Frequently Asked Questions 
31/08/2009 
 

Chapter 6 Products - Securities Market

6.7

Listed Equity Linked Instruments   

 

6.7.1    

What are Equity Linked Instruments (ELI)?

ELI are structured products which can be listed on the Exchange 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.

When an investor purchases an ELI, he is indirectly writing an option on the underlying shares.  If the market moves as the investor expected, he earns a fixed return from his investment which is derived mainly from the premium received on writing the option.  If the market moves against the investor's view, he may lose some or all of his investment or receive shares worth less than the initial investment.

 

6.7.2

What are the features of ELI?     

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 underlying assets of ELI can be any single scheduled equity instrument (where the public float should be at least $4 billion) or one of the Hang Seng Index constituent stocks.  The issue size is at least $10 million without a cap, and the issue price should be at least $0.25 each.

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.

 

6.7.3

What are the obligations of liquidity providers (LP)?

The obligations of LP for an ELI are specified in the listing document, including, among other things: (1) circumstances under which liquidity will and will not be provided; (2) the minimum quantity of ELI (at least 10 board lots) for which liquidity is provided; and (3) the maximum bid/ask spread per quote.

 

6.7.4

How many types of ELI are there?

To match their directional view on the underlying securities, investors may choose from three different types of ELI listed on the Stock Exchange: Bull, Bear and Range.  Other types of ELI may be traded on the Exchange in future.

Bull ELI

Investors taking a bullish view on the underlying security may consider a Bull ELI, which offers two possible forms of payback on expiry:

  • If on the expiry date the closing price of the underlying security is AT or ABOVE the strike price, investors will receive a cash payment at the total par value of the ELI (total investment plus interest).
  • If on the expiry date the closing price of the underlying security is BELOW the strike price, investors will receive a predetermined quantity of the underlying security at the strike price (total par value/strike price).  If the ELI is cash settled in lieu of share delivery, investors will receive a cash payment based on the closing price of the underlying security.

Bear ELI

Investors who are bearish on the underlying security may consider a Bear ELI, which offers two possible forms of payback on expiry:

  • If on the expiry date the closing price of the underlying security is BELOW the strike price, investors will receive a cash payment at the total par value of the ELI (total investment plus interest).
  • If on the expiry date the closing price of the underlying security is AT or ABOVE the strike price, investors will receive a cash payment from the issuer according to the following formula:

Par value per board lot of the ELI - [number of underlying shares at strike price per board lot of ELI x (closing price - strike price)] where the number of underlying shares at strike price equals the total par value divided by strike price. 

The cash payment will never be negative and the amount will be zero if the closing price is double or more than double the strike price.

Range ELI

Investors with a neutral view on the underlying security may consider a Range ELI, which offers three possible forms of payback on expiry:     

  • If on the expiry date the closing price of the underlying security is WITHIN THE RANGE of the two strike prices (AT or ABOVE the lower strike price and BELOW the upper strike price), investors will receive a cash payment at the total par value of the ELI (ie total investment plus interest).
  • If on the expiry date the closing price of the underlying security is AT or ABOVE the upper strike price, investors will receive a cash payment from the issuer according to the following formula:

Par value per board lot of the ELI - [number of underlying shares at lower strike price per board lot of ELI x (closing price - upper strike price)] where the number of underlying shares at lower strike price is equal to the total par value divided by lower strike price. 

The cash payment will never be negative and the amount will be zero if the closing price equals or exceeds the sum of the lower and upper strike prices.

  • If on the expiry date the closing price of the underlying security is BELOW the lower strike price, investors will receive a predetermined quantity of the underlying security at the lower strike price (total par value of ELI/lower strike price).  If the ELI is cash settled in lieu of share delivery, investors will receive a cash payment based on the closing price of the underlying security.

Investors should contact their brokers or refer to the listing documents for the exact payback.

 

6.7.5

What should investors note when investing in ELI?

Investors should pay attention to the points below.

  • 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.
  • 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.
  • 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. 
  • 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.
  • Potential yield - Investors should consult their brokers on fees and charges related to the purchase and sale of ELI and payment / delivery at expiry.  The potential yields disseminated by HKEX have not taken fees and charges into consideration.

 

6.7.6

What happens at expiry?

When ELI are issued, issuers will indicate on the listing document and launch announcement whether the ELI is 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.

Depending on the type of ELI purchased and the closing price of the underlying security on the expiry date in relation to the strike price, ELI holders will receive a cash payment or physical shares on the payment date.  In case of physical settlement, the underlying securities will be delivered in board lots to ELI holders; any fractional shares and odd lots will be paid in cash, subject to rounding, at the value of those shares at the closing price on the expiry date.

 

6.7.7

How do investors obtain basic information on ELI?

Investors can get basic information on an ELI from its short name.  The first two letters represent the abbreviation of the issuer’s name and they are followed by the short name of the underlying security, the settlement method upon expiry (* for physical settlement and @ for cash settlement when closing price on expiry is below or lower strike price), ELI type (U for Bull, E for Bear and R for Range), the expiry year and the expiry month.

Investors can obtain information about the issuers and the terms and conditions of an ELI from the listing document.

 

6.7.8

How is the potential yield of an ELI calculated?

The potential (annual) yield of an ELI can be calculated by using the par value, the ask price and the number of outstanding days (which can be obtained from the Listed ELI Financial Information Pages on HKEX trading terminals or equivalent pages on vendors’ terminals) according to the following formula:

Par Value - Ask Price

 

365

 

 

--------------------------------

x

--------------------------------

x

100%

Ask Price

Number of Outstanding Days

where

No. of Outstanding Days is the number of days from the Settlement Date to the Payment Date of the ELI.

It should be noted that the potential yield calculated this way is on an annualised basis and does not take into account any transaction costs that may arise from trading and settling the ELI trade as well as settlement at expiry.

 

6.7.9

What are the similarities and differences in trading and settlement between ELI listed in the Exchange and stocks?

 

Stock

ELI

Trading

Traded on the Stock Exchange during trading hours

 

Same

Trading Unit

Stocks are traded in shares.  Purchase and sale of shares are in board lots or multiples except in the odd lot market.

ELI listed on the Exchange are traded in ELI units that are similar to shares for stocks.  Purchase and sale of ELI are in board lots or multiples.  No odd lots are allowed.

 

Transaction fees

Brokerage commission, transaction levy, trading fee, and, if applicable, stamp duty

 

Same

Accessibility

Any broker

Same

 

Settlement

T+2

Same

 

Underlying assets

Nil

Individual stock

 

Liquidity provider

Normally not available

Normally available

 

Last trading day

N/A

One  trading day before the expiry date

 

Duration

No expiry date

Usually from 28 days to  two years, as specified by the issuer

 

 

For further details, please refer to "Listed Equity Linked Instruments" of "Securities Products" under the "Products & Services" section of the HKEX website.