CBBC

A Callable Bull/Bear Contract (CBBC) is an instrument that tracks the performance of an underlying asset. The trading price of a CBBC tends to mirror the movement in the price of its underlying asset. Like warrants, CBBCs can be issued over a range of eligible underlying assets prescribed by the Exchange from time to time.

A CBBC can be issued as a bull contract or a bear contract:

(a) A "bull" CBBC may be invested in by an investor who holds a view that the price of the underlying asset will increase during the term of the CBBC.

(b) A "bear" CBBC may be invested in by an investor who holds a view that the price of the underlying asset will decrease during the term of the CBBC.

Characteristics of CBBC

You can trade CBBCs on the Exchange during trading hours, similar to trading stocks.

The higher the leverage, the greater the potential reward and risk.

CBBC will be called by the issuer and expire early when the price or level of the underlying asset hits its call price or level.

Product Information Statement

A CBBC is an instrument that tracks the performance of an underlying asset. The trading price of a CBBC tends to mirror the movement in the price of its underlying asset. Like warrants, CBBCs can be issued over a range of eligible underlying assets prescribed by the Exchange from time to time. However the scope of eligible underlying assets is currently more restrictive for CBBCs than it is for warrants.

A CBBC can be issued as a bull contract or a bear contract:

(a) A "bull" CBBC may be invested in by an investor who holds a view that the price of the underlying asset will increase during the term of the CBBC.

(b) A "bear" CBBC may be invested in by an investor who holds a view that the price of the underlying asset will decrease during the term of the CBBC.

There are 2 types of CBBC

Category R CBBC refers to a CBBC that has a "residual value" after the mandatory call event. When a Category R CBBC is called, its intrinsic value is generally above HKD0, and therefore it may have residual value to be distributed to its holders.

Category N CBBC refers to a CBBC that has "no residual value" after the mandatory call event, its call price and the exercise price are set at the same level.

Underlying Asset

CBBCs can be issued over a range of eligible underlying assets, such as Stocks, Stock Indices.

The Price of a CBBC

The price of a CBBC = intrinsic value + funding cost

Intrinsic value is the difference between the spot price of underlying asset and the exercise price of CBBC.

Intrinsic value of bull CBBC = spot price of underlying – exercise price of bull CBBC / conversion ratio

Intrinsic value of bear CBBC = exercise price of bear CBBC – spot price of underlying / conversion ratio

Funding Cost

Funding costs vary by issuer depending on their respective borrowing rates used which include the Hong Kong Interbank Offered Rate (HIBOR), the London Interbank Offered Rate (LIBOR) and overnight interest rate. Funding costs tend to reduce over time as does the price of a CBBC. When a CBBC is called back or when it matures, its funding cost will be zero.

Premium

The premium of a CBBC is regarded as the financial cost of an issuer. Generally, CBBC with higher premium is considered as more expensive.

Call Price

When the underlying price approaches the call price, the actual fluctuation of the CBBC price may be more than in theory due to market demand and supply factors and the increased difficulties for an issuer to hedge its position. If the underlying price touches the call price of a CBBC, the CBBC will be called back by the issuer. Trading of the CBBC will stop immediately and will not resume regardless further fluctuation in the underlying price. Settlement will take place at a later date.

Exercise Price

The exercise price is used to calculate the settlement price of a CBBC. When a category R CBBC is called back by the issuer, the holder of the CBBC can theoretically get back the residual value — the difference between the exercise price and the settlement price of the CBBC. Assuming other factors remain unchanged, in theory, when the exercise price is closer to the call price, the higher the effective gearing of a CBBC and vice versa. However, if a CBBC is called back mandatorily before maturity, the settlement value may be lower.

Market Interest Rate

Theoretically, when market interest rates go up, the bull price goes up and the bear price goes down.

The Difference between Actual Dividend and Issuer's Expectation

If the underlying asset pays dividend more or earlier than the issuer expected, the bull CBBC price may decrease and the bear CBBC price may increase.*

On the other hand, if the underlying asset distributes dividend less or later than the issuer expected, the bull CBBC price may increase and the bear CBBC price may decrease.

* Assuming other factors remain unchanged, please refer to the relevant listing documents for more information.

Contract Multiplier

CBBC price x board lot unit

Last Trading Day

Each CBBC is assigned a unique expiry date at launch. If a CBBC is called before expiry, the day on which the CBBC is called (the date on which an MCE occurs) is the last trading day of that CBBC. When an MCE occurs, the CBBC will be called by the issuer and trading of that CBBC will terminate at once, hence investors cannot sell the CBBC. The last trading day will be one trading day before the expiry day of the CBBC if it has not been called.

Expiry Day

The date on which a CBBC will expire and become worthless, subject to the occurrence of a mandatory call event.

Final Settlement Price

For CBBCs issued on a local stock traded on the Exchange, the settlement price at expiry is calculated based on the closing price of the underlying stock on the trading day before expiry of the CBBCs.

For CBBCs issued on a local index (such as HSI or HSCEI), the settlement price at expiry is based on the final settlement price of the corresponding index futures contract of the same expiry month as the CBBCs traded on the Hong Kong Futures Exchange on the second last business day of the contract month.

For more information about the settlement price at expiry for CBBCs on other underlying assets, please refer to the relevant listing documents.

Settlement Method

A CBBC can be settled by cash delivery upon exercise.

It is available for Professional Investor or Non- Professional Investor.

Non-collateralisation

CBBCs are not secured by any asset of the issuer or the guarantor (if any) or supported by any other collateral.

Credit Risk

Holders of CBBCs are unsecured creditors of the issuer and the guarantor (if any) and they have no preferential claim to any assets that an issuer or a guarantor (if any) may hold. You can access information about issuers' credit ratings on the HKEX's website.

Gearing Risk

Although warrants often cost less than the underlying assets, a warrant may change in value to a much greater extent than the underlying assets. In the worst case the value of CBBCs may fall to zero and holders may lose their entire investment amount.

Limited Life

CBBCs have an expiry date and therefore a limited life. Unless the CBBCs are in-the-money, they become worthless when they expire.

Time Decay

So long as other factors remain unchanged, the funding costs of CBBCs will decrease over time and will become zero upon maturity. Therefore, without a strong view of the underlying assets, CBBCs should be viewed as a relatively short term investment product in comparison with an investment in the underlying assets.

Market Forces

In addition to the basic factors that determine the theoretical price of a CBBC, prices of CBBCs are also affected by the demand for and supply of the CBBCs. This is particularly the case when CBBCs of a series are almost sold out and when there are further issues of a series of CBBC.

Turnover

High turnover should not be regarded as an indication that the price of a warrant will go up. The price of a warrant is affected by a number of factors in addition to market forces, such as the price of the underlying assets and their volatility, the time remaining to expiry, interest rates and the expected dividend on the underlying assets.

Possibly Limited Secondary Market

The liquidity provider may be the only market participant for a particular CBBC. The more limited the secondary market, the more difficult it may be for you to realise the value in the CBBC before expiry.

Operational and Technical Problems Affecting Liquidity Services

The liquidity provider may not be able to provide liquidity when there are operational and technical problems hindering its ability to do so. Even if the liquidity provider is able to provide liquidity in such circumstances, its performance on liquidity provision may be adversely affected.

Corporate Action of the Underlying Stocks

Corporate actions affect the value of the underlying stocks which in turn affect the value of the CBBCs. Adjustments may or may not be made to the terms of the CBBCs (such as entitlement ratio, exercise price, etc.) depending on the terms and conditions set out in the listing documents. Where adjustments are to be made, the adjustments will only become effective (the "Effective Date") when all necessary parameters can be determined.

Mandatory Call Event

Since a CBBC will be called by the issuer and expire early due to the occurrence of a mandatory call event when the price or level of the underlying asset hits its call price or level.

Additional Risks in Trading CBBCs with Overseas Underlying Assets
Exchange Rate Risk

Investors trading in CBBCs with overseas underlying assets may be exposed to an exchange rate risk during the term of the CBBCs when the price and cash settlement amount of such CBBCs are converted from a foreign currency in which the overseas underlying asset is priced into Hong Kong dollars.

Different Trading Hours

If trading in the overseas underlying assets is suspended on the underlying exchange, trading in the CBBCs will be suspended for a similar period. The trading hours of the underlying exchange (based on Hong Kong time) are likely to be different from the trading hours of the Exchange. Trading in the overseas underlying assets on the underlying exchange may be suspended during non-trading hours of the Exchange. Such suspension may be lifted, and trading may resume, during non-trading hours of the Exchange.

If trading in the overseas underlying assets on the underlying exchange is suspended, trading in the CBBCs on the Exchange will not be automatically suspended – in such case, the market price of the CBBCs may fluctuate significantly until trading in the CBBCs on the Exchange is suspended. If trading in the overseas underlying assets on the underlying exchange resumes following a suspension, trading in the CBBCs on the Exchange will not be resumed automatically and you will not be able to trade the CBBCs until trading in the CBBCs on the Exchange is resumed.

In addition, the trading price of the overseas underlying assets is calculated and published during the trading hours of the underlying exchange. You should be aware of the time zone difference between Hong Kong and the location in which the underlying exchange is situated in assessing the trading price of the overseas underlying assets. The trading prices of the overseas underlying assets may be volatile in response to the movements on the underlying exchange during which the Exchange is not open for trading of the CBBCs.

Less Public Information about the Overseas Underlying Assets and Such Information May Not Be Available in English or Chinese

There may be less publicly available information about the overseas underlying assets than those about Hong Kong underlying assets and some of that information may not be available in English or Chinese. If you do not understand any such information, you should obtain independent advice.

Political and Economic Risk

The trading prices of the overseas underlying assets may be subject to political, economic, financial and social factors that apply in those geographical regions, which may differ favourably or unfavourably from those factors that apply to Hong Kong. Moreover, foreign economies may also differ favourably or unfavourably from the Hong Kong economy in important respects such as growth of gross national product, rate of inflation, capital reinvestment, resources and self-sufficiency.

Mandatory Call Event for CBBCs outside Trading Hours

CBBCs linked to overseas underlying assets may be called outside the Exchange's trading hours. In such cases, the CBBCs will be suspended from trading on the Exchange in the next trading session or soon after the issuer has notified the Exchange about the occurrence of the mandatory call event. There will be no automatic suspension of the CBBCs by the trading systems of the HKEX’s securities market upon the occurrence of a mandatory call event. For Category R CBBCs, valuation of the residual value will be determined on the valuation day according to the terms and conditions as set out in the listing documents.

The value of CBBC may fall to zero and holders may lose their entire investment amount.

The higher the leverage, the greater the potential reward and risk. Subject to the factors affect CBBC price.

This is non - principal protected product.

CBBCs have a mandatory call feature measured by reference to a call price or level. If the spot price or level of the underlying asset is at or below (in respect of a series of bull CBBCs) or at or above (in respect of a series of bear CBBCs) the call price or level at any time during an observation period (including pre-opening session, continuous trading session and closing auction session), a mandatory call event is triggered, following which the CBBC is terminated early and the trading of that CBBC ceases immediately.

CBBCs are traded on the Exchange during trading hours in board lot multiples Investors may contact their brokers for placing orders.

The product is a complex product and investors should exercise caution in relation to the product.

In the worst case scenario (e.g. insolvency of issuer), the investor may get nothing back and the potential maximum loss could be 100% of investment amount.

If the offering documents provided by the issuer have not been reviewed by the SFC; investors are advised to exercise caution in relation to the offer.

SFC authorization does not imply official recommendation or endorsement of a product nor does it guarantee the commercial merits of a product or its performance.

The product is available for professional investors / non- professional investors.

The above information is provided for reference only. The information may not contain all material terms, in and of itself should not form the basis for any investment decision. Potential investors must seek their own independent advice in relation to any legal, tax, accounting or regulatory issues relating to the matters discussed herein, By accepting receipt of this information the reader will be deemed to represent that they posses, either individually or through their advisor, sufficient investment expertise to understand the risks involved in any purchase or sale of any investment products, referenced herein, and investor has made its own independent judgment. The value, price or income from investments may fall as well as rise.