined method in which the writer settles an option, and depends on what's
stated in the contract. An option can be settled either by physical delivery of the underlying
asset or in cash.
RISK DISCLOSURE
1
Risk of Trading Options
The risk of loss in trading futures contracts or options is substantial. In some circumstances,
you may sustain losses in excess of your initial margin funds. Placing contingent orders, such
as "stop-loss" or "stop-limit" orders, will not necessarily avoid loss. Market conditions may
make it impossible to execute such orders. You may be called upon at short notice to deposit
additional margin funds. If the required funds are not provided within the prescribed time, your
position may be liquidated. You will remain liable for any resulting deficit in your account. You
should therefore study and understand options before you trade and carefully consider whether
such trading is suitable in the light of your own financial position and investment objectives. If
you trade options you should inform yourself of the exercise and expiration procedures and
your rights and obligations upon exercise or expiry.
2
Variable degree of risk
Transactions in options carry a high degree of risk. Purchasers and sellers of options should
familiarize themselves with the type of option (i.e. put or call) which they contemplate trading
and the associated risks. You should calculate the extent to which the value of the options must
increase for your position to become profitable, taking into account the premium and all
transaction costs.
The purchaser of options may offset or exercise the options or allow the options to expire. The
exercise of an option results either in a cash settlement or in the purchaser acquiring or
delivering the underlying interest. If the option is on a futures contract, the purchaser will
acquire a futures position with associated liabilities for margin (see the section on Futures
above). If the purchased options expire worthless, you will suffer a total loss of your investment
which will consist of the option premium plus transaction costs. If you are contemplating
purchasing deep-out-of-the-money options, you should be aware that the chance of such
options becoming profitable ordinarily is remote.
Sell
ing (“writing” or “granting”) an option generally entails considerably greater risk than
purchasing options. Although the premium received by the seller is fixed, the seller may sustain
a loss well in excess of that amount. The seller will be liable for additional margin to maintain
the position if the market moves unfavourably. The seller will also be exposed to the risk of the
purchaser exercising the option and the seller will be obligated to either settle the option in cash
or to acquire or deliver the underlying interest. If the option is on a futures contract, the seller
will acquire a position in a futures contract with associated liabilities for margin. If the option is
“covered” by the seller holding a corresponding position in the underlying intere
st or a futures
contract or another option, the risk may be reduced. If the option is not covered, the risk of loss
can be unlimited.
Certain exchanges in some jurisdictions permit deferred payment of the option premium,
exposing the purchaser to liability for margin payments not exceeding the amount of the
premium. The purchaser is still subject to the risk of losing the premium and transaction costs.
When the option is exercised or expires, the purchaser is responsible for any unpaid premium
outstanding at that time.
3
Terms and conditions of the
contract
You should ask the firm with which you deal about the terms and conditions of the specific
futures or options which you are trading and associated obligations (e.g. the circumstances
under which you may become obliged to make or take delivery of the underlying interest of a
futures contract and, in respect of options, expiration dates and restrictions on the time for
exercise. Under certain circumstances the specifications of outstanding contracts (including
the exercise price of an option) may be modified by the exchange or clearing house to reflect
changes in the underlying interest.
4
Suspension or restriction of
trading and pricing
relationships
Market conditions (e.g. illiquidity) and/or the operation of the rules of certain markets (e.g. the
suspension of trading in any contract or contract month because of price limits or “circuit
breakers”) may increase the risk of loss by making it difficult or impossible to effect transactions
or liquidate/offset positions. If you have sold options, this may increase the risk of loss.
Further, normal pricing relationships between the underlying interest and the futures, and the
underlying interest and the option may not exist. This can occur when, for example, the futures
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contract underlying the option is subject to price limits while the option is not. The absence of
an underlying reference price may make it difficult to judge “fair value”.
5
Deposited cash and property You should familiarize yourself with the protections given to money or other property you
deposit for domestic and foreign transactions, particularly in the event of a firm insolvency or
bankruptcy. The extent to which you may recover your money or property may be governed by
specific legislation or local rules. In some jurisdictions, property which had been specifically
identifiable as your own will be pro-rated in the same manner as cash for purposes of
distribution in the event of a shortfall.
6.
Commission and other
charges
Before you begin to trade, you should obtain a clear explanation of all commission, fees and
other charges for which you will be liable. These charges will affect your net profit (if any) or
increase your loss.
7
Transaction in other
jurisdictions
Transactions on markets in other jurisdictions, including markets formally linked to a domestic
market, may expose you to additional risk. Such markets may be subject to regulation which
may offer different or diminished investor protection. Before you trade you should enquire
about any rules relevant to your particular transactions. Your local regulatory authority will be
unable to compel the enforcement of the rules of regulatory authorities or markets in other
jurisdictions where your transactions have been effected. You should ask the firm with which
you deal for details about the types of redress available in both your home jurisdiction and other
relevant jurisdictions before you start to trade.
8
Currency risks
The profit or loss in transactions in foreign currency-denominated contracts (whether they are
traded in your own or another jurisdiction) will be affected by fluctuations in currency rates
where there is a need to convert from the currency denomination of the contract to another
currency.
9
Trading facilities
Electronic trading facilities are supported by computer-based component systems for the
order-routing, execution, matching, registration or clearing of trades. As with all facilities and
systems, they are vulnerable to temporary disruption or failure. Your ability to recover certain
losses may be subject to limits on liability imposed by the system provider, the market, the
clearing house and/or participant firms. Such limits may vary: you should ask the firm with
which you deal for details in this respect.
10
Electronic trading
Trading on an electronic trading system may differ from trading on other electronic trading
systems. If you undertake transactions on an electronic trading system, you will be exposed to
risks associated with the system including the failure of hardware and software. The result of
any system failure may be that your order is either not executed according to your instructions
or is not executed at all.
11
Off-exchange transactions
In some jurisdictions, and only then in restricted circumstances, firms are permitted to effect
off-exchange transactions. The firm with which you deal may be acting as your counterparty to
the transaction. It may be difficult or impossible to liquidate an existing position, to assess the
value, to determine a fair price or to assess the exposure to risk. For these reasons, these
transactions may involve increased risks. Off-exchange transactions may be less regulated or
subject to a separate regulatory regime. Before you undertake such transactions, you should
familiarize yourself with applicable rules and attendant risks.
12.
Risk of client assets
received or held outside
Hong Kong
Client assets received or held by the licensed or registered person outside Hong Kong are
subject to the applicable laws and regulations of the relevant overseas jurisdiction which may
be different from the SFO and the rules made thereunder. Consequently, such client assets
may not enjoy the same protection as that conferred on client assets received or held in Hong
Kong.
3.
BOND
Bond is a debt instrument issued for a predetermined period of time with the purpose of raising capital by borrowing. A bond generally
involves a promise to repay the principal and interest on specified dates. This kind of debt instrument may also be called as bills or notes
and these names are used interchangeably in the market.
CHARACTERISTICS
1
Issuer
The party who borrows the money. The bonds are classified by the nature of their issuers, for
example, corporate bonds (by listed companies or their subsidiaries), government bonds (by
governors or government authorities), and supranational bond (by supranational organization,
for example, the World Bank).
2
Principal
This is amount repaid to bondholder when bond matures; it is also called par value or face
value.
3
Coupon rate
The rate which issuer pays interest on the principal to bondholder in regular intervals, e.g.
annually, semi-annually, quarterly. The coupon rate can be fixed where the rate will not change
over the term of the bond. The rate can be floating which will adjust periodically according to
the predetermined benchmark, e.g. HIBOR. The coupon rate can also be zero, e.g.
zero-coupon bond sold at low price than principal but will be repaid in principal upon maturity.
4
Term
This is the tenor of the bond which issuer has promised to meet its obligations under the bond.
5
Special feature
“Callable” bond grants the issuer the right to replay the bond before matures.
“Puttable” bond gives bondholder the right to
sell bond back to issuer.
“Convertible” bond gives you the right to convert bond into a specified number of unissued
shares of the issuer or a related company. “Exchangeable” bond allows bondholder to
exchange the bond for the shares of any organization which are already in issue and held by
the issuer or a related company.
6
Guarantor
Some bonds are guaranteed by a third party called guarantor. In case of defaults of issuer, the
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guarantor agrees to repay the principal and/or interest to bondholder.
RISK DISCLOSURE
1
Default risk
This is a risk that issuer may fail to pay bondholder the interest or principal as scheduled.
2.
Interest rate risk
The price of a fixed rate bond will drop when the interest rate rises. If the bond to be sold before
matures, the bond price may be less than the purchase price.
3
Exchange rate risk
Exchange rate risk exists if the bond is dominated in foreign currency.
4
Liquidity risk
In case of emergency to sell bond before maturity, there is a risk of low liquidity of the
secondary bond market.
5
Equity risk
If the bond is “convertible” and “exchangeable”, equity risk associated with the stock will be
existed.
4.
WARRANTS
Warrants are an instrument which gives investors the right - but not the obligation - to buy or sell the Warrants
’
underlying asset at a
pre-set price on or before a specified date. There are two main types of warrants, namely, subscription warrants and derivative warrants.
5.
SUBSCRIPTION WARRANTS
Subscription warrants are issued by a listed company and give holders the rights to buy the underlying shares of such company. They
are either attached to new shares sold in initial public offerings, or distributed together with declared dividends, bonus shares or rights
issues. Subscription warrants are valid between 1 and 5 years. Upon exercise, the underlying company will issue new shares and deliver
them to the warrant holders.
6.
DERIVATIVE WARRANTS
Derivative warrants are issued by financial institutions. Unlike subscription warrants which must be call warrants, derivative warrants can
be call or put warrants. Most of the derivative warrants in the market have a shorter life, ranging from 6 months to 2 years normally,
although the current Listing Rules allow a maximum life of 5 years.
Derivative warrants can be linked with a single stock, a basket of stocks, an index, a currency, a commodity or a futures contract (e.g. oil
futures). They can be settled by cash or physical delivery, which must be specified by the issuers at launch. However, basket 1, index
warrants and warrants on stocks listed overseas are settled by cash only.
In exercising a call derivative warrant on a single stock with physical settlement, the issuer will deliver the underlying shares to the
warrant holder. This does not involve the issuance of new shares by the underlying listed company as in the case of subscription
warrants.
Furthermore, every derivative warrant has a designated liquidity provider to help improve the liquidity of the instrument in the market.
Such a requirement does not apply to subscription warrants.
CHARACTERISTICS
1
Issuer
A warrant can be issued by a listed company (i.e. subscription warrant) or a third party such as
a financial institution (i.e. derivative warrant).
2
Underlying asset
It can be a single stock, a basket of stocks, an index, a currency, a commodity, a futures
contract (e.g. oil futures) etc.
3
Types of rights
Don't mix up a call warrant with a put warrant. A call warrant gives you the right to buy whereas
a put warrant gives you the right to sell the underlying asset.
4
Exercise price
The price at which you buy or sell the underlying asset in exercising a warrant.
5
Conversion ratio
This refers to the number of units of the underlying asset exchanged when exercising a unit of
a warrant. Normally, in Hong Kong a derivative warrant on shares has the ratio of 1 (i.e. one
warrant for one share) or 10 (i.e.10 warrants for one share).
6
Expiry date
The date on which a warrant will expire and become worthless if the warrant is not exercised.
7
Exercise style
With an American warrant, you can exercise to buy/sell the underlying asset on or before the
expiry date. Whereas a European warrant allows exercise on the expiry date only.
8
Settlement
A warrant can be settled by cash or physical delivery upon exercise.
TRADING ARRANGEMENT
Derivative warrants are traded on The Stock Exchange of Hong Kong Limited during trading hours in board lot multiples settled on T+2
(T being the transaction day).
RISK DISCLOSURE
Derivative warrant trading involves high risks and is not suitable for every investor. Investor should understand and consider the
following risks before trading in derivative warrants.
1
Issuer risk
Derivative warrant holders are unsecured creditors of the issuer and they have no preferential
claim to any assets an issuer may hold.
2
Gearing risk
Although derivative warrants often cost less than the price of the underlying assets, a derivative
warrant may change in value to a much greater extent than the underlying assets. Although
potential return on derivative warrants may be higher than that on the underlying assets, it
should be noted that in the worst case the value of derivative warrants may fall to zero and
holders may lose their entire investment amount.
3
Limited life
Unlike stocks, derivative warrants have an expiry date and therefore a limited life. Unless the
derivative warrants are in-the-money, they become worthless at expiration.
100
40
4
Time decay
So long as other factors remain unchanged, the value of derivative warrants will decrease over
time. Therefore, derivative warrants should never be viewed as products that are bought and
held as long term investments.
5
Market forces
In addition to the basic factors that determine the theoretical price of a derivative warrant,
derivative warrant prices are also affected by the demand for and supply of the derivative
warrants. This is particularly the case when a derivative warrant issue is almost sold out and
when there are further issues of an existing derivative warrant.
6
Turnover
High turnover should not be regarded as an indication that a derivative warrant’s price will go
up. The price of a derivative warrant is affected by a number of factors in addition to market
forces, such as the price of the underlying assets and its volatility, the time remaining to expiry,
interest rates and the expected dividend on the underlying assets.
7
Volatility
Other factors being equal an increase in the volatility of the underlying asset should lead to a
higher warrant price and a decrease in volatility lead to a lower derivative warrant price.
7.
CALLABLE BULL/BEAR CONTRACTS (CBBC)
CBBC track the performance of an underlying asset without requiring investors to pay the full price required to own the actual asset.
They are issued either as Bull or Bear contracts with a fixed expiry date, allowing investors to take bullish or bearish positions on the
underlying asset. CBBC are issued by a third party, usually an investment bank, independent of The Stock Exchange of Hong Kong
Limited and of the underlying asset.
CBBC are issued with the condition that during their lifespan they will be called by the issuers when the price of the underlying asset
reaches a level (known as the “Call Price”) specified in the listing docu
ment. If the Call Price is reached before expiry, the CBBC will
expire early and the trading of that CBBC will be terminated immediately. The specified expiry date from the listing document will no
longer be valid.
CBBC may be issued with a lifespan of three months to five years and are settled in cash only.
CHARACTERISTICS
1
Price movement of CBBC
tends to track the price of
underlying asset closely
The price changes of CBBC tend to follow the price change of the underlying asset (i.e. delta
close to one). Thus, if their underlying asset increases in value, a Bull CBBC with entitlement
ratio of 1 to 1 generally increases in value approximately the same amount whereas a Bear
CBBC with entitlement ratio of 1 to 1 generally decreases in value by approximately the same
amount. However, when the underlying asset of a CBBC is trading at a price close to its Call
Price, the change in the value of CBBC may be more volatile and disproportionate with the
change in the value of the underlying asset.
2
Call Price and a Mandatory
Call Feature
For Bull contracts, the Call Price must be equal to or above the Strike Price. For Bear contracts,
the Call Price must be equal to or below the Strike Price. If the underlying asset’s price reaches
the Call Price at any time prior to expiry, the CBBC will expire early. The issuer must call the
CBBC and trading of the CBBC will be terminated immediately. Such an event is referred to as
a Mandatory Call Event (“MCE”).
3
Valuation at expiry
CBBC can be held until maturity (if not called before expiry) or sold on The Stock Exchange of
Hong Kong Limited before expiry.
In the case of a Bull contract, the cash settlement amount at normal expiry will be the positive
amount of the settlement price of the underlying asset as determined on the valuation day less
the Strike Price.
In the case of a Bear contract, the cash settlement amount at normal expiry will be the positive
amount of the Strike Price less the settlement price of the underlying asset on valuation day.
There will be no cash settlement if the amounts calculated under (a) and (b) are negative.
RISK DISCLOSURE
1
Mandatory call
A CBBC will be called by the issuer when the price of the underlying asset hits the Call Price
and that CBBC will expire early. Payoff for Category N CBBC will be zero when they expire
early. When Category R CBBC expire early the holder may receive a small amount of Residual
Value payment, but there may be no Residual Value payment in adverse situations. Once the
CBBC is called, even though the underlying asset may bounce back in the right direction, the
CBBC which has been called will not be revived and investors will not be able to profit from the
bounce-back.
2
Gearing effects
Since a CBBC is a leveraged product, the percentage change in the price of a CBBC is greater
compared with that of the underlying asset. Investors may suffer higher losses in percentage
terms if they expect the price of the underlying asset to move one way but it moves in the
opposite direction.
3
Limited life
A CBBC has a limited lifespan of three months to five years. The life of a CBBC may be shorter
if called before the fixed expiry date. The price of a CBBC fluctuates with the changes in the
price of the underlying asset from time to time and may become worthless after expiry and in
certain cases, even before the normal expiry if the CBBC has been called early.
4
Liquidity
Although CBBC have liquidity providers, there is no guarantee that investors will be able to
buy/sell CBBC at their target prices any time they wish.
5
Funding Costs
The issue price of a CBBC includes funding costs charged upfront for the entire period from
launch to normal expiry. When a CBBC is called, the CBBC holders (investors) will lose the
funding cost for the remaining period even though the actual period of funding for the CBBC
turns out to be shorter. Further, the funding costs of a CBBC after launch may vary during its
life.
6
Movement with underlying
Although the price changes of a CBBC tends to follow closely the price changes of its
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