What Are CBBC?

CBBC are a type of structured product that tracks 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 HKEx and of the underlying asset.

In some overseas markets, listed products equivalent to CBBC are generally known as "knock out" or "stop loss" certificates and non-listed equivalents are generally known as Contracts For Difference (CFD).

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 document.  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 3 months to 5 years and are settled in cash only.  They are traded on the cash market of HKEx through the Third Generation Automatic Order Matching and Execution System (AMS/3) during the market's trading hours. 

Major Features of CBBC

1.     Price Movement of CBBC Tends to Track the Price of Underlying Asset Closely - The price of a CBBC tends to follow closely the price of the underlying asset (i.e. delta close to one).  Thus, if the underlying asset increases in value, a Bull CBBC with entitlement ratio of 1 to 1 generally increases in value by approximately the same amount whereas a Bear CBBC with entitlement ratio of 1 to 1 generally decreases in value by approximately the same amount.  This property offers investors a product which tracks the price movement of the underlying asset more closely and with higher price transparency than some other structured products.

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.     CBBC have a Call Price and a Mandatory Call Feature - For Bull contracts, the Call Price must be either 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.     Categories of CBBC - There are two categories of CBBC, namely Category N CBBC and Category R CBBC.

1. A Category N CBBC refers to a CBBC where its Call Price is equal to its Strike Price, and the CBBC holder will not receive any cash payment once the price of the underlying asset reaches or goes beyond the Call Price.
2. A Category R CBBC refers to a CBBC where its Call Price is different from its Strike Price, and the CBBC holder may receive a small amount of cash payment (called "Residual Value") upon the occurrence of an MCE but in the worst case, no residual value will be paid. (Please refer to point 5 on the determination of residual value) 

Comparing a Category N CBBC and a Category R CBBC with the same Strike Price, the Category R CBBC may be called at an earlier level than the Category N CBBC.

4.     Valuation at Expiry - CBBC can be held until maturity (if not called before expiry) or sold on the Stock Exchange (the Exchange) before expiry.

1. 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.
2. 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.

For CBBC with a Hong Kong stock as underlying, the settlement price of the CBBC will be the closing price of the underlying on the last trading day.  For CBBC with Hang Seng Index or Hang Seng China Enterprises Index as underlying, the settlement level of the CBBC will be the same index level for settling that expiring index future contract.  There will be no cash settlement if the amounts calculated under (i) and (ii) are negative.  For the settlement price of CBBC with overseas stocks, commodities or other indices as underlying, investors should refer to the details in the listing documents.

5.     Determination of Residual Value for Category R CBBC - When a Category R Bull contract is called, the residual value will be the positive amount of the settlement price as determined according to the terms in the listing document less the Strike Price.  The settlement price of a Bull contract must not be lower than the minimum trade price of the underlying asset after the MCE and up to the next trading session*.  Similarly, when a Category R Bear contract is called, the residual value will be the positive amount of the Strike Price less the settlement price as determined according to the terms in the listing document.  The settlement price of a Bear contract must not be higher than the maximum trade price of the underlying asset after the MCE and up to the next trading session.  For this purpose, pre-opening session and morning session are considered as one trading session.  But, in the adverse case where the settlement price is at or goes beyond the Strike Price, there may not be any residual value.
* unless the following session does not contain any continuous period of 1 hour during which trading in the stock is permitted on the Exchange, the MCE valuation period shall be extended to the subsequent trading session.  For CBBC issued on overseas underlying assets, the residual amount will be determined after the time of the MCE and up to a period as specified in the Listing Documents.

Eligible Underlying Assets for CBBC Issuance

Issuers can apply to issue CBBC on the following underlying assets:

1. Liquid Hong Kong stocks listed on the Exchange as selected by the Exchange and approved by the Securities and Futures Commission (SFC).  The list of the Hong Kong stocks eligible for CBBC issuance will be updated quarterly and displayed on CBBC Product Corner of HKEx's website;
2. Hong Kong stock indices such as Hang Seng Index and Hang Seng China Enterprises Index (i.e. H-shares Index);
3. Overseas stocks and overseas stock indices;
4. Currencies; and
5. Commodities

More underlying assets may be added in the future from time to time subject to consultation with the SFC.  Please refer to HKEx website for a current list of eligible underlying for CBBC issuance.