Products

Investors can subscribe for new shares electronically through one of the following channels:

1. The designated website of the White Form eIPO service provider appointed by the newly listed company (a newly listed company may appoint a designated service provider to provide White Form eIPO services);
   
   
2. Investors can contact their brokers or custodians to apply for new shares electronically via HKSCC’s EIPO Channel through the FINI system.
   

If an investor applies via the first channel, refund for surplus application monies are effected through bank transfers or by cheque. Please contact the relevant White Form eIPO service provider for information.

If an investor applies via the second channel, the broker or custodian will arrange refund to the investor’s designated bank account subject to the arrangement between them.

Stock Code

Stock Short Name

• With the RQFII quota granted to ETFs, RQFII A-share ETFs can achieve full replication or physical representative sampling by directly investing in the Mainland A-shares that replicate or represent the composition of the underlying A-share index. Thus RQFII A-share ETFs are physical ETFs.
• Other A-share ETFs currently listed and traded on the Exchange are synthetic ETFs which track the index through synthetic replication by investing in derivative instruments to replicate the underlying index performance, without physically holding the underlying securities.

In addition, RQFII A-share ETFs are also subject to the following key risks unique to this class of ETFs. Investors are also advised to read individual ETF prospectuses including the product key facts statement (Product KFS) in full to fully understand the risks of the individual RQFII A-share ETF.

A derivative warrant is an instrument that gives the holder a right – but not the obligation - to “buy” or “sell” an underlying asset at a pre-set price (called the “exercise price”) on or before the expiry date. Derivative warrants can be issued over a range of assets, including but not limited to stocks, exchanged traded funds, stock indices, currencies and commodities or a basket of assets. The list of eligible stocks for warrants over single stock is posted on the HKEX’s website. However, investing in a derivative warrant does not give you any rights in or to the underlying asset. Currently, all derivative warrants are cash settled when exercised on expiry. 

There are two types of derivative warrants: 

(a) A “call” warrant may be invested in by an investor who believes that the price of the underlying asset will increase during the term of the derivative warrants.

(b) A “put” warrant may be invested in by an investor who believes that the price of the underlying asset will decrease during the term of the derivative warrants. 

Typically, derivative warrants in Hong Kong are issued with a life span of six months to two years, but are usually traded by investors before expiry. Derivative warrants magnify your investment through leverage. This carries significant opportunities as well as significant risks. Derivative warrants usually cost a fraction of the price of the underlying asset and may provide a leveraged return, but such leverage could also magnify your losses. 

Derivative warrant is a special form of option in which an investor can only take a long position in the derivative warrant, just like option buyers. This means you can only take a long position in a call or a put warrant by buying such derivative warrant and close out such long position previously established by selling such derivative warrant – that is, you cannot short sell such derivative warrant. Your maximum loss will therefore be limited to the amount you pay for the derivative warrant (plus any transaction costs, such as broker fees associated with your investment).

This depends on the type of warrant you buy (call versus put). The following examples deal with either a call or put warrant linked to a local stock. 

(a) Call warrant - At the expiry of a call warrant over a local stock, if the 5-day average closing price of the underlying stock before the expiry date is: 

i. higher than the warrant's exercise price, the warrant is "in-the-money" and will be exercised automatically at expiry. In that case, you will receive a cash payment calculated by reference to the positive difference between that 5-day average closing price and the exercise price of the call warrant, adjusted by the entitlement ratio; or 

ii. equal to or lower than its exercise price, the warrant is “at-the-money” or “out-of-the money”, respectively, and will become worthless.

(b) Put warrant - At the expiry of a put warrant over a local stock, if the 5-day average closing price of the underlying stock before the expiry date is:

i. lower than its exercise price, the warrant is "in-the-money" and will be exercised automatically at expiry. In that case, you will receive a cash payment calculated by reference to the positive difference between the exercise price and that 5-day average closing price, adjusted by the entitlement ratio; or 

ii. equal to or higher than its exercise price, the warrant is “at-the-money” or “out-of-the money”, respectively, and will become worthless.

There are various types of warrants in the market.  Exotic warrants carry exotic features and their terms may be more complicated than derivative warrants.  An exotic warrant is usually identified with an “X” in its English stock short name.  For more details, investors should refer to the listing documents and seek independent professional advice.

The following table describes the key differences between derivative warrants, inline warrants and CBBCs.

Investing in derivative warrants is not suitable for everyone. Derivative warrants involve a high degree of risk and you must be comfortable with that risk before investing. The relevant listing documents disclose the key risks applicable to the relevant derivative warrants. You must consider and understand those risks. You must also be able to assume the risks, which includes being financially able to bear the potential losses in a “worst case” scenario. 

Generally speaking, the key risks include the following:

(a) Non-collateralisation - Derivative warrants are not secured by any asset of the issuer or the guarantor (if any) or supported by any other collateral. 

(b) Credit risk - Holders of derivative warrants 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. When you purchase derivative warrants, you are relying upon the creditworthiness of the issuer and/or a guarantor (if any).

(c) Gearing risk - Although these products often cost less than the underlying assets, they may change in value to a much greater extent than the underlying assets. Although the potential return on such products may be higher than that on the underlying assets, in the worst case the value of these products may fall to zero and holders may lose their entire investment amount.

(d) Limited life - Unlike stocks, derivative warrants have an expiry date and therefore a limited life.

(e) Time value - So long as other factors remain unchanged, the time value of derivative warrants will decrease over time and will become zero upon maturity. Therefore, without a strong view of the underlying assets, derivative warrants should be viewed as a relatively short-term investment product in comparison with an investment in the underlying assets.

(f) Market forces - In addition to the basic factors that determine the theoretical price of a derivative warrant, prices of derivative warrants are also affected by the demand for and supply of the derivative warrants. This is particularly the case when the existing issuance of a single series of derivative warrants are almost sold out and when there are further issues in that single series of derivative warrants. 

(g) Turnover ‐ High turnover should not be regarded as an indication that the price of a derivative warrant 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 their volatility, the time remaining to expiry, interest rates and the expected dividend on the underlying assets.

(h) Possibly limited secondary market - The liquidity provider may be the only market participant for a particular derivative warrant. The more limited the secondary market, the more difficult it may be for you to realise the value in the derivative warrant before expiry.

(i) 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. For example: 

i. the spread between bid and ask prices quoted may be significantly wider than its normal standard;
ii. the size for which liquidity will be provided by the liquidity provider may be significantly smaller than its normal standard; and
iii. the liquidity provider’s response time for a quote may be significantly longer than its normal standard.

(j) Corporate action of the underlying stocks - Corporate actions affect the value of the underlying stocks which in turn affect the value of the derivative warrants. Adjustments may or may not be made to the terms of the derivative warrants (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.

The prices of the derivative warrants may be volatile from the ex-entitlement date of the underlying stocks until the Effective Date. You should exercise particular caution in trading those derivative warrants during that period. In addition, no adjustment will be made to those derivative warrants that expire within that period.

You should read carefully the risk disclosure in the relevant listing documents of the derivative warrants before investing in such products.

The issuer’s existing derivative warrants are still valid and you can continue to trade them through the Exchange trading system. The issuer must publish an announcement regarding the credit rating downgrade and continue to provide liquidity for its existing derivative warrants and perform its settlement obligations upon expiry.

However, when an issuer no longer meets the eligibility requirements in the Listing Rules, the issuer will not be allowed to launch new issues or further issues.  It must apply for the withdrawal of derivative warrants launched but not yet listed and all derivative warrants with no outstanding positions held by the public.

You should be cautious that prices of derivative warrants issued by the affected issuer may be affected by its or its guarantor’s credit downgrade. For the avoidance of doubt, where the issuer or the guarantor relies on the credit rating of their respective holding company for satisfying the eligibility requirements under the Listing Rules, such credit rating is for investors’ reference only, and investors shall have no recourse against the relevant holding company under the terms of the derivative warrants.

You can access information about the credit ratings of the issuers, their guarantors (if any) or their respective holding companies (where such credit rating is relied upon for satisfying the eligibility requirements in the Listing Rules) on the HKEX’s website.

No, derivative warrants are not eligible for trading in closing auction session and their market closing time is 4:00 p.m.

However, some underlying securities are eligible for trading in closing auction session and the closing level of the relevant index will be ascertained after 4:10 p.m. (or 12:10 p.m. in the case of half day trading) (“eligible underlying asset”). As a result, the market closing time for a derivative warrant and its underlying asset can be different. In this case, the price or level of eligible underlying assets may move in closing auction session while investors cannot buy or sell related  derivative warrant. 

Since the affected underlying security or index is not suspended and continues to trade within a specified price limit during the 5-minute cooling off period after the triggering of the VCM, the derivative warrant can still be traded without any price limit. You can access information about VCM on the HKEX’s website.

However, investors should note that where events surrounding VCM cause abnormal trading behavior of the underlying leading to hedging difficulties, the liquidity provision obligations of issuers could be exempted. In this case, there may be a temporary absence of price quotes, a reduction in quote size, or a wider bid-ask spread during the 5-minute cooling-off period.

VCM is a dynamic price limit model applied at the individual instrument level. Where the price deviates more than a predefined percentage within a specific time frame, the instrument will trade within band during a 5-minute cooling off period. This provides a window allowing market participants to reassess their strategies, if necessary. It also helps to re-establish an orderly market during volatile market situations.

If a cash settlement amount is payable by an issuer at expiry but the issuer defaults in its payment obligation, you can claim as an unsecured creditor against the issuer, and if the product is guaranteed, also against the guarantor.

None of the  derivative warrants currently listed on the Exchange is collateralised. This means that there is no specific security or asset to back up the obligations of the issuer or guarantor. If the issuer or its guarantor (if any) becomes insolvent or default, you may not recover all or even part of the amount due (if any).

(a) Exchange rate risk 

Derivative warrants linked to overseas underlying assets that are denominated, traded and settled in Chinese Renminbi (RMB), Hong Kong dollars (HKD) or US dollars (USD) are eligible for issuance.

Investors trading HKD-denominated derivative warrants with overseas underlying assets may be exposed to an exchange rate risk during the term of the derivative warrants when the price and cash settlement amount of such derivative warrants are converted from a foreign currency in which the overseas underlying asset is priced into HKD. Additionally, investors trading in foreign currency denominated (e.g. USD-denominated) derivative warrants with overseas underlying assets corresponding to derivative warrants trading currency may still be exposed to an exchange rate risk if their primary funding income is in a different currency. 

(b) Different trading hours between the underlying exchange on which the overseas underlying assets are traded and the Exchange 

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

(c) 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. 

(d) Foreign tax implications

Investors trading in derivative warrants with overseas underlying assets may be exposed to various foreign tax implications that could adversely affect their overall investment returns. The foreign tax rules may be intricate, and their applicability can vary based on individual circumstances. You should refer to the listing documents to understand the details of foreign tax implications (if any) and/or consult your tax advisor before investing in such products.

(e) 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.

i. Differences in spread
Foreign currency-denominated derivative warrants may expose investors to a wider bid-ask spread (in terms of monetary value based on the relevant exchange rate), resulting in higher transaction costs.

Below is an example illustrating the differences in one tick of bid-ask spread between HKD-denominated and USD-denominated derivative warrants.

ii. Differences in minimum trading price and liquidity
Derivative warrants are not tradable on the Exchange if the trading price is below 0.01 unit of trading currency. The minimum trading price of derivative warrants denominated in foreign currency (in terms of monetary value based on the relevant exchange rate) may therefore be different from that of derivative warrants denominated in HKD.

Below is an illustrative example:

In addition to the minimum trading price, liquidity providers are also not obliged to provide liquidity if the theoretical value of the derivative warrant is less than 0.01 unit of trading currency (see “Liquidity Provision Requirements – Quote request” of the Product Sheets). Consequently, liquidity in foreign currency denominated derivative warrants may be more limited than that of HKD-denominated derivative warrants. 

Below is an illustrative example:

Investors should be aware that trading activity may be concentrated among a small number of participants. In such cases, a high proportion of turnover may be driven by the trading strategies of a few investors rather than broad market demand. If these investors change or withdraw their positions, liquidity may decline rapidly, potentially making it more difficult to trade the product at expected prices.

Investors should refer to the List of Structured Products with High Trading Concentration which highlights derivative warrants where trading activity is concentrated among a small group of investors.

No, investors should not rely solely on turnover when selecting derivative warrants. In assessing liquidity, investors should also consider other factors, including but not limited to the bid‑ask spread, the quote size provided by liquidity providers and the duration for which quotes are available.

You can learn some basic features of a derivative warrants from its stock short name. Below are the naming conventions for reference.

You should note that the above naming conventions are applicable in most cases but not exclusive for all circumstances. The stock short names of derivative warrants indicate some basic information only. You should refer to the relevant listing documents of the product and consult your brokers or investment advisers before trading. Listing documents can be found at the HKEXnews website.

Investors can start to buy derivative warrants on the Exchange from the first listing day of the products. To initiate the listing process,  derivative warrants issuers submit product term sheets to the Exchange for approval on the launch day (“Launch Date”). Commencing from 13 July 2020, the listing cycle has been shortened from five trading days to three trading days following the product launch.

For example:

The listing date will be postponed due to an exceptional situation causing the stock market to (i) close for the entire day; or (ii) close prior to its regular hours on any of the two trading days between launch date and the scheduled listing date. No further notice or announcement will be published in respect of such postponement. Below is an illustrative example in respect of a product launched on Monday with a listing date on Thursday:

Trading of derivative warrants will remain available during typhoon signal number 8 or above or the black rainstorm warning issued by the Hong Kong Observatory, or ‘extreme conditions’ issued by the Hong Kong Special Administrative Region Government.  In addition, structured products issuers will provide active quotes and quote requests for structured products as usual.

However, the Exchange will assess specific circumstances in consultation with the Government and the Securities and Futures Commission to decide whether there is an exceptional situation that warrants the markets, including structured products market, to be closed.  In this case, the Exchange will make relevant announcements as required to provide the market with advanced notice and updates.

Yes. Similar to the trading of shares, transaction fees currently include:

(a)  brokerage commission and fees charged by the relevant broker;

(b)  the transaction levies imposed by the SFC and the Accounting and Financial Reporting Council of Hong Kong; and

(c)  a trading fee charged by the Exchange.

No. Currently, all derivative warrants traded on the Exchange are cash settled and trading in such cash settled derivative warrants are not subject to any stamp duty.

No, trading of derivative warrants linked to the affected indices will be halted as soon as practicable after publication of a notice of such failure by Hang Seng Indexes Company on its website.  Where such notice is published within 15 minutes before the end of a continuous trading session, trading halt will take place in the next continuous trading session.

Trading of the derivative warrants will resume as soon as practicable (which may occur during a trading session) after publication of notice of recovery of normal index level dissemination by Hang Seng Indexes Company on its website.  Where such notice is published within 15 minutes before the end of a continuous trading session, trading resumption will take place in the next continuous trading session.

No, outstanding orders will not be automatically cancelled and will remain valid when trading is resumed on the same day.  Investors should contact their brokers before trading resumption if they wish to cancel their orders of the derivative warrants.

Investors without foreign currency accounts may not be able to buy or sell derivative warrants that are traded and settled in the relevant foreign currency. Investors should contact their brokers regarding trading and settlement of such products.

A liquid product has a tradable market with tight bid and ask prices and sufficient size, in which there are opportunities to buy and sell derivative warrants. The provision of liquidity is an important feature of derivative warrants because it allows investors to buy and sell derivative warrants that may otherwise be illiquid (that is, have insufficient supply or demand).

Most derivative warrants do not have public holdings on their first listing dates. Issuers may provide liquidity in respect of their products through a designated liquidity agent (called a “liquidity provider”). In Hong Kong, liquidity providers are commonly known as “market makers”.

Each issuer must appoint one liquidity provider, who must be an Exchange participant, for each of its products.

A liquidity provider provides quotations for a particular derivative warrant to support a tradable environment for that product. Such quotations take into account the prevailing market conditions affecting the underlying asset, such as hedging costs and liquidity, spread and volatility of the underlying. Liquidity providers provide liquidity by inputting orders into the trading system of the Exchange when they receive “quote requests”. They do so according to the committed service levels as set out in the relevant listing document. These standards typically include:

(a)  the maximum response time – i.e. the maximum time it will take to submit a pair of quotes after a request is received;

(b)  the maximum spread between the bid and ask prices;

(c)  the minimum quote size; 

(d)  the minimum holding time for the quotes; and

(e)  situations in which a quote will not be provided.

Under certain circumstances, liquidity providers are required to provide “active quotes” (that is, even where no request has been submitted by investors) by actively inputting orders into the Exchange’s trading system.

Each liquidity provider is currently identified by a 4-digit broker ID code of 95XX, 96XX or 97XX. The relevant listing documents of an issuer set out the exact obligations of its liquidity provider.

In circumstances where the outstanding quantity of a derivative warrant in the market increases, the liquidity provider may be less active in providing quotes for such derivative warrant. This is because the key role of a liquidity provider is to facilitate liquidity when there is limited or no market liquidity on the derivative warrant (such as when the products are newly listed on the Exchange with limited or no trading by market participants or investors) and to support a tradable environment for the  derivative warrant. If a derivative warrant is not eligible for active quotes due to the fact that there is more than 50% of its aggregate number outstanding in the market, then there may not be any active quote from the liquidity provider. You can find out the outstanding quantity of derivative warrant as of the previous trading day on the HKEX’s website.

Where the number of market participants for a particular product grows, the “market force” increases, and the product becomes less dependent on the liquidity provider as the sole source of liquidity. By implication, the role of the liquidity provider becomes less important when there is a higher number of particular derivative warrant outstanding in the market because this means there are more investors trading in the product, leading to a natural market.

No. Liquidity providers are not required to support prices of derivative warrants. In practice, like other market participants, a liquidity provider is free to buy and sell at any price.

Each series of derivative warrant will have only one liquidity provider appointed for such series.

You can obtain the liquidity provider’s name and contact details in two ways:

(a)  Visit the HKEX’s website: The designated HKEX’s website lists all the liquidity providers for all derivative warrants listed on the Exchange.

(b)  Check the relevant listing documents of the derivative warrant.

Simply contact the liquidity provider directly during trading hours on a trading day at its designated phone number. 

Through the liquidity provider, the issuer takes into account the prevailing market conditions affecting the underlying asset (e.g. hedging costs and liquidity, spread and volatility of the underlying) in the quotations provided to the market.

Not necessarily. Trading derivative warrants is similar to trading stocks listed on the Exchange. Any investor’s bid or ask price may be accepted and traded upon by other investors. You may also place orders just like trading in listed stocks. However, there may not be sufficient interest in trading such derivative warrants.

If the appointed liquidity provider is no longer an Exchange participant, it cannot continue to provide liquidity. The issuer must appoint another liquidity provider in its place.

The Exchange has set out the minimum service levels for liquidity provision in the Product Sheets. Issuers are required to specify the minimum service levels in their listing documents and ensure that they comply with the minimum service levels as published by the Exchange from time to time. Liquidity must be provided in respect of their derivative warrants in accordance with these minimum service levels.

Quote request is one of the methods in which liquidity is provided. It refers to the provision of liquidity by entering orders into the Exchange’s trading system in response to an investor’s request.

Quote request standards are the minimum service level for all derivative warrants applicable to all possible market conditions (regardless of the underlying assets), subject to certain exemptions set out in the listing documents.

The following table summarises the current service levels.

When a liquidity provider responds to your quote request, it must continue to hold a quotation (which effectively means it must continue to make available an offer to trade for investors) for at least 5 minutes after it is posted on the Exchange’s trading system upon your request. This means that you can accept the quote (that is, agree to trade on that basis) within such 5 minutes, if it has not lapsed (see below).

However, it is important to be aware that even within those 5 minutes, the liquidity provider may need to adjust the bid and ask prices if the prevailing market circumstances or the price of the underlying asset changes. If that occurs, the liquidity provider will “refresh its quote” – that is, an adjusted quote will be posted on the Exchange’s trading system.

More importantly, if a liquidity provider’s quote is being traded by another investor within the 5 minute holding time and thus the quotation lapses, you need to submit another quote request if you wish to have a quote from the liquidity provider to trade.

The liquidity provider is not obliged to provide quote upon request in the following key situations:

(a)  during a pre-opening session or a closing auction session (if applicable);

(b)  during the first 5 minutes of each morning session or the first 5 minutes after trading commences for the first time on a trading day;

(c)  when the derivative warrant or any underlying asset is suspended from trading for any reason;

(d)  when there is no derivative warrant available for market making activities;

(e)  if the theoretical value of the derivative warrant is less than 0.01 unit of trading currency (e.g. RMB$0.01, HK$0.01 or US$0.01);

(f)  where the underlying asset is an index, if there occurs or exists any suspension of, or limitation imposed on, trading of options or futures contracts relating to the index or if the index level is not calculated or published as scheduled for any reason;

(g)  when there are operational and technical problems beyond the control of the liquidity provider that hinder the liquidity provider’s ability to provide liquidity; or

(h)  if there is a “fast market” which materially affects the issuer’s hedging ability.

These circumstances are stated in the relevant listing documents. 

If trading in the underlying asset of a derivative warrant is suspended, trading in such  derivative warrant will also be suspended until trading in the underlying asset resumes. Investors must understand and take into account the risks arising from a loss of time value during a suspension period.

If trading in the underlying asset remains suspended at the expiry of the derivative warrants, the issuer will determine the settlement price in good faith and in a commercially reasonable manner. The cash settlement amount may be substantially less than the investor’s initial investment and may be zero.

“Fast market” refers to situations where the financial markets experience exceptional price movements and high volatility over relatively short periods of time, which can result in a sudden increase in risk and uncertainty, possibly affecting issuers’ hedging abilities.

For example, these situations may include:

(a)  financial uncertainty - exceptionally volatile market conditions linked to financial uncertainty, for example, the period following Lehman Brothers’ bankruptcy in September 2008 and the “flash crash” of 6 May 2010, when the Dow Jones Industrial Average suffered its worst intra-day point loss; and

(b)  underlying uncertainty - the occurrence of events causing the intraday market price of the underlying stock or index to experience significant fluctuations and/or a material reduction in liquidity of the underlying, for example, Japan’s earthquake on 11 March 2011 which resulted in a drastic fall in Nikkei index in the immediately following period and fluctuation in prices of the related derivative warrants.

These are just possible examples of fast market events. Depending on circumstances, some market events may trigger a VCM which may possibly result in a fast market.

It is generally more difficult to provide quotes momentarily when the price of the underlying asset is changing rapidly within a short period of time.

System difficulties and failures can affect the ability of a liquidity provider to provide quotes within the service level set out in relevant listing documents or provide any quote at all.

A system failure will be notified to the market as soon as practicable and shall be fixed within the shortest possible time.

The issuer will commit to Quote Request obligations during the day, including during the cooling off period, unless an exemption is obtained for Quote Request if there is a “fast market” which materially affects the issuer’s hedging ability.

Active quotes refer to the provision of liquidity where a liquidity provider actively inputs orders into the Exchange’s trading system.  Issuers will, without any need for a request from an investor, provide active quotes on derivative warrants as a service to investors. Active quotes save investors the inconvenience of having to request quotes and promote transparency.

For further information, please refer to “Liquidity Provision Requirements – Active quote” of the Product Sheets.

Generally speaking, yes. However, active quotes may not strictly be “continuous” because liquidity providers may need to pause the provision of active quotes for a reasonably short period of time to adjust quote parameters in response to market conditions or operational needs.

Roughly speaking, active quotes should be provided for at least 90% of the time of a trading day for derivative warrants that meet the criteria for active quotes and each pause should not exceed 10 minutes.

No. Unlike quote request, there is no minimum holding time for active quotes.

Issuers are only required to provide active quotes during the “Qualified Period”. This means the period when:

(a)  the active quote criteria set out in “Liquidity Provision Requirements” of the Product Sheets are met; and

(b)  none of the exemptions set out in “Liquidity Provision Requirements” of the Product Sheets applies.

Issuers are only committed to providing active quotes for derivative warrants that satisfy the following criteria (as measured on a real time basis):

(a)  an active underlying;

(b)  50% or less of their aggregate number outstanding in the market;

(c)  remaining time to expiry of at least 30 calendar days (for instance, if the expiry date of the warrant is 2 January 2013, active quote should be provided by the liquidity provider up to and inclusive of 3 December 2012) ;

(d)  moneyness between 20% in-the-money and 20% out-of-the money. “Moneyness” is derived by comparing the spot price or level of the underlying and the exercise price or strike level.

For further information, please refer to “Liquidity Provision Requirements – Active quote” of the Product Sheets.

A liquidity provider’s quotation for derivative warrants must be based on the actual market conditions. There are three key considerations for an issuer when deciding if active quotes can be provided:

(a)  if the derivative warrant is suitable in terms of demand and risk management;

(b)  if the market conditions affecting the underlying asset, such as its liquidity and the availability of hedging, permit active quotations; and

(c)  the prevailing market conditions affecting the derivative warrant itself, such as supply and demand patterns.

An “active underlying” means local indices (such as the Hang Seng Index and Hang Seng China Enterprises Index) and stocks listed on the Exchange which are eligible for CBBC issuance. These represent stocks with the highest turnover in the market.

CBBC eligible list is generally updated on a quarterly basis and posted on HKEX’s website.

Investors should pay attention to the change in the eligible underlying and the effective date of the eligible list. An underlying previously eligible for CBBC issuance and is removed from the current eligible list will no longer be an “active underlying”. As a result, derivative warrants with that particular underlying will cease to be subject to active quotes commencing on the effective date of the eligible list.

On the other hand, a newly added eligible underlying will become an “active underlying” and will be subject to active quotes commencing on the effective date of the eligible list (assuming the criteria for active quotes set out in “Liquidity Provision Requirements – Active quote” of the Product Sheets.

If you want to know whether a particular derivative warrant is eligible for active quotes at any particular time on a trading day, you may contact the issuer to ask if such derivative warrant meets the active quote criteria.

The list of derivative warrants which were eligible for active quotes based on market data as of close of trading on a trading day will be included in each issuer’s daily trading summary published on the next trading day. If you wish to use such market data as a general reference point, please note that such data of derivative warrants is historical.

Such information included in an issuer’s daily trading summary will only show historic data as of the close of trading on the previous trading day for general guidance only. You must not assume that such information is accurate, complete or up-to-date. You should not rely on such historic list as an indication that a derivative warrant listed in such daily trading summary actually meets the active quote criteria at any other time.

The time value of some derivative warrants, especially those at-the-money, may fall rapidly when they are close to expiry, making it more difficult to provide active quotes. Active quotes are therefore only able to be provided for a derivative warrant the value of which is not materially affected by the erosion of its time value.

“Moneyness” describes where the derivative warrant’s exercise price or strike level is in relation to the price or level of the underlying asset.

In the case of a call warrant, if the exercise price or strike level is:

(a)  above the price or level of the underlying asset, the warrant is said to be “out-of the-money”; or

(b)  below the price or level of the underlying asset, the warrant is said to be “in-the money”.

Numerically, moneyness of a call warrant is calculated by reference to the difference between the underlying asset’s price or level and the exercise price or strike level, divided by the underlying asset’s price or level, as illustrated in the table below.

In the case of a put warrant, if the exercise price or strike level is:

(a)  below the price or level of the underlying asset, the warrant is said to be “out-of- the-money”; or

(b)  above the price or level of the underlying asset, the warrant is said to be “in-the money”.

Similar to a call warrant, the moneyness of a put warrant is calculated by reference to the difference between the exercise price or strike level and the underlying asset’s price or level, divided by the underlying asset’s price or level, as illustrated in the table below.

Derivative warrants which are either deep in, or out, of-the-money generally have lower investor interest. Accordingly, issuers will only provide active quotes for derivative warrants with ±20% moneyness.

Active quotes may not be continuous because liquidity providers may need time to pause the provision of active quotes for a reasonably short period of time to adjust quote parameters in response to market conditions or operational needs.

Common causes of these short interruptions include the following:

(a)  a sudden or material change in the trading pattern of the derivative warrant, such as where a relatively inactive derivative warrant suddenly becomes active;

(b)  news is published that might have an impact on the market price of the underlying. For example, a change in forecast earnings or proposed dividends;

(c)  the underlying or the stock market experiences exceptional price movement or high volatility over a short period of time which materially affects the liquidity provider’s ability to source a hedge or unwind an existing hedge;

(d)  the underlying stock trades at a wider bid-ask spread than normal which causes the spread in the derivative warrant to exceed the maximum level specified in “Liquidity Provision Requirements – Active quote” of the Product Sheets;

(e)  the liquidity provider reasonably suspects any potential mispricing, system issue or error;

(f)  the liquidity provider reasonably suspects abnormal trading in respect of the underlying;

(g)  operational and technical problems such as computer network disconnection, loss of data feed, loss of connectivity with the Exchange or technical issues which arise in the issuer’s computer system; or

(h)  the liquidity provider will suffer, or expects to suffer, a financial risk due to frequency of trades and size of trades in relation to its derivative warrant.

An issuer may stop providing active quotes for a derivative warrant on a trading day if that derivative warrant no longer meets the active quote criteria stated in paragraph 4.2 of the Industry Principles. Individual issuers may voluntarily decide to keep providing active quotes, or may switch to providing liquidity on a quote request basis in accordance with the minimum liquidity service levels.

The bid and ask spreads for active quote are tighter than the maximum spreads prescribed for quote request. These tightened spreads are as follows:

Spreads for CBBCs are wider than those for derivative warrants because the price of CBBCs is generally more sensitive to movements in the value of the underlying asset, meaning that it is more costly for the issuer to hedge that underlying asset.

Investors should be aware that the standards for active quotes described in the Product Sheets are intended to apply to normal market conditions. Provision of active quotes may be affected where there are abnormal or exceptional market conditions.

Quotes provided by liquidity providers necessarily reflect the liquidity of the underlying securities or indices at any given time. If the liquidity of the underlying is impaired by conditions surrounding a VCM event, or by the VCM itself, the liquidity of the derivative warrant may be adversely affected in terms of quote size and spread relative to more normal market conditions.

During the 5-minute cooling off period after triggering of the VCM, where issuers’ hedging ability is materially affected due to the uncertainty in the underlying securities or index, it is possible that the minimum service level for active quotes will not be fulfilled, such as no bid-ask quotations, widening of bid-ask spread and reduction in quote size.

Similarly, after the 5-minute cooling off period, liquidity provision may still be affected if issuers continue to experience hedging difficulties. Under such circumstances, Liquidity Providers may not fulfil the minimum service level for active quotes as described in the Product Sheets.

However, issuers will use best efforts to meet quote request requirements.

VCM is a dynamic price limit model applied at the individual instrument level. Where the price deviates more than a predefined percentage within a specific time frame, the instrument will trade within band during a 5-minute cooling off period. This provides a window allowing market participants to reassess their strategies, if necessary. It also helps to re-establish an orderly market during volatile market situations.

Yes, unless the situation falls within any of the circumstances described in “Liquidity Provision Requirements – Quote request” of the Product Sheets.

Possibly, it depends on the circumstances.  The maximum response time for quote request has been capped at 10 minutes.  If the situation falls within any of the circumstances described in "Liquidity Provision Requirements – Quote request” of the Product Sheets, then the liquidity provider is not required to provide quotes within 10 minutes.

Not necessarily.  For example, the quote may have been taken by another market participant or one of the circumstances set out in "Liquidity Provision Requirements – Quote request” of the Product Sheets may have arisen.

The quote size offered by the liquidity provider is limited by the actual liquidity of the relevant hedging vehicle (e.g. the underlying asset or the listed or OTC options linked to the underlying asset).  In this case, the liquidity provider may not be able to buy all 1,000 board lots of your call warrants if the liquidity provider cannot unwind such hedging vehicle for all of the 1,000 board lots of your call warrants (for example, because the relevant hedging vehicle is illiquid).  The minimum quote size that a liquidity provider is committed to quote is 20 board lots. 

The last reported price (or the nominal price) is not necessarily the same as the warrant’s actual theoretical value. In this case, the most likely reason is that the actual theoretical value of the call warrant is less than 0.01 unit of trading currency. This is one of the circumstances in which a liquidity provider is not required to respond to any quote request.

No.  If an existing quote that complies with the minimum service levels is available, the liquidity provider will be deemed to have complied with its liquidity obligations.

The liquidity provider is only required to commit to the minimum service level. If your request for a bid-ask spread reduction is a tighter standard than the minimum service level, the liquidity provider is not obliged, and may not be able, to provide a tighter spread. It is because the bid-ask spread may change from time to time or even widen according to the prevailing market conditions affecting the underlying asset (such as hedging costs and liquidity, spread and volatility of the underlying).

If the liquidity provider has provided active quotes that comply with the spread requirement for active quotes as prescribed in the Product Sheets, it should not be necessary to make a separate quote request for such products as the bid and ask spreads for active quotes are tighter than the maximum spreads prescribed for quote request.

The liquidity provider is exempted from providing liquidity when there is a “fast market” which materially affects the issuer’s hedging ability. “Fast market” refers to situations where the financial markets experience exceptional price movements and high volatility over relatively short periods of time, which can result in a sudden increase in risk and uncertainty, possibly affecting issuers’ hedging abilities.

A significant move in the Hang Seng Index or the overall market may or may not result in exceptional price movement and high volatility of the underlying stock.  In this case, the liquidity provider may need to demonstrate to the Exchange that its hedging ability has been materially affected by exceptional price movement during a short period of time. 

Time to maturity is one of the criteria for active quotes.  As your call warrant has a maturity of less than 30 calendar days, it does not meet the active quote criteria set out in the Product Sheets.  In this case, you could contact the issuer to make a quote request. 

Issuers provide active quotes for call warrants with moneyness between 20% in-the-money and 20% out-of-the-money.  Where the spot price of the underlying stock is HK$50, an exercise price of the call warrant between HK$40 (+20%) and HK$60 (-20%) meets the ±20% moneyness criteria.  In this case, your call warrant should be eligible for active quotes (subject to it meeting the other criteria), as the exercise price of HK$45 falls within the ±20% moneyness range.

Issuers provide active quotes for derivative warrants with moneyness between 20% in-the-money and 20% out-of-the-money.

Where the level of the HSI is 18300, call warrants with strike level between 14640 (+20%) and 21960 (-20%) meets the ±20% moneyness criteria.   In this case, your call warrant does not fulfil the active quote criteria because the strike level of 22900 falls outside the ±20% moneyness range.

As a result, you could contact the issuer to make a quote request if you want to sell your call warrant.

Active quotes will not be provided where one of the exemptions set out under “Liquidity Provision Requirements” of the Product Sheets applies.  For example, the liquidity providers need not provide active quotes where:

(a) the theoretical value is less than HK$0.01

(b) there is a technical failure and operational problems beyond the control of the liquidity provider; or

(c) the underlying asset or the stock market experiences exceptional price movement and high volatility over a short period of time which materially affects the liquidity provider’s hedging ability.

Remember that active quotes are not continuous. You could contact the liquidity provider, if you have any questions about liquidity.

No.  An issuer may, at its option, provide active quotes voluntarily. In those circumstances, the issuer is not bound by the specific spread requirements for active quotes as set out in the Product Sheets.  However, in this case, the issuer will still need to comply with the spread requirement applicable to quote request in response to a quote request.

Derivative warrants have a “theoretical value” that may be very different from their traded (nominal) price. The theoretical value is the price of the derivative warrant calculated by reference to the issuer’s pricing model, taking into account all relevant market factors. 

The price of a derivative warrant (i.e. put/call warrant) generally depends on the price of the underlying asset. However, throughout the term of a derivative warrant, its price will be influenced by a number of other factors, including:

(a)  the exercise price of the derivative warrant;

(b)  the value and volatility of the price of the underlying asset (being a measure of the issuer’s expectation on the fluctuation in the price of the underlying asset over time);

(c)  the time remaining to expiry: generally, the longer the remaining life of the derivative warrant, the greater its value;

(d)  the interim interest rates and expected dividend payments or other distributions on the underlying asset;

(e)  the liquidity of the underlying asset;

(f)  the availability of, and demand for, the derivative warrant;

(g)  the issuer’s hedging transaction costs;

(h)  the creditworthiness of the issuer and/or its guarantor; and

(i)  in case of index warrants, the price and liquidity of the futures contracts relating to such index

Assuming other factors remain unchanged, the theoretical impact of changes in certain key factors on call and put warrants is illustrated in the table below:

* Please note that the table above only shows the theoretical relationship with the key pricing parameters. In reality, there are other factors affecting the price of a derivative warrant.

(a)  The price of a derivative warrant is not only affected by the price of the underlying asset but a range of other factors. This means that movements in the price of a  derivative warrant may not be proportionate, or may even be opposite, to the price movement of the underlying asset. For example, for a call warrant, if the price of the underlying asset increases, but the implied volatility of the price of the underlying asset decreases, the price of the call warrant may decrease as the drop in its implied volatility may offset an increase in the price of the underlying asset;

(b)  if a derivative warrant is deep “out-of-the-money” (e.g. when its theoretical value is substantially less than 0.01 unit of trading currency such as HK$0.01), the price of the  derivative warrant may be insensitive to any increase (in respect of a call warrant) or decrease (in respect of a put warrant) in the price of the underlying asset;

(c)  if the outstanding volume of a series of derivative warrants in the market is high, the supply and demand of the warrant may have a greater impact on the warrant price than the price of the underlying asset;

(d)  in respect of a call warrant, a decrease in time value may offset any increase in the price of the underlying asset, especially when the call warrant is close to its expiry where the time value usually decreases more rapidly; and

(e)  in respect of a put warrant, a decrease in time value may offset any decrease in the price of the underlying asset, especially when the put warrant is close to its expiry where the time value usually decreases more rapidly.

Time value is the value of a derivative warrant arising from the time left to maturity and is equal to the difference between the current derivative warrant price and its intrinsic value. The time value can be considered as the cost paid in return for the gearing effect. In general, the longer the time to expiry, the higher the probability that the underlying price will move in favour of the derivative warrant holder and hence a higher derivative warrant price. However, the time value of a derivative warrant will become zero when the derivative warrant has reached maturity. This is often referred to as the time decay of a derivative warrant.

“Outstanding quantity” means the quantity held by investors and is generally shown as a percentage. It is calculated by dividing the number of derivative warrants held by the market on a particular day (after closing) by the total number of derivative warrants issued. For example, if the number of certain derivative warrants held after closing on a particular day is 90 million and the number of those derivative warrants that had been issued is 100 million, then the outstanding quantity is 90%.

A product with a high outstanding quantity may be more vulnerable to the influence of the forces of market supply and demand. For example, when there is a selling pressure on a product, the price of that product may be squeezed (that is, brought down) by prevailing market forces. The price of the product may also be volatile due to short supply. As a result, its price may not follow the price of the underlying asset very closely.

Issuers are entitled to increase market supply of a derivative warrant where the outstanding quantity exceeds 50%, to prevent price fluctuations caused by short supply. The way this takes place is that the issuer applies to the Exchange for a further issuance of the product.

Further issuance has the potential to bring greater stability to the product price and minimise the chance of price fluctuations caused by the disequilibrium between supply and demand.

The entitlement ratio for a product is the number of such products required to be converted into a unit of the underlying asset at the strike price on the expiry date. Assuming all other factors affecting two different products are the same (underlying asset, strike price, expiry date, volatility etc.), their respective entitlement ratios would directly affect their respective values per unit. Generally, a product with a higher entitlement ratio would have a relatively small value per unit. However, in theory, the entitlement ratio would not affect the performance of a particular product, as it has been calculated into the effective gearing.

The premium reflects the degree by which the price of the underlying asset needs to move before reaching the break-even price of a product at expiry.

For example, if the premium of a call warrant is 10%, the underlying price should rise by 10% at expiry, in order to reach the break-even price.

You can calculate the premium based on the formula below (based on the payout formula at expiry):

These formulae can therefore be used as a reference to calculate the percentage by which the price of the underlying asset needs to move before reaching the break-even price of a derivative warrant at expiry.

This seems unreasonable as the call warrant price should at least be equal to its intrinsic value, i.e. the excess of the prevailing market price of the underlying stock over the exercise price of the call warrant.

While in most cases a call warrant does trade above its intrinsic value, this does not mean that the intrinsic value must be the minimum value of a call warrant. As explained below, it is possible for a call warrant to trade below its intrinsic value.

Holding a call warrant differs from holding the underlying stock, especially since the holders of the call warrant are not entitled to receive any dividends that might be declared by the underlying stock. In this particular case, the underlying stock was due to announce its annual results in late March. Based on practices in previous years, the underlying stock is likely to go ex-dividend in mid-April. With an expiry date for the call warrant in late April, the market price of the underlying stock would be the ex-dividend price in determining the payout of the call warrant on that expiry date. This would result in a lower payout to call warrant holders than it otherwise should. Although the final dividend that the underlying stock would declare was still unknown in mid-March, it was widely anticipated that the dividend would be no less than $1.5. It was not unreasonable for potential investors and the liquidity provider to deduct the dividend element when pricing the call warrant. 

Delta is the ratio of the change in the derivative warrant price (after adjusted by the entitlement ratio) to the change in the underlying asset’s price.

Delta normally ranges between 0 and 1 for call warrants and 0 and -1 for put warrants (the negative sign shows the opposite directional movement to the underlying). In general, at-the-money call and put warrants have a delta of approximately 0.5 and -0.5 respectively. In-the-money derivative warrants will generally have a higher delta than out-of-the-money derivative warrants with the same underlying asset and maturity. For example, a call warrant with a delta of 0.1 is generally a deep out-of-the money derivative warrant, whereas a call warrant with a delta of 0.9 is generally a deep in-the-money derivative warrant. Vice versa, a put warrant with a delta of -0.1 is generally a deep out-of-the-money derivative warrant, whereas a put warrant with a delta of -0.9 is generally a deep in-the-money derivative warrant.

“Gearing” means the relationship that the cost of the underlying asset bears to the cost of a  derivative warrant. For example, if the gearing for a particular derivative warrant is 10 times, then the investment cost of that derivative warrant is 1/10 of the underlying asset.

However, in the case of a derivative warrant this only relates to the initial cost of the underlying asset and the initial cost of the derivative warrant. It cannot be used later to reflect the dynamic relationship between the price of the underlying asset and the price of the derivative warrant over time. “Effective gearing” of a derivative warrant is calculated by multiplying the gearing and the delta of the derivative warrant (adjusted with entitlement ratio).

Effective gearing is a better measure of the percentage change of a derivative warrant with a 1% change of underlying asset. For example, if the effective gearing is 10 times for a call warrant (and we assume other factors remain unchanged), when the price of the underlying asset rises by 1%, the theoretical price of the call warrant price should rise by 10%. Similarly, when the underlying asset falls by 1%, the theoretical price of the call warrant price should fall by 10%.

However, effective gearing should only be used as a reference as it will change over time given other factors, such as the underlying price, delta, gearing, time decay and implied volatility, also change.

A number of other factors affecting the price of the derivative warrant may also change over time and, therefore, a mere rise in the underlying asset’s price may not necessarily lead to a corresponding increase to the extent of the effective gearing, or to any increase at all in the derivative warrant’s price.

Implied volatility represents the anticipated level of volatility of underlying assets over the remaining life of a derivative warrant, as reflected in the price of the derivative warrant.

Implied volatility is one of the factors influencing the price of a derivative warrant. For example, assuming other factors remain constant, when implied volatility of a derivative Warrant decreases, its price should theoretically also go down, and vice versa. The movement of implied volatility will always cause a same directional movement in the price of a derivative warrant, and implied volatility is commonly used as a measurement to compare the expensiveness of a derivative warrant with products of similar terms.

Implied volatility is a key parameter in the issuer’s pricing formulae that cannot be observed directly. However, issuers can estimate the implied volatility based on:

(a)  the historical volatility of the underlying asset;

(b)  the implied volatility of the listed and OTC options based on market data; and

(c)  the issuer’s market expectation and cost of issuing the derivative warrant.

Implied volatility level of derivative warrants varies between issuers because each issuer may hold a different market expectation on a particular underlying asset from other issuers and has different issuing cost. 

Volatility is determined by annualised statistics measuring changes in price of its underlying asset: the greater the fluctuations, the higher the volatility.

“Historical volatility” is a measure of underlying price fluctuations over a certain period in the past. You may obtain information on historical volatility of the underlying asset by subscribing to the data provision service of a market data information provider.

Implied volatility of a derivative warrant has a close relationship with the implied volatility generated by OTC and listed options.

After an issuer sells a derivative warrant, it generally needs to hedge against the risks arising from that issuance through different channels: two of those channels are OTC options and listed options. OTC options are options that are traded on a bilateral basis outside of the trading facilities provided by any exchange. Usually, the counterparties are institutional professional investors, such as investment banks. Listed options are those traded on a trading facility such as the Exchange.

If the implied volatility of an OTC option or a listed option is moving downward, the implied volatility of a related derivative warrant may also move downward. On the contrary, if the implied volatility of an OTC option or a listed option is going upward, the implied volatility of the related derivative warrant may also go upward. Therefore, variations in the implied volatility of an OTC option or a listed option may indicate a trend in the implied volatility of related derivative warrant. 

OTC options are bilateral contracts traded privately between two participants, off-exchange. As a result, there is no public information available for the implied volatility of an OTC option.

You may obtain information on the implied volatility of a listed option by subscribing to the data provision service of a market data information provider.

When a listed company announces its financial results, it will also generally announce whether dividends will be paid.

Whether or not this affects the price of a related derivative warrant depends on whether or not dividends were expected and, if so, at what level and on what date. This is because the issuer considers past records of dividend distribution and the dividends expected by the market, when calculating the derivative warrant price.

If the dividend distribution and ex-dividend date are as expected and other factors remain constant, theoretically, the dividends should not affect the price of the derivative warrant.

Under normal circumstances, a derivative warrant linked to shares of a company will be adjusted if there is a capital adjustment of those underlying stocks (such as bonus issue, rights issue and restructuring event or spin-off / merger / consolidation). Specifically, an adjustment will be made to the entitlement ratio according to terms specified in the relevant listing documents.

In the case of a merger/consolidation, an adjustment will be made to the entitlement ratio of the derivative warrant of the company being merged or consolidated with. If the merger/consolidation results in an extinguishment of the current underlying, such underlying of the derivative warrant will change from the original underlying to a surviving/new underlying. Where there is a surviving company, no adjustment will be made to the derivative warrant of the surviving company.

Where the effective date of the adjustment occurs after the ex-entitlement date of the underlying stocks (such as in the case of spin-off), no adjustment will be made to those derivative warrants that expire in the interim period.

It is possible that trading of shares of the entities undergoing a merger may be suspended for a period of time. The Listing Rules require suspension of derivative warrants where the underlying stock is suspended. When this happens, the value of derivative warrants may be adversely affected due to time decay during the suspension period.

Under normal circumstances and for the purpose of calculating the value of the rights attached to the spin-off company, issuers will use volume-weighted average price (VWAP) of those auto-matched trades of that company on its first day of listing as the basis of adjustment. The adjustment will take effect from the day following the listing date. Investors should note that no adjustment will be made to those derivative warrants that expire before the effective date of the adjustment.

A call warrant is a short-term trading instrument with a gearing effect, it could magnify your loss relative to the underlying performance.

In addition to the underlying price, the liquidity provider’s quote also depends on a number of other factors.  Assuming all other factors remain constant, although the underlying price went back to HK$50 from HK$48, it is likely that the increase in the underlying price was offset or even outweighed by the decrease in the implied volatility of the call warrant, hence lowered the call warrant price.

The issue price of a call warrant is determined based on the market factors prevailing on the launch date of a warrant.  On the first trading day of the call warrant (being 3 trading days after the launch date), it is possible that substantial changes have occurred in respect of the market factors affecting the price of that call warrant.  

In addition to the terms of the call warrant (i.e. underlying, expiry date and strike price), its price also depends on a number of other factors which are based on different pricing assumptions adopted by individual issuers (e.g. different implied volatilities, interest rate, expected dividends, etc.).   Moreover, even with identical terms, different call warrants may have a different level of market participation and outstanding amount, which may affect the warrant price to a different extent.  Accordingly, the prices of call warrants with identical terms issued by different issuers may vary.

It is likely that the HK$0.01 last traded (nominal) price could have been brought down a while ago and does not reflect its prevailing theoretical value before the rally of the HSI, hence it is not the best reference to gauge the actual performance of the call warrant. 

It is particularly the case for a short term and deep out-of-the-money call warrant. Despite the HSI rallied more than 3%, the warrant is still out-of-the-money with short time to expiry, hence its prevailing theoretical value after the rally of the HSI is still below HK$0.01. 

The liquidity provider is not required to provide quote when the theoretical value of the warrant is less than HK$0.01.

HSI call warrants are not solely priced based on HSI index. They are mainly priced based on HSI index, interest rate and expected dividend. Since HSI futures contract reflects the value of HSI index, interest rate and expected dividend, the pricing of the HSI call warrants is generally priced based on HSI futures contracts.

Liquidity providers can provide bid and ask quotes at the pricing level they deem fair by reference to the theoretical price of the call warrant provided that they comply with the maximum spread requirements. The bid and ask spread may change from the time to time according to the prevailing market conditions affecting the underlying asset such as hedging costs and liquidity, spread and volatility of the relevant hedging vehicles.  Therefore it is possible that their quotes will not match your expected price levels due to the widening of the bid and ask spread.

The closing price of the call warrant and the underlying was as below.

This could happen because:

(a)  some other pricing factors affected the call warrant price (e.g. volatility, expected dividend, time decay, etc.);

(b)  the market closing time of the call warrant and the underlying security was different. Being an eligible security under the closing auction session, it continued to trade in the closing auction session which ended at 4:10 p.m. while the trading in the call warrant ceased at 4:00 p.m. In this case, due to the 10 minutes closing time gap, direct comparison of closing price of the call warrant and the underlying security might not be appropriate and meaningful, or

(c)  the closing price of the call warrant might not reflect the quote price of the liquidity provider. In this case, quotes of the liquidity provider might have moved in line with the underlying but were not reflected in the closing price of the call warrant.The closing price could be (1) calculated based on other exchange participants’ trades and quotes; or (2) carried forward from previous days.

The entitlement and exercise price of the call warrant will be adjusted according to the following formula:

Adjusted entitlement = Adjustment factor * E

Adjusted exercise price = X / Adjustment factor

Where

• Adjustment factor = 1 + N
• E:  Existing entitlement immediately prior to the bonus issue
• X:  Existing exercise price immediately prior to the bonus issue
• N:  Number of additional shares received by a holder of existing shares for each share held prior to the bonus issue

In this case,

• Adjustment factor = 1+ 1/10 = 1.1
• Adjusted entitlement = 1 * 1.1 = 1.1 shares
• Adjusted exercise price = HK$12.28/1.1 = HK$11.164 (rounded to the nearest HK$0.001)

The purpose of the adjustment is to ensure that as far as possible, the theoretical price of the call warrant remains unchanged immediately before and immediately after the adjustment. Assuming all factors being equal, the theoretical price of the call warrant will remain unchanged.

No, the expiry day of a derivative warrant is not the same as the last trading day. Investors can only trade a derivative warrant on or before the last trading day:

For a derivative warrant, there should be 3 settlement days between the last trading day and the expiry day. For example, if a warrant expires on Friday, 23 June, the last day of trading will be Monday, 19 June (assuming the 3 days between 19 and 23 June are settlement days).

All derivative warrants currently traded on the Exchange are European style and are cash settled at expiry.

For cash-settled derivative warrants that are in-the-money on the expiry date, the derivative warrant holders are then paid a positive cash settlement amount according to the terms and conditions as set out in the listing documents.

For derivative warrants issued on a single stock, the settlement price at expiry is calculated based on the 5-day average closing price of the underlying stock prior to and excluding the expiry day.

For derivative warrants issued on a local index, 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 derivative warrants 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 derivative warrants on other underlying assets, please refer to the relevant listing documents.

The issuer may elect to early terminate the derivative warrants. Holders of those derivative warrants may receive an early termination amount which is determined by the issuer:

(a)  in good faith and a commercially reasonable manner; and

(b)  where applicable, by reference to the determination made by the Exchange in relation to the relevant listed options or futures over the underlying stock. In a past case, such early termination amount has been calculated based on the difference between the exercise price and the offer price of cancelling the underlying stock under the proposed privatisation, adjusted by the entitlement ratio. However, such determination may be different on a case by-case basis.

(a)  Trading suspension or absence of closing price on:

i.  the 1st, 2nd, 3rd, or 4th valuation date only - in that case, the closing price on the next valuation date will be used as the closing price on such 1st, 2nd, 3rd, or 4th valuation date, so that there are 5 closing prices used to determine such 5-day average closing price.

ii. each of the 3rd and 4th valuation dates only - in that case, the closing price on the 5th valuation date will be used as the closing price on each of the 3rd and 4th valuation dates, so that there are 5 closing prices used to determine such 5-day average closing price.

(b)  Trading suspension or absence of closing price on the 5th valuation date only (but not the expiry date) - in that case, the closing price on the 5th valuation date is determined based on the issuer’s good faith estimate made in accordance with the terms and conditions. Such determination will be made on a case-by-case basis based on prevailing market conditions. The closing price on the expiry date was used in most of the past cases.

(c)  Trading suspension or absence of closing price on each of the 5 valuation dates and the expiry date - in that case, the closing prices on each of the 5 valuation dates are determined based on the issuer’s good faith estimate made in accordance with the terms and conditions. Such determination will be made on a case-by-case basis by reference to the prevailing market conditions. The last reported closing price was used in most of the past cases.

Trading suspension above means suspension of trading of the underlying stock during the last half hour before close of trading.

5-day average closing price: the average of the closing prices of the underlying stock quoted on each of the 5 business days falling immediately before the expiry date of a derivative warrant. This price is used to compare against the exercise price of a derivative warrant to determine the cash settlement amount at expiry.

Unlike derivative warrants linked to local indices or other actively traded local stocks, liquidity providers are not required to proactively provide quotes for products linked to an overseas underlying asset.  In case you do not see liquidity providers’ quotes in the market, you have to call them to request for quotes. They are obligated to provide quotes within 10 minutes with a maximum bid/ask spread of 20 ticks and a minimum offer size of 20 board lots subject to certain exemptions set out in “Liquidity Provision Requirements” of the Product Sheets.

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 derivative 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 derivative warrants. The list of eligible stocks for CBBCs is posted on the HKEX’s website.

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.

A CBBC is generally issued at a price that represents the difference between the spot price or level of the underlying asset and the strike price or level of the CBBC, plus the issuer’s funding costs.

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. Otherwise, the following happens on expiry:

(a)  Bull CBBCs - For a bull CBBC, if the closing price or level of the underlying asset at expiry is:

1. higher than the CBBC’s strike price or level, you will receive a cash payment calculated by reference to the positive difference between that closing price or level and the strike price or level of the CBBC, adjusted by the entitlement ratio; or
2. equal to or lower than its strike price or level, the CBBC will become worthless.
   
   

(b)  Bear CBBCs - For a bear CBBC, if the closing price or level of the underlying asset at expiry is:

1. lower than the CBBC’s strike price or level, you will receive a cash payment calculated by reference to the positive difference between strike price or level of the CBBC and that closing price or level, adjusted by the entitlement ratio; or
2. equal to or higher than its strike price or level, the CBBC will become worthless.

The difference between these two categories of CBBCs is where the call price or level of the CBBC is set.

(a)  A “Category N” CBBC refers to a CBBC where its call price or level is equal to its strike price or level, under which you will not receive any cash payment after the occurrence of a mandatory call event and will lose your entire investment.

(b)  A “Category R” CBBC refers to a CBBC where its call price or level is different from its strike price or level, and you may receive a residual cash payment (called "residual value") upon the occurrence of a mandatory call event. However, in the worst case, you will not receive any residual value and will lose your entire investment. 

The following table describes the key differences between CBBCs, derivative warrants and inline warrants.

Investing in CBBCs is not suitable for everyone.

CBBCs involve a high degree of risk and you must be comfortable with that risk before investing. The relevant listing documents disclose the key risks applicable to the relevant CBBCs. You must consider and understand those risks. You must also be able to assume the risks, which includes being financially able to bear the potential losses in a “worst case” scenario.

Generally speaking, the key risks include the following:

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

(b)  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. When you purchase CBBCs, you are relying upon the creditworthiness of the issuer and/or a guarantor (if any).

(c)  Gearing risk - Although CBBCs often cost less than the underlying assets, they may change in value to a much greater extent than the underlying assets. Although the potential return on CBBCs may be higher than that on the underlying assets, in the worst case the value of CBBCs may fall to zero and holders may lose their entire investment amount.

(d)  Limited life - Unlike stocks, CBBCs have an expiry date and therefore a limited life.

(e)  Time value - 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.

(f)  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 the existing issuance of a single series of CBBCs are almost sold out and when there are further issues in that single series of CBBCs.

(g)  Turnover ‐ High turnover should not be regarded as an indication that the price of a CBBC will go up. The price of a CBBC 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.

(h)  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.

(i)  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. For example:

1. the spread between bid and ask prices quoted may be significantly wider than its normal standard;
2. the size for which liquidity will be provided by the liquidity provider may be significantly smaller than its normal standard; and
3. the liquidity provider’s response time for a quote may be significantly longer than its normal standard.

(j)  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.

The prices of the CBBCs may be volatile from the ex-entitlement date of the underlying stocks until the Effective Date. You should exercise particular caution in trading those CBBCs during that period. In addition, no adjustment will be made to those CBBCs that expire within that period.

(k)  Knock out risk - 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. The payoff for a Category N CBBC is zero when it expires early due to the occurrence of a mandatory call event. When a Category R CBBC expires early due to the occurrence of a mandatory call event, the holder may receive a small residual value payment, but there may be no residual value payment in some situations.

In general, the larger the buffer between the Call Price and the spot price of the underlying assets, the lower the probability of the CBBC being called, since the underlying assets of that CBBC would have to experience a larger movement in their price before it is called.  However, the larger the buffer, the lower the leverage effect.

Once the CBBC is called, even though the underlying assets may bounce back in the right direction from the investors' point of view, the CBBC which has been called will not be revived and investors will not be able to profit from the bounce-back.

You should read carefully the risk disclosure in the relevant listing documents of the CBBCs before investing in such products.

The issuer’s existing CBBCs are still valid and you can continue to trade them through the Exchange trading system. The issuer must publish an announcement regarding the credit rating downgrade and continue to provide liquidity for its existing CBBCs and perform its settlement obligations upon expiry.

However, when an issuer no longer meets the eligibility requirements in the Listing Rules, the issuer will not be allowed to launch new issues or further issues.  It must apply for the withdrawal of CBBCs launched but not yet listed and all CBBCs with no outstanding positions held by the public.

You should be cautious that prices of CBBCs issued by the affected issuer may be affected by its or its guarantor’s credit downgrade. For the avoidance of doubt, where the issuer or the guarantor relies on the credit rating of their respective holding company for satisfying the eligibility requirements under the Listing Rules, such credit rating is for investors’ reference only, and investors shall have no recourse against the relevant holding company under the terms of the CBBCs.

You can access information about the credit ratings of the issuers, their guarantors (if any) or their respective holding companies (where such credit rating is relied upon for satisfying the eligibility requirements in the Listing Rules) on the HKEX’s website.

No, CBBCs are not eligible for trading in closing auction session and their market closing time is 4:00 p.m.

However, some underlying securities are eligible for trading in closing auction session and the closing level of the relevant index will be ascertained after 4:10 p.m. (or 12:10 p.m. in the case of half day trading) (“eligible underlying asset”). As a result, the market closing time for a CBBC and its underlying asset can be different. In this case, the price or level of eligible underlying assets may move in closing auction session while investors cannot buy or sell related CBBC. Moreover, the CBBC can be knocked out and mandatory call event will occur if the closing price or level of the eligible underlying asset hits the call price or level at the end of the closing auction session.

Since the affected underlying security or index is not suspended and continues to trade within a specified price limit during the 5-minute cooling off period after the triggering of the VCM, the CBBC can still be traded without any price limit. You can access information about VCM on the HKEX’s website.

However, investors should note that where events surrounding VCM cause abnormal trading behavior of the underlying leading to hedging difficulties, the liquidity provision obligations of issuers could be exempted. In this case, there may be a temporary absence of price quotes, a reduction in quote size, or a wider bid-ask spread during the 5-minute cooling-off period.

VCM is a dynamic price limit model applied at the individual instrument level. Where the price deviates more than a predefined percentage within a specific time frame, the instrument will trade within band during a 5-minute cooling off period. This provides a window allowing market participants to reassess their strategies, if necessary. It also helps to re-establish an orderly market during volatile market situations.

If a cash settlement amount is payable by an issuer at expiry but the issuer defaults in its payment obligation, you can claim as an unsecured creditor against the issuer, and if the product is guaranteed, also against the guarantor.

None of the CBBCs currently listed on the Exchange is collateralised. This means that there is no specific security or asset to back up the obligations of the issuer or guarantor. If the issuer or its guarantor (if any) becomes insolvent or default, you may not recover all or even part of the amount due (if any).

(a)  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 CBBC is converted from a foreign currency in which the overseas underlying asset is priced into Hong Kong dollars.

(b)  Different trading hours between the underlying exchange on which the overseas underlying assets are traded and the Exchange

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 opened for trading of the CBBCs.

(c)  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.

(d)  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.

(e)  Occurrence of 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 credit rating of the issuer’s holding company is required to be disclosed in the listing document for investors’ reference if the issuer is relying on the credit rating of its holding company for satisfying the eligibility requirements under the Listing Rules (for example, where the issuer itself is not rated).  However, the holding company does not have any contractual obligation to provide financial support to the issuer or to meet the issuer’s obligations in respect of the CBBCs.

No. If the issuer defaults, investors will have no recourse against the holding company and may only claim against the issuer (and the guarantor, if any) in accordance with the terms and conditions of the relevant product.

Where the credit rating of the issuer’s holding company is disclosed in the listing document, investors should understand that it is provided for reference only. They should assess its relevance and significance carefully, and should not solely rely on it when making investment decisions.

Not necessarily. While high turnover may suggest that a CBBC is actively traded, it does not always reflect sustainable liquidity.

Investors should be aware that trading activity may be concentrated among a small number of participants. In such cases, a high proportion of turnover may be driven by the trading strategies of a few investors rather than broad market demand. If these investors change or withdraw their positions, liquidity may decline rapidly, potentially making it more difficult to trade the product at expected prices.

Investors should refer to the List of Structured Products with High Trading Concentration which highlights CBBCs where trading activity is concentrated among a small group of investors.

No, investors should not rely solely on turnover when selecting CBBCs. In assessing liquidity, investors should also consider other factors, including but not limited to the bid‑ask spread, the quote size provided by liquidity providers and the duration for which quotes are available.

You can learn some basic features of a CBBC from its stock short name. Below are the naming conventions for reference.

The “#” sign in the stock short name could help investors differentiate a CBBC from a derivative warrant and an inline warrant. You should note that the above naming conventions are applicable in most cases but not exclusive for all circumstances. The stock short names of CBBCs indicate some basic information only.

You should refer to the relevant listing documents of the product and consult your brokers or investment advisers before trading. Listing documents can be found at the HKEXnews website.

Investors can start to buy CBBCs on the Exchange from the first listing day of the products. To initiate the listing process, CBBCs issuers submit product term sheets to the Exchange for approval on the launch day (“Launch Date”). Commencing from 13 July 2020, the listing cycle has been shortened from five trading days to three trading days following the product launch.

For example:

The listing date will be postponed due to an exceptional situation causing the stock market to (i) close for the entire day; or (ii) close prior to its regular hours on any of the two trading days between launch date and the scheduled listing date. No further notice or announcement will be published in respect of such postponement. Below is an illustrative example in respect of a product launched on Monday with a listing date on Thursday:

Trading of CBBCs will remain available during typhoon signal number 8 or above or the black rainstorm warning issued by the Hong Kong Observatory, or ‘extreme conditions’ issued by the Hong Kong Special Administrative Region Government.  In addition, structured products issuers will provide active quotes and quote requests for structured products as usual.

However, the Exchange will assess specific circumstances in consultation with the Government and the Securities and Futures Commission to decide whether there is an exceptional situation that warrants the markets, including structured products market, to be closed.  In this case, the Exchange will make relevant announcements as required to provide the market with advanced notice and updates.

Yes. Similar to the trading of shares, transaction fees currently include:

(a)  brokerage commission and fees charged by the relevant broker;

(b)  the transaction levies imposed by the SFC and the Accounting and Financial Reporting Council of Hong Kong; and

(c)  a trading fee charged by the Exchange.

No. Currently, all CBBCs traded on the Exchange are cash settled and trading in such cash settled CBBCs are not subject to any stamp duty.

No, trading of CBBCs linked to the affected indices will be halted as soon as practicable after publication of a notice of such failure by Hang Seng Indexes Company on its website. Where such notice is published within 15 minutes before the end of a continuous trading session, trading halt will take place in the next continuous trading session. 

A liquid product has a tradable market with tight bid and ask prices and sufficient size, in which there are opportunities to buy and sell CBBCs. The provision of liquidity is an important feature of CBBCs because it allows investors to buy and sell CBBCs that may otherwise be illiquid (that is, have insufficient supply or demand).

Most CBBCs do not have public holdings on their first listing dates.  Issuers may provide liquidity in respect of their products through a designated liquidity agent (called a “liquidity provider”). In Hong Kong, liquidity providers are commonly known as “market makers”.

Each issuer must appoint one liquidity provider, who must be an Exchange participant, for each of its products.

A liquidity provider provides quotations for a particular CBBC to support a tradable environment for that product. Such quotations take into account the prevailing market conditions affecting the underlying asset, such as hedging costs and liquidity, spread and volatility of the underlying. Liquidity providers provide liquidity by inputting orders into the trading system of the Exchange when they receive “quote requests”. They do so according to the committed service levels as set out in the relevant listing document. These standards typically include:

(a)  the maximum response time – i.e. the maximum time it will take to submit a pair of quotes after a request is received;

(b)  the maximum spread between the bid and ask prices;

(c)  the minimum quote size;

(d)  the minimum holding time for the quotes; and

(e)  situations in which a quote will not be provided.

Under certain circumstances, liquidity providers are required to provide “active quotes” (that is, even where no request has been submitted by investors) by actively inputting orders into the Exchange’s trading system.

Each liquidity provider is currently identified by a 4-digit broker ID code of 95XX, 96XX or 97XX. The relevant listing documents of an issuer set out the exact obligations of its liquidity provider.

In circumstances where the outstanding quantity of a CBBC in the market increases, the liquidity provider may be less active in providing quotes for such CBBC. This is because the key role of a liquidity provider is to facilitate liquidity when there is limited or no market liquidity on the CBBC (such as when the CBBCs are newly listed on the Exchange with limited or no trading by market participants or investors) and to support a tradable environment for the CBBC. If a CBBC is not eligible for active quotes due to the fact that there is more than 50% of its aggregate number outstanding in the market, then there may not be any active quote from the liquidity provider. You can find out the outstanding quantity of CBBC as of the previous trading day on the HKEX’s website.

Where the number of market participants for a particular product grows, the “market force” increases, and the product becomes less dependent on the liquidity provider as the sole source of liquidity. By implication, the role of the liquidity provider becomes less important when there is a higher number of particular CBBC outstanding in the market because this means there are more investors trading in the product, leading to a natural market.

No. Liquidity providers are not required to support prices of CBBCs. In practice, like other market participants, a liquidity provider is free to buy and sell at any price.

Each series of CBBC will have only one liquidity provider appointed for such series.

You can obtain the liquidity provider’s name and contact details in two ways:

(a)  Visit the HKEX’s website: The designated HKEX’s website lists all the liquidity providers for all CBBCs listed on the Exchange.

(b)  Check the relevant listing documents of the CBBC.

Simply contact the liquidity provider directly during trading hours on a trading day at its designated phone number. 

Through the liquidity provider, the issuer takes into account the prevailing market conditions affecting the underlying asset (e.g. hedging costs and liquidity, spread and volatility of the underlying) in the quotations provided to the market.

Not necessarily. Trading CBBCs is similar to trading stocks listed on the Exchange. Any investor’s bid or ask price may be accepted and traded upon by other investors. You may also place orders just like trading in listed stocks. However, there may not be sufficient interest in trading such CBBCs.

If the appointed liquidity provider is no longer an Exchange participant, it cannot continue to provide liquidity. The issuer must appoint another liquidity provider in its place.

The Exchange has set out the minimum service levels for liquidity provision in the Product Sheets. Issuers are required to specify the minimum service levels in their listing documents and ensure that they comply with the minimum service levels as published by the Exchange from time to time. Liquidity must be provided in respect of their CBBCs in accordance with these minimum service levels.

Quote request is one of the methods in which liquidity is provided. It refers to the provision of liquidity by entering orders into the Exchange’s trading system in response to an investor’s request.

Quote request standards are the minimum service level for all CBBCs applicable to all possible market conditions (regardless of the underlying assets), subject to certain exemptions set out in the listing documents.

The following table summarises the current service levels.

When a liquidity provider responds to your quote request, it must continue to hold a quotation (which effectively means it must continue to make available an offer to trade for investors) for at least 5 minutes after it is posted on the Exchange’s trading system upon your request. This means that you can accept the quote (that is, agree to trade on that basis) within such 5 minutes, if it has not lapsed (see below).

However, it is important to be aware that even within those 5 minutes, the liquidity provider may need to adjust the bid and ask prices if the prevailing market circumstances or the price of the underlying asset changes. If that occurs, the liquidity provider will “refresh its quote” – that is, an adjusted quote will be posted on the Exchange’s trading system.

More importantly, if a liquidity provider’s quote is being traded by another investor within the 5 minute holding time and thus the quotation lapses, you need to submit another quote request if you wish to have a quote from the liquidity provider to trade.

The liquidity provider is not obliged to provide quote upon request in the following key situations:

(a)  during a pre-opening session or a closing auction session (if applicable);

(b)  during the first 5 minutes of each morning session or the first 5 minutes after trading commences for the first time on a trading day;

(c)  when the CBBC or any underlying asset is suspended from trading for any reason;

(d)  when there is no CBBC available for market making activities;

(e)  if the theoretical value of the CBBC is less than 0.01 unit of trading currency (e.g. RMB$0.01, HK$0.01 or US$0.01);

(f)  upon the occurrence of a mandatory call event;

(g)  where the underlying asset is an index, if there occurs or exists any suspension of, or limitation imposed on, trading of options or futures contracts relating to the index or if the index level is not calculated or published as scheduled for any reason;

(h)  when there are operational and technical problems beyond the control of the liquidity provider that hinder the liquidity provider’s ability to provide liquidity; or

(i)  if there is a “fast market” which materially affects the issuer’s hedging ability.

These circumstances are stated in the relevant listing documents. 

If trading in the underlying asset of a CBBC is suspended, trading in such CBBC will also be suspended until trading in the underlying asset resumes. Investors must understand and take into account the risks arising from a loss of time value during a suspension period.

If trading in the underlying asset remains suspended at the expiry of the CBBCs, the issuer will determine the settlement price in good faith and in a commercially reasonable manner. The cash settlement amount may be substantially less than the investor’s initial investment and may be zero.

“Fast market” refers to situations where the financial markets experience exceptional price movements and high volatility over relatively short periods of time, which can result in a sudden increase in risk and uncertainty, possibly affecting issuers’ hedging abilities.

For example, these situations may include:

(a)  financial uncertainty - exceptionally volatile market conditions linked to financial uncertainty, for example, the period following Lehman Brothers’ bankruptcy in September 2008 and the “flash crash” of 6 May 2010, when the Dow Jones Industrial Average suffered its worst intra-day point loss; and

(b)  underlying uncertainty - the occurrence of events causing the intraday market price of the underlying stock or index to experience significant fluctuations and/or a material reduction in liquidity of the underlying, for example, Japan’s earthquake on 11 March 2011 which resulted in a drastic fall in Nikkei index in the immediately following period and fluctuation in prices of the related CBBCs.

These are just possible examples of fast market events. Depending on circumstances, some market events may trigger a VCM which may possibly result in a fast market.

It is generally more difficult to provide quotes momentarily when the price of the underlying asset is changing rapidly within a short period of time.

VCM is a dynamic price limit model applied at the individual instrument level. Where the price deviates more than a predefined percentage within a specific time frame, the instrument will trade within band during a 5-minute cooling off period. This provides a window allowing market participants to reassess their strategies, if necessary. It also helps to re-establish an orderly market during volatile market situations.

System difficulties and failures can affect the ability of a liquidity provider to provide quotes within the service level set out in relevant listing documents or provide any quote at all.

A system failure will be notified to the market as soon as practicable and shall be fixed within the shortest possible time.

The issuer will commit to Quote Request obligations during the day, including during the cooling off period, unless an exemption set out below is obtained for Quote Request if there is a “fast market” which materially affects the issuer’s hedging ability.

VCM is a dynamic price limit model applied at the individual instrument level. Where the price deviates more than a predefined percentage within a specific time frame, the instrument will trade within band during a 5-minute cooling off period. This provides a window allowing market participants to reassess their strategies, if necessary. It also helps to re-establish an orderly market during volatile market situations.

Active quotes refer to the provision of liquidity where a liquidity provider actively inputs orders into the Exchange’s trading system. Issuers will, without any need for a request from an investor, provide active quotes on CBBCs as a service to investors. Active quotes save investors the inconvenience of having to request quotes and promote transparency.

For further information, please refer to “Liquidity Provision Requirements – Active quote” of the Product Sheets.

Generally speaking, yes. However, active quotes may not strictly be “continuous” because liquidity providers may need to pause the provision of active quotes for a reasonably short period of time to adjust quote parameters in response to market conditions or operational needs.

Roughly speaking, active quotes should be provided for at least 90% of the time of a trading day for CBBCs that meet the criteria for active quotes and each pause should not exceed 10 minutes.

No. Unlike quote request, there is no minimum holding time for active quotes.

Issuers are only required to provide active quotes during the “Qualified Period”. This means the period when:

(a)  the active quote criteria set out in “Liquidity Provision Requirements” of the Product Sheets are met; and

(b)  none of the exemptions set out in “Liquidity Provision Requirements” of the Product Sheets applies.

Issuers are only committed to providing active quotes for CBBCs that satisfy the following criteria (as measured on a real time basis):

(a)  an active underlying;

(b)  50% or less of their aggregate number outstanding in the market; and

(c)  the prevailing price of the underlying stock falls outside 2% of the call price or the prevailing level of the underlying index falls outside 1% of the call level. This qualified range” is derived by comparing the spot price or level of the underlying and the call price or level.

For further information, please refer to “Liquidity Provision Requirements – Active quote” of the Product Sheets.

A liquidity provider’s quotation for CBBCs must be based on the actual market conditions. There are three key considerations for an issuer when deciding if active quotes can be provided:

(a)  if the CBBC is suitable in terms of demand and risk management;

(b)  if the market conditions affecting the underlying asset, such as its liquidity and the availability of hedging, permit active quotations; and

(c)  the prevailing market conditions affecting the CBBC itself, such as supply and demand patterns.

An “active underlying” means local indices (such as the Hang Seng Index and Hang Seng China Enterprises Index) and stocks listed on the Exchange which are eligible for CBBC issuance. These represent stocks with the highest turnover in the market.

CBBC eligible list is generally updated on a quarterly basis and posted on HKEX’s website.

Investors should pay attention to the change in the eligible underlying and the effective date of the eligible list. An underlying previously eligible for CBBC issuance and is removed from the current eligible list will no longer be an “active underlying”. As a result, derivative warrants with that particular underlying will cease to be subject to active quotes commencing on the effective date of the eligible list.

On the other hand, a newly added eligible underlying will become an “active underlying” and will be subject to active quotes commencing on the effective date of the eligible list (assuming the criteria for active quotes set out in “Liquidity Provision Requirements – Active quote” of the Product Sheets are all met).

If you want to know whether a particular CBBC is eligible for active quotes at any particular time on a trading day, you may contact the issuer to ask if such CBBC meets the active quote criteria.

The list of CBBCs which were eligible for active quotes based on market data as of close of trading on a trading day will be included in each issuer’s daily trading summary published on the next trading day. If you wish to use such market data as a general reference point, please note that such data of CBBCs is historical.

Such information included in an issuer’s daily trading summary will only show historic data as of the close of trading on the previous trading day for general guidance only. You must not assume that such information is accurate, complete or up-to-date. You should not rely on such historic list as an indication that a CBBC listed in such daily trading summary actually meets the active quote criteria at any other time.

Active quotes may not be continuous because liquidity providers may need time to pause the provision of active quotes for a reasonably short period of time to adjust quote parameters in response to market conditions or operational needs.

Common causes of these short interruptions include the following:

(a)  a sudden or material change in the trading pattern of the CBBC, such as where a relatively inactive CBBC suddenly becomes active;

(b)  news is published that might have an impact on the market price of the underlying. For example, a change in forecast earnings or proposed dividends;

(c)  the underlying or the stock market experiences exceptional price movement or high volatility over a short period of time which materially affects the liquidity provider’s ability to source a hedge or unwind an existing hedge;

(d)  the underlying stock trades at a wider bid-ask spread than normal which causes the spread in the CBBC to exceed the maximum level specified in “Liquidity Provision Requirements – Active quote” of the Product Sheets;

(e)  the liquidity provider reasonably suspects any potential mispricing, system issue or error;

(f)  the liquidity provider reasonably suspects abnormal trading in respect of the underlying;

(g)  operational and technical problems such as computer network disconnection, loss of data feed, loss of connectivity with the Exchange or technical issues which arise in the issuer’s computer system; or

(h)  the liquidity provider will suffer, or expects to suffer, a financial risk due to frequency of trades and size of trades in relation to its CBBC.

An issuer may stop providing active quotes for a CBBC on a trading day if that CBBC no longer meets the active quote criteria stated in “Liquidity Provision Requirements – Active quote” of the Product Sheets. Individual issuers may voluntarily decide to keep providing active quotes, or may switch to providing liquidity on a quote request basis in accordance with the minimum liquidity service levels.

The bid and ask spreads for active quote are tighter than the maximum spreads prescribed for quote request. These tightened spreads are as follows:

Spreads for CBBCs are wider than those for derivative warrants because the price of CBBCs is generally more sensitive to movements in the value of the underlying asset, meaning that it is more costly for the issuer to hedge that underlying asset.

Investors should be aware that the standards for active quotes described in the Product Sheets are intended to apply to normal market conditions. Provision of active quotes may be affected where there are abnormal or exceptional market conditions.

Quotes provided by liquidity providers necessarily reflect the liquidity of the underlying securities or indices at any given time. If the liquidity of the underlying is impaired by conditions surrounding a VCM event, or by the VCM itself, the liquidity of the CBBC may be adversely affected in terms of quote size and spread relative to more normal market conditions.

During the 5-minute cooling off period after triggering of the VCM, where issuers’ hedging ability is materially affected due to the uncertainty in the underlying securities or index, it is possible that the minimum service level for active quotes will not be fulfilled, such as no bid-ask quotations, widening of bid-ask spread and reduction in quote size.

Similarly, after the 5-minute cooling off period, liquidity provision may still be affected if issuers continue to experience hedging difficulties. Under such circumstances, Liquidity Providers may not fulfil the minimum service level for active quotes as described in the Product Sheets.

However, issuers will use best efforts to meet quote request requirements.

VCM is a dynamic price limit model applied at the individual instrument level. Where the price deviates more than a predefined percentage within a specific time frame, the instrument will trade within band during a 5-minute cooling off period. This provides a window allowing market participants to reassess their strategies, if necessary. It also helps to re-establish an orderly market during volatile market situations.

When the underlying price or level approaches the call price or call level, the price of a CBBC may fluctuate more sharply. As a result, it may be more difficult for issuers to maintain quotes within the tightened spreads, especially when the underlying stock price is within 2% of the call price, or the underlying index level is within 1% of the call level.

Yes, unless the situation falls within any of the circumstances described in “Liquidity Provision Requirements – Quote request” of the Product Sheets.

Possibly, it depends on the circumstances.  The maximum response time for quote request has been capped at 10 minutes.  If the situation falls within any of the circumstances described in "Liquidity Provision Requirements – Quote request” of the Product Sheets, then the liquidity provider is not required to provide quotes within 10 minutes.

Not necessarily.  For example, the quote may have been taken by another market participant or one of the circumstances set out in "Liquidity Provision Requirements – Quote request” of the Product Sheets may have arisen.

The quote size offered by the liquidity provider is limited by the actual liquidity of the relevant hedging vehicle (e.g. the underlying asset or the listed or OTC options linked to the underlying asset). In this case, the liquidity provider may not be able to buy all 1,000 board lots of your bull CBBCs if the liquidity provider cannot unwind such hedging vehicle for all of the 1,000 board lots of your bull CBBCs (for example, because the relevant hedging vehicle is illiquid). The minimum quote size that a liquidity provider is committed to quote is 20 board lots. 

No. If an existing quote that complies with the minimum service levels is available, the liquidity provider will be deemed to have complied with its liquidity obligations.

The liquidity provider is only required to commit to the minimum service level. If your request for a bid-ask spread reduction is a tighter standard than the minimum service level, the liquidity provider is not obliged, and may not be able, to provide a tighter spread. It is because the bid-ask spread may change from time to time or even widen according to the prevailing market conditions affecting the underlying asset (such as hedging costs and liquidity, spread and volatility of the underlying).

If the liquidity provider has provided active quotes that comply with the spread requirement for active quotes as prescribed in the Product Sheets, it should not be necessary to make a separate quote request for such products as the bid and ask spreads for active quotes are tighter than the maximum spreads prescribed for quote request.

The liquidity provider is exempted from providing liquidity when there is a “fast market” which materially affects the issuer’s hedging ability. “Fast market” refers to situations where the financial markets experience exceptional price movements and high volatility over relatively short periods of time, which can result in a sudden increase in risk and uncertainty, possibly affecting issuers’ hedging abilities.

Issuers provide active quotes for bull CBBCs linked to stocks where the spot price of the underlying stock is above 2% of the call price.

Where the call price of a bull CBBC is HK$50, a spot price above HK$51 meets the percentage requirement for the bull CBBC. In this case, your CBBC should be eligible for active quotes (subject to it meeting the other criteria, such as the aggregate number outstanding in the market) since the spot price is above 2% of the call price. You should also note that the bull CBBC would be knocked out when the spot price reaches HK$50.

Issuers provide active quotes for bull CBBCs linked to an index where the spot level of the underlying index is above 1% of the call level.

Where the call level of a bull CBBC is 19000, a spot level above 19190 meets the percentage requirement for the bull CBBC. Your CBBC does not fulfil the active quote criteria because the spot level is less than 1% above the call level. You should also note that the bull CBBC would be knocked out when the spot level reaches 19000. In this case, you could contact the issuer to make a quote request. 

Active quotes will not be provided where one of the exemptions set out in under “Liquidity Provision Requirements” of the Product Sheets applies.  For example, the liquidity providers need not provide active quotes where:

(a)  the theoretical value is less than HK$0.01

(b)  there is a technical failure and operational problems beyond the control of the liquidity provider; or

(c)  the underlying asset or the stock market experiences exceptional price movement and high volatility over a short period of time which materially affects the liquidity provider’s hedging ability.

Remember that active quotes are not continuous. You could contact the liquidity provider if you have any questions about liquidity.

No. An issuer may, at its option, provide active quotes voluntarily. In those circumstances, the issuer is not bound by the specific spread requirements for active quotes as set out in the Product Sheets. However, in this case, the issuer will still need to comply with the spread requirement applicable to quote request in response to a quote request.

CBBCs have a “theoretical value” that may be very different from their traded (nominal) price. The theoretical value is the price of the CBBC calculated by reference to the issuer’s pricing model, taking into account all relevant market factors.

During the term of a CBBC, its price will be influenced by a number of factors, including:

(a)  its strike price or level and call price or level;

(b)  the likelihood of the occurrence of a mandatory call event;

(c)  the probable range of residual value (if any) upon the occurrence of a mandatory call event;

(d)  the funding cost;

(e)  time remaining to expiry;

(f)  the interim interest rates and expected dividend payments or other distributions on the underlying asset;

(g)  the liquidity of the underlying asset;

(h)  the availability of, and demand for, the CBBC;

(i)  the probable range of the cash settlement amount;

(j)  the issuer’s related hedging transaction costs;

(k)  the creditworthiness of the issuer and its guarantor, if applicable; and

(l)  in the case of index CBBCs, the price and liquidity of the futures contracts relating to such index.

The price of a CBBC tends to follow closely the price of the underlying asset. As a result, if the underlying asset increases in value, a “bull” CBBC with an entitlement ratio of 1 to 1 (i.e. one CBBC to one unit of the underlying asset) generally increases in value by approximately the same amount, whereas a “bear” CBBC with an 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 value of CBBC may become more volatile (and less sensitive to movements in the price of the underlying asset due to the risk of occurrence of a mandatory call event) and the change in its value may be disproportionate to the change in the value of the underlying asset.

The funding cost of a CBBC is relevant to determining its price. A CBBC is generally traded at a price that represents:

(a)  for bull CBBC, (spot price or level of the underlying asset - strike price or level of the CBBC) + prevailing funding cost; and

(b)  for bear CBBC, (strike price or level of the CBBC - spot price or level of the underlying asset) + prevailing funding cost.

The funding cost is determined based on:

(a)  an issuer’s financing or stock borrowing costs, after adjustment for any expected ordinary dividends of the shares (if the underlying assets are dividend-paying shares); and

(b)  its profit margin.

These items fluctuate from time to time. The funding cost of a CBBC may be affected by its supply and demand. Furthermore, depending on the liquidity and volatility of the underlying asset at the time, the cost and risk of hedging may also cause a fluctuation in the issuer’s funding costs. This means that the issuer’s funding costs are not fixed throughout the term of the CBBC. In addition, the longer the duration of the CBBC, the higher the funding costs. The funding costs decline over time as the CBBC moves towards expiry.

“Outstanding quantity” means the quantity held by investors and is generally shown as a percentage. It is calculated by dividing the number of CBBCs held by the market on a particular day (after closing) by the total number of CBBCs issued. For example, if the number of certain CBBCs held after closing on a particular day is 90 million and the number of those CBBCs that had been issued is 100 million, then the outstanding quantity is 90%.

A product with a high outstanding quantity may be more vulnerable to the influence of the forces of market supply and demand. For example, when there is a selling pressure on a product, the price of that product may be squeezed (that is, brought down) by prevailing market forces. The price of the product may also be volatile due to short supply. As a result, its price may not follow the price of the underlying asset very closely.

Issuers are entitled to increase market supply of a CBBC where the outstanding quantity exceeds 50%, to prevent price fluctuations caused by short supply. The way this takes place is that the issuer applies to the Exchange for a further issuance of the CBBC.

The entitlement ratio for a CBBC is the number of such products required to be converted into a unit of the underlying asset at the strike price on the expiry date. Assuming all other factors affecting two different products are the same (underlying asset, strike price, expiry date, volatility etc.), their respective entitlement ratios would directly affect their respective values per unit. Generally, a CBBC with a higher entitlement ratio would have a relatively small value per unit. However, in theory, the entitlement ratio would not affect the performance of a particular product, as it has been calculated into the effective gearing.

The premium reflects the degree by which the price of the underlying asset needs to move before reaching the break-even price of a CBBC at expiry.

For example, if the premium of a bull CBBC is 10%, the underlying price should rise by 10% at expiry, in order to reach the break-even price.

You can calculate the premium based on the formula below (based on the payout formula at expiry):

These formulae can therefore be used as a reference to calculate the percentage by which the price of the underlying asset needs to move before reaching the break-even price of a CBBC at expiry.

These formulae can therefore be used as a reference to calculate the percentage by which the price of the underlying asset needs to move before reaching the break-even price of a CBBC at expiry.

In calculating the premium for a bull CBBC linked to the HSI based on the below formula, we need to determine the underlying price for the HSI. The spot level of the HSI may differ from its estimated future price, because the estimated future price of the HSI is calculated by reference to the sum of the cash value of the HSI (based on the HSI’s spot level) and interest rate, less the expected dividends. In most cases, as the expected dividends would be higher than the interest rate, such estimated future price of the HSI is therefore often lower than the cash value of the HSI’s spot level.

The premium calculated pursuant to the below formula may therefore be different depending on whether you apply (i) the spot level of the HSI as the underlying price, or (ii) the estimated future price of the HSI as the underlying price.

However, as the product price of a CBBC linked to the HSI is generally based on the estimated future price of the HSI futures expiring in 6 months (rather than the spot level of the HSI), such estimated future price should be adopted as the underlying price for calculating the premium of the CBBC. It is therefore likely that the premium calculated based on such lower estimated future price may result in a positive premium, whereas the premium calculated based on the spot level of the HSI may result in a negative premium, using the below formula.

Delta is the ratio of the change in the CBBC price (after adjusted by the entitlement ratio) to the change in the underlying asset’s price.

“Gearing” means the relationship that the cost of the underlying asset bears to the cost of a CBBC. For example, if the gearing for a particular CBBC is 10 times, then the investment cost of that CBBC is 1/10 of the underlying asset.

A number of other factors affecting the price of the CBBC may also change over time and, therefore, a mere rise in the underlying asset’s price may not necessarily lead to a corresponding increase to the extent of the effective gearing, or to any increase at all in the CBBC’s price.

When a listed company announces its financial results, it will also generally announce whether dividends will be paid.

Whether or not this affects the price of a related CBBC depends on whether or not dividends were expected and, if so, at what level and on what date. This is because the issuer considers past records of dividend distribution and the dividends expected by the market, when calculating the CBBC price.

Under normal circumstances, a CBBC linked to shares of a company will be adjusted if there is a capital adjustment of those underlying stocks (such as bonus issue, rights issue and restructuring event or spin-off / merger / consolidation). Specifically, an adjustment will be made to the call price, strike price and entitlement ratio according to terms specified in the relevant listing documents.

In the case of a merger/consolidation, an adjustment will be made to the call price, strike price and entitlement ratio of the CBBC of the company being merged or consolidated with. If the merger/consolidation results in an extinguishment of the current underlying, such underlying of the CBBC will change from the original underlying to a surviving/new underlying. Where there is a surviving company, no adjustment will be made to the CBBC of the surviving company.

It is possible that trading of shares of the entities undergoing a merger may be suspended for a period of time. The Listing Rules require suspension of CBBCs where the underlying stock is suspended. When this happens, the value of CBBCs may be adversely affected due to time decay during the suspension period. 

Under normal circumstances and for the purpose of calculating the value of the rights attached to the spin-off company, issuers will use volume-weighted average price (VWAP) of those auto-matched trades of that company on its first day of listing as the basis of adjustment. The adjustment will take effect from the day following the listing date. Investors should note that no adjustment will be made to those CBBCs that expire before the effective date of the adjustment.

Depending on circumstances of the case, CBBCs may be suspended from trading from the ex-entitlement date to the listing date of the spin-off company. In this case, the value of CBBCs may be adversely affected due to time decay during the suspension period.

Similarly, depending on circumstances of the case, the observation period for CBBCs may be suspended from the ex-entitlement date to the listing date of the spin-off company. Thus, no mandatory call event will occur during such period. 

In addition to the term of CBBC (i.e. underlying, expiry date, strike price and call price), the price of a CBBC also depends on a number of other factors which are based on different pricing assumptions adopted by individual issuers (e.g. different funding level, hedging cost, expected dividends, etc.). Accordingly, the prices of CBBCs with identical terms issued by different issuers may be different.

Assuming all other factors remain constant, it is likely that the bull CBBC price is affected by market force. The higher the outstanding amount, the greater the potential that the bull CBBC price is affected by market supply and demand, and as a result of which the bull CBBC price may drop due to the high selling pressure while the price of the underlying remained unchanged. 

HSI bull CBBCs are not solely priced based on HSI index. They are mainly priced based on HSI index, interest rate and expected dividend. Since HSI futures contract reflects the value of HSI index, interest rate and expected dividend, the pricing of the HSI bull CBBCs is generally priced based on HSI futures contracts.

The price of such CBBC is based on the estimated future price of the HSI futures expiring in 6 months against which the CBBC is hedged (rather than the spot level of the HSI or the future price of the front month HSI futures). The estimated future price of the HSI is calculated by reference to the sum of the cash value of the HSI (based on the HSI’s level) and interest rate, less the expected dividend. Assuming all other factors remain constant, it is likely that such increase in the spot level of the HSI was offset by the adjustment of expected dividend by the issuer, and hence the price of the CBBC remained unchanged. 

This is because the delta of the bull CBBC is not exactly equal to 1. Besides, there are a number of different factors which may affect the price of a CBBC other than underlying spot such as expected dividend and funding cost. 

When the underlying price is trading close to the call price, the price of the CBBC may become more volatile and the change in the price of the CBBC may be disproportionate to the change in the underlying price. Investors should also be aware of the number of outstanding CBBC in the market. The higher the outstanding number, the greater the selling pressure when the underlying price gets closer to the call price. This leads to a more volatile price behaviour.

A liquidity provider provides quotes for a particular CBBC by taking into consideration the prevailing market conditions such as hedging costs and the liquidity, spread and volatility of the relevant hedging vehicles. Normally, blue chip stocks have better liquidity which allows liquidity provider to provide a tighter quote than illiquid underlying.

Liquidity providers can provide bid and ask quotes at the pricing level they deem fair by reference to the theoretical price of the bull CBBC provided that they comply with the maximum spread requirements. The bid and ask spread may change from the time to time according to the prevailing market conditions affecting the underlying asset such as hedging costs and liquidity, spread and volatility of the relevant hedging vehicles.  Therefore it is possible that their quotes will not match your expected price levels due to the widening of the bid and ask spread.

For example, we assume that the theoretical price of the bull CBBC was initially HK$0.2 with a spread of HK$0.003 on each side, such that the bid and ask quotes were initially HK$0.197 and HK$0.203 respectively. The HSI then drops which leads to a corresponding drop in the theoretical price of the bull CBBC to HK$0.197. Notwithstanding the drop in the theoretical price of the bull CBBC, the spread may be widened to reflect the prevailing market conditions. For example, if the spread is then widened to HK$0.006 on each side. The new bid and ask quotes will become HK$0.191 and HK$0.203 respectively for the CBBC with a theoretical price of HK$0.197. In such case, the ask quote does not change but the bid quote is lowered due to the widened spread.

This could happen because:

1. some other pricing factors affected the bull CBBC price (e.g. expected dividend, time decay, etc.);
2. the market closing time of the bull CBBC and the underlying security was different. Being an eligible security under the closing auction session, it continued to trade in the closing auction session which ended at 4:10 p.m. while the trading in the bull CBBC ceased at 4:00 p.m. In this case, due to the 10 minutes closing time gap, direct comparison of closing price of the bull CBBC and the underlying security might not be appropriate and meaningful, or

    

3. the closing price of the bull CBBC might not reflect the quote price of the liquidity provider. In this case, quotes of the liquidity provider might have moved in line with the underlying but were not reflected in the closing price of the bull CBBC.  The closing price could be (1) calculated based on other exchange participants’ trades and quotes; or (2) carried forward from previous days.

CBBCs can be knocked out during the observation period which includes pre-opening session, continuous trading session and closing auction session. Even though the trading in the CBBC ceased at the end of the continuous trading session at 4:00 p.m., it could still be knocked out when the underlying stock hits the call price at the end of the closing auction session.

The entitlement and exercise price of the call warrant will be adjusted according to the following formula:

Adjusted entitlement = Adjustment factor * E

Adjusted exercise price = X / Adjustment factor

Adjusted call price = Y / Adjustment factor

Where

• Adjustment factor = 1 + N
• E:  Existing entitlement immediately prior to the bonus issue
• X:  Existing exercise price immediately prior to the bonus issue
• Y: Existing call price immediately prior to the bonus issue 
• N:  Number of additional shares received by a holder of existing shares for each share held prior to the bonus issue

In this case,

• Adjustment factor = 1+ 1/10 = 1.1
• Adjusted entitlement = 1 * 1.1 = 1.1 shares
• Adjusted exercise price = HK$12.28/1.1 = HK$11.164 (rounded to the nearest HK$0.001)
• Adjusted call price =HK$12.88/1.1=HK$11.709 (rounded to the nearest HK$0.001)

The purpose of the adjustment is to ensure that as far as possible, the theoretical price of the call warrant remains unchanged immediately before and immediately after the adjustment. Assuming all factors being equal, the theoretical price of the call warrant will remain unchanged.

Assuming all other factors remain unchanged, the bull CBBC price will drop upon declaration of dividend on 5 April.  It is because the actual ex-date (29 May) falls before the expiry date (14 June) and the dividend actually paid during the term of the bull CBBC is higher than expected (according to historical record it was expected that such dividend would only be paid after the expiry of the bull CBBC).  

A mandatory call event occurs when, at anytime during a trading day between the first trading day and the trading day immediately preceding the expiry date of the CBBC, the spot price or level of the underlying asset is:

• at or below the call price or level in respect of a bull CBBC; or
• at or above the call price or level in respect of a bear CBBC.

A trading day includes the pre-opening session and the closing auction session.

Generally, MCE time is posted on “MCE time” webpage under the Products Corner for Callable Bull/Bear Contract on HKEX website and such information is available within 45 minutes from the occurrence of a mandatory call event. Investors should refer to the announcement published by issuers on HKEXnews website for the official MCE time.

In addition, some issuers may post MCE time on their own websites.

For “Category N” CBBCs, the answer is no. If a mandatory call event occurs, you will lose all of your investment.

For “Category R” CBBCs, the answer is maybe. You may receive a residual value when a Category R CBBC is being called before expiry. The residual value is calculated generally in accordance with the following principles:

(a)  For a Category R “bull” CBBC – (The lowest spot price or level of the underlying asset in the MCE valuation period minus the strike price or level) divided by the entitlement ratio.

(b)  For a Category R “bear” CBBC – (The strike price or level minus the highest spot price or level of the underlying asset in the MCE valuation period) divided by the entitlement ratio.

For a CBBC, MCE valuation period is a period commencing from the time upon which a mandatory call event occurs in the trading session of the Exchange up to and including the end of the following trading session.

Pre-opening session and morning session are considered as one trading session. The afternoon session and the closing auction session are considered as another trading session. In the case of half day trading, the pre-opening session, the morning session and the closing auction session are considered as one trading session.

Please see the listing documents of the relevant CBBC for further details.

Mandatory call event may occur at any time during the trading day. If it occurs during the continuous trading session, no further trade can be concluded via auto-matching. In addition, all trades concluded manually after the mandatory call event will be cancelled.

Please note that since there may be a time gap between the mandatory call event and termination of trading of the CBBC, some CBBC trades concluded after the occurrence of the mandatory call event may be cancelled even though they have been confirmed by brokers.

Investors should therefore apply special caution when a CBBC is trading close to the call prices or levels.

No, the expiry day of a CBBC is not the same as the last trading day. Investors can only trade a CBBC on or before the last trading day:

The last trading day falls on the trading day immediately before its expiry date, subject to the occurrence of a mandatory call event following which the CBBC is terminated early and the trading of that CBBC ceases immediately.

All CBBCs currently traded on the Exchange are European style and are cash settled at expiry.

For cash-settled CBBCs that are in-the-money on the expiry date, the CBBC holders are then paid a positive cash settlement amount according to the terms and conditions as set out in the listing documents.

Investors will receive the cash settlement amount (if any) no later than the third settlement day following the expiry date. In general, Christmas Eve, New Year’s Eve and Lunar New Year’s Eve (being half trading days) will normally be prescribed by the Exchange as non-settlement day.

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.

The issuer may elect to early terminate the CBBCs. Holders of those CBBCs may receive an early termination amount which is determined by the issuer:

(a)  in good faith and a commercially reasonable manner; and

(b)  where applicable, by reference to the determination made by the Exchange in relation to the relevant listed options or futures over the underlying stock. In a past case, such early termination amount has been calculated based on the difference between the exercise price and the offer price of cancelling the underlying stock under the proposed privatisation, adjusted by the entitlement ratio. However, such determination may be different on a case by-case basis.

(a)  Trading suspension or absence of closing price on the original valuation date only - in that case, the closing price on the trading day following the original valuation date will be used as the settlement price at expiry.

(b)  Trading suspension or absence of closing price on the original valuation date and each of the three trading days immediately following the original valuation date - in that case, the closing price on the 4th trading day following the original valuation date will be used as the settlement price at expiry.

(c)  Trading suspension or absence of closing price on the original valuation date and each of the four trading days immediately following the original valuation date - in that case, the settlement price at expiry is determined based on the issuer’s good faith estimate made in accordance with the terms and conditions. Such determination will be made on a case-by-case basis by reference to the prevailing market conditions.

Trading suspension above means suspension of trading of the underlying stock during the last half hour before close of trading.

You can only trade CBBCs linked to an underlying asset listed overseas during trading hours of the Exchange. However, when the Exchange is closed, even though the overseas exchange is open for trading, you cannot trade your CBBCs.  

If the overseas underlying asset becomes volatile during the trading hours of the overseas exchange, you will not be able to trade out your position while the Exchange is closed.  This is one of the risks of trading CBBCs linked to an overseas underlying asset where the Exchange and the overseas exchange have different trading hours.

In addition, if you hold a CBBC linked to an overseas underlying, you should also be aware that you will not be able to sell it when it approaches knock-out while the Exchange is closed.

Conversely, when overseas exchange is closed and there is no trading of overseas underlying during the trading hours of the Exchange. You may not be able to obtain the underlying price for reference.  As a result, the bid/ask spread of the CBBCs linked to an overseas underlying may be wider, as compared to CBBCs linked to a local underlying asset.

Unlike CBBCs linked to local indices or other actively traded local stocks, liquidity providers are not required to proactively provide quotes for products linked to an overseas underlying asset.  In case you do not see liquidity providers’ quotes in the market, you have to call them to request for quotes. They are obligated to provide quotes within 10 minutes with a maximum bid/ask spread of 20 ticks and a minimum offer size of 20 board lots subject to certain exemptions set out in “Liquidity Provision Requirements” of the Product Sheets.

Debt securities that can be listed on the Stock Exchange include (without limitation):

• convertible / exchangeable bonds;


• asset backed securities;

• green / social / sustainable / sustainability-linked bonds;

• perpetual securities;
       
• Sukuk bonds; and
  
  
• exchange fund notes (EFN). For more information on EFN, please refer to Exchange Fund Notes Information for Investors on the Hong Kong Monetary Authority website.

The above-mentioned debt securities may be listed under:

• Chapter 22 to Chapter 36 of the Main Board Listing Rules  - these debt securities can be invested by public investors, or
  
   
• Chapter 37 of the Main Board Listing Rules (“Chapter 37”)  - these debt securities are offered to professional investors (as defined under Chapter 37) only and not offered to public investors in Hong Kong.

Professional Debts are targeted at professional investors only who are sufficiently sophisticated to determine whether a listing document provides them with the necessary information to make an informed investment decision. These debts are offered to professional investors as defined in Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap. 571), including authorized financial institutions, insurance companies and high net worth individuals or corporations having investment portfolio of not less than certain prescribed amounts.

Professional Debts are intended for investment by professional investors only. Chapter 37, under which Professional Debts are listed, is not designed to contain provisions for the protection of retail investors. Professional Debts have a higher value minimum board lot of HK$500,000 which is intended to limit retail investors’ access to the Professional Debts market.

Investors may refer to the “List of Debt Issued to Professional Investors” in “Debt Securities” under the section headed “Our Products” on the HKEX website.

The Listing Rules requires the front page of the listing documents of Professional Debts to contain a statement that the relevant Professional Debts are intended for purchase by professional investors only in Hong Kong. Investors can review the listing documents to find out if the relevant debt securities are for professional investors only.

Listing documents of Professional Debts are required to be published on the HKEXnews website on the listing date. Professional investors may also contact the intermediaries or brokers offering the Professional Debts to obtain the relevant listing documents.

It depends on whether the debt securities are eligible for settlement in the Central Clearing and Settlement System (CCASS).

The accrued interests for all CCASS settled debt securities are disseminated to clients of the Exchange such as information vendors through the Exchange’s market data platform. Investors may contact their brokers or subscribe for the information through information vendors which provide such information.

Some listed debt securities, including most of the Professional Debts, are not admitted into CCASS for clearing and settlement purpose. Trades executed on the Exchange may be settled outside CCASS through other means according to the issuer’s listing documents. Investors who want to trade in these debt securities should check with their brokers on settlement arrangements, including accrued interests, before they trade.

It depends on whether the debt securities have been admitted into CCASS for settlement.

If the trade is settled in CCASS, CCASS will automatically add the accrued interest onto the trade value to come up with the final settlement amount, where the buyer of the debt securities will pay to the seller the purchase price plus an amount equal to the interest accrued from the last interest payment date (or the issue date) to the settlement date stipulated by CCASS.  If the trade is settled outside CCASS, the buyer and seller will separately work with their brokers and agree on the settlement arrangements and settlement amount with reference to the settlement date.

Only professional investors (as defined in Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap. 571)) should trade in Professional Debts. Exchange Participants should exercise special caution when handling client order instructions to ensure the suitability of their clients to trade in these securities.

Before accepting any instruction to purchase Professional Debts from a client, an exchange participant should conduct appropriate know-your-client procedures to ensure that such client is a professional investor in accordance with the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. If such client is an intermediary placing orders to the exchange participant as agent on behalf of its underlying customers, the exchange participant should ensure that those underlying customers who purchase Professional Debts through an intermediate broker are also professional investors.

Exchange participants shall implement appropriate and effective measures to ensure compliance with the above requirements under the SEHK Rules. Failure to comply with such requirements may constitute a situation calling for disciplinary action under the SEHK Rules.

In addition, where the relevant debt securities are not cleared through CCASS, the Exchange Participants should ensure appropriate payment and settlement arrangements are put in place before conducting any transactions for their clients on the Exchange.

Exchange participants should already have in place appropriate controls to comply with the investor eligibility requirement in relation to Professional Debts and necessary measures to rectify any non-compliance. For example, exchange participants should have prior agreement with their clients that a non-professional investor may be requested to unwind its debt securities positions as soon as possible.

As is the case of any violation of the SEHK Rules, an exchange participant should report to the Exchange if it had executed an order for a non-professional investor to purchase such debt securities. In addition, the exchange participant shall consider taking, or the Exchange may require the exchange participant to take, such actions or measures as may be necessary to remedy or rectify any non-compliance, for example, acquiring the positions of the non-professional investors; or to prevent any further non-compliance.

The Exchange takes any non-compliance seriously and will review and follow up on each incident. Follow-up actions may include issuing warning letters, conducting further enquiries, commencing investigations and reporting the matter to the SFC.

The contract multiplier for HSI futures and options is 50 per index point.  The contract months for HSI futures are spot, next calendar and next two calendar quarter months.  The contract months for short-dated options contracts are spot, next two calendar and next three calendar quarter months, whereas those for long-dated options are the next five months of June and December. 

For more information, investors can refer to "Hang Seng Index Futures & Options" under "Products & Services - Derivatives Products" on the HKEX website.

Underlying stock price - The underlying stock price is normally the most significant factor affecting the price of an option.  In-the-money options enable holders to buy or sell the underlying stock at a better price than the prevailing securities market price.  They therefore cost more than the equivalent at-the-money and out-of-the-money options because there is more value in them.  And whether an option is in-the-money depends solely on the underlying stock’s price because the option’s strike price is fixed.  The difference between the strike price of an in-the-money option and the price of the underlying stock is called the intrinsic value. For example, a call option with a strike price of $45 when the underlying stock’s price is $50 has an intrinsic value of $5.  However, it is possible that the call option in this case will be traded above $5.  Even out-of-the-money and at-the-money options, which have no intrinsic value, will normally have some value in the market.  This is because there are other factors determining the value of the option.  These are called “extrinsic” factors (or sometimes "time value" factors).  The extrinsic factors are time until expiration, dividend expectation, interest rate and volatility.

Time Until Expiration - All other things being equal, the value of an option will diminish as the option approaches expiry, and the rate at which it diminishes will be faster the closer it gets to expiry so that close-to-expiry, out-of-the-money options can lose their value very quickly.  It is for this reason that an option is often referred to as a “wasting asset”.

Dividend - The dividend factor generally only applies to stock options because most other underlying assets do not pay dividends.  All other things being equal, a cash dividend will lower the share price by the present value of the dividend on the day the stock first trades “ex-dividend”.  The larger the dividend, the more the stock price is expected to fall.  This change in the stock price in turn affects the option premium.

A higher dividend results in a drop in the premium for the call but a higher premium for the put.

Interest rate - A rise in interest rates will raise the value of call options, and lower the value of put options.  Interest rates may be regarded as an opportunity cost.  Since an option is a leveraged instrument, a call option holder does not need to pay the full value of the underlying stock, and can invest remaining funds in interest-bearing instruments.

Volatility - Risk is the probability that the price of the underlying stock will move, within the life of the option, from its present value to a point where the option writer incurs losses.  The greater the probability that this will happen, the greater the risk and hence the higher the premium, whether call or put.

The degree of expected fluctuation in the underlying stock price determines the extent of the risk.  The measure of this fluctuation is most commonly referred to as “volatility”.  Implicit in any option premium are assumptions about the likely volatility of the stock.  For this reason, one generally speaks of the “implied volatility” of the option premium, ie the likely volatility of the underlying stock is “implied” by the option premium.  Expressed as a percentage, volatility is closely monitored by option market users as a vital indicator.

The impacts of the above factors on option premium are summarised below:

Taking into account the dividend payout of the underlying stock, the theoretical stock futures price is made up of three factors, including:

The adjustment on the contract price and contract multiplier would be based on the Adjustment Ratio (AR). The AR is determined using the following formula and it is subject to a floor (details below).

Adjustment Ratio:

AR Floor, Adjusted Contract Price and Adjusted Contract Multiplier

In order to offer additional market protection by preventing the calculated AR to be extremely low, a floor of 0.1 will be introduced to the AR for calculating the adjusted contract multiplier. Please note that an alternative AR floor value may be prescribed by HKFE from time to time, after consultation with the SFC. For details, please refer to the table below.

The adjustment on the strike price and contract size would be based on the Adjustment Ratio (AR). The AR is determined using the following formula and it is subject to a floor (details below).

Adjustment Ratio:

AR Floor, Adjusted Strike Price and Adjusted Contract Size

In order to offer additional market protection by preventing the calculated AR to be extremely low, a floor of 0.1 will be introduced to the AR for calculating the adjusted contract multiplier. Please note that an alternative AR floor value may be prescribed by SEHK from time to time, after consultation with the SFC. For details, please refer to the table below.

Pure Trading
Pure trading is mainly based on unidirectional investment strategies, where an investor buys or sells a specific quantity of futures contracts based on his own projection of the movement of the underlying stock.

Hedging
The purpose of hedging is to offset the negative impact of market moves on a portfolio’s overall return.

Risk management and transfer
Stock futures trading provides an efficient mechanism for allocating price risk from those who wish to avoid the price risk in stock holding to those who are interested in bearing the price risk for a potential return, and hence, can help reduce the price risk inherent in stock investment.

Arbitrage opportunities
Arbitrage refers to profiting from the difference between the prices of similar financial instruments in the futures and securities markets by buying low in one market and selling high in another.  Stock futures' prices are linked to the underlying stocks, so any deviation between the price of the underlying stock and the futures is likely to attract the attention of arbitragers.

Spread trading opportunities
Stock futures provide opportunities for investors to trade on the relative performance of difference stocks via spread trading.

Other factors being equal, the value of a shareholder's portfolio will not change on the ex-date. But for buyers or holders of stock futures, the case is different. If both the contracted price and contract multiplier of the stock futures remain unchanged, any adjustment to the stock price will have an unreasonable and unfair impact on the value of the stock futures position.

The HKFE will decide the adjustment ratio based on the principle of maintaining the fair value of futures contracts, and adjustment will only be made in case of any material change.  HKFE will publish the details of any adjustment and its Exchange Participants (ie futures brokers) are required to notify their clients of such adjustments.

¹ SPAN (Standard Portfolio Analysis of Risk) is a registered trademark of the Chicago Mercantile Exchange

Investors can utilise the standardised calendar spread combinations (combos) offered on HKATS. Each calendar combo is the simultaneous purchase and/or sale of two different calendar months with the same underlying. Calendar combos offer 40% reduction in margin requirements. Calendar combos can be facilitated by price makers through on-screen or block-trade execution.

HKEX offers a full suite of 45 calendar spreads for USD/CNH futures, covering any pair of the 10 listed contract months, effective from 19 June 2018.

• For the physically-settled USD/CNH futures, the contract will be settled on the final settlement day by principal exchange, i.e. contract size in US dollars versus final settlement value in RMB (contract size multiplied by final settlement price¹). Delivery of US dollars will be made by short-position holder (i.e. seller); and payment of the RMB will be made by long-position holder (i.e. buyer). Please refer to the illustration of final settlement procedures on HKEX website.
  
  
• The physically-settled USD/CNH options are European style, with only “in-the-money”²  options to be exercised at expiry. The contract will be settled on final settlement day by principal exchange, i.e. contract size in US dollars versus final settlement value in RMB (contract size multiplied by strike price). Delivery of US dollars will be made by call option writer or put option holder; and payment of the RMB will be made by the call option holder or put option writer. Please refer to the illustration of final settlement procedures on HKEX website.
  
  

  	Holder	Writer
  Call Options	Payment of the Final Settlement Value in RMB	Delivery of US dollars
  Put Options	Delivery of US dollars	Payment of the Final Settlement Value in RMB

• For the cash-settled EUR/CNH, JPY/CNH, AUD/CNH and CNH/USD futures, the contract will be settled on the final settlement day by cash settlement for difference in the settlement currency.

¹ For USD/CNH futures (options), final (official) settlement price is the USD/CNY (HK) spot rate published by the Treasury Market Association in Hong Kong at or around 11:30 a.m. on the Last Trading Day

² A call option is in-the-money if the official settlement price is greater than strike price. A put option is in-the-money if the strike price is greater than official settlement price.

¹ European market infrastructure regulation (“EMIR”) is the regulatory technical standards pursuant to Article 11 European Market Infrastructure Regulation (EU) No. 648/2012 of the European Parliament and of the Council.

² Commodity Exchange Act of the U.S. Commodity Futures Trading Commission (“CFTC”).

³ Continuous Linked Settlement System — a global clearing and settlement system for cross-border FX transactions

The WM/Reuters Intra-Day Spot Rate was launched in 1994, and is generally recognised as the FX market benchmark¹. The EUR/USD, JPY/USD and AUD/USD WM/Reuters Intra-Day Spot Rates are used for calculating the final settlement price for HKEX’s EUR/CNH, JPY/CNH and AUD/CNH futures.

Please refer to the Reuters website for further details:
https://financial.thomsonreuters.com/en/products/data-analytics/market-data/financial-benchmarks/spot-rates.html

¹ As cited by a report of the Financial Stability Board in 2014 http://www.fsb.org/wp-content/uploads/FX-Benchmarks-progress-report.pdf

While both products are China Government bond futures, they are traded separately in the offshore and onshore market. There are also notable contract specification differences between the two in areas such as contract size, trading days and hours, trading mechanism, position limit, and settlement arrangements.

Please refer to the Official Circular for further details on HKEX’s CGB Futures.

A market wide trading fee discount and two incentive programs will be offered from product launch 3 August 2026 to 30 Jul 2027 (both dates inclusive).

Please refer to the Incentive Programs Circular for further details.

The Bond Basket is used to determine the FSP, where it shall be composed of bonds in the Bond Universe which fulfils the following criteria:

1. Publicly issued by the China Ministry of Finance and denominated in RMB;
2. Tradable in the China Interbank Bond Market (“CIBM”);
3. Book-entry treasury bonds with fixed coupon rates (annual coupon payment); and
4. With original term to maturity of no more than 7 years, and remaining term to maturity greater than 4 years and less than 5.25 years as of the Last Trading Day of the futures contract

The two most liquid bonds with the highest Average Daily Turnover (“ADT”) in the observation period will be selected from the Bond Universe to construct the Bond Basket. The observation period shall exclude the bond’s first CIBM trading day, and be measured by the immediately preceding 10 CIBM trading days from the Bond Basket Confirmation Day. Bonds with an observation period of less than 10 CIBM trading days will not be considered as a Bond Basket constituent.

You may reference the below for Bond Basket selection illustration:

HKEX’s CGB Futures is a cash-settled product upon contract expiry, the FSP is based on the Bond Basket of the futures contract, which is determined and announced on the last trading day (“LTD”) (the second Friday of contract month) for each contract. If the LTD is not a Trading Day or it falls on a Chinese Mainland public holiday, the LTD shall be the preceding Trading Day which is also a business day in Chinese Mainland.

ChinaBond Pricing Center Co., Ltd (“CBPC”) is a benchmark pricing platform for bonds with its data widely used by both onshore and offshore participants. The HKFE Clearing Corporation Limited (“HKCC”) will determine the FSP for each contract which shall be the reference price of the relevant Bond Basket provided by CBPC on the LTD. The formula of FSP is as follows:

The Bond Basket will be confirmed and published on HKEX’s website by day-end on the Bond Basket Confirmation Day (a day which is 20 HKFE trading days prior to the Last Trading Day of such contract). If such a day is not also a CIBM trading day, the Bond Basket Confirmation Day will be the preceding HKFE trading day which is also a CIBM trading day. Once confirmed, the Bond Basket for a futures contract shall remain unchanged until contract expiry.

Prior to the Bond Basket announcement, HKEX may publish an indicative Bond Basket on HKEX's website daily to indicate what the confirmed Bond Basket could be. The constituents of the indicative Bond Basket may be adjusted in response to changes in liquidity rankings.

You may reference the below for Bond Basket announcement illustration:

The methodology will be reviewed from time to time to ensure the Bond Basket remains suitable and representative, allowing market participants to achieve their hedging / trading objectives.

The Bond Basket constituents and other relevant information of each futures contract is available under the “Bond Basket Information” section of the HKEX 5-Year China Government Bond Futures product webpage.

The HKEX’s 5-Year CGB Futures will be a Holiday Trading Product (“H Product”), it will follow the same trading calendar for other H Products and be traded on all weekdays (Monday to Friday) except New Year’s Day. Only Holiday Trading Exchange Participants can trade the H Product.

The trading hours will be from 9:30 a.m. to 4:30 p.m. After-Hours trading is not applicable at this stage.

Please refer to HKEX’s Trading Calendar webpage for further details.

Investors can file error trade claims to the Exchange if the trades deviate from the predefined Error Trade Price Parameters. The error trade parameter is 2% from Notation Price. Large-Scale Error Trade claims (“LET”) are also available. HKEX will consider factors such as the number of trades, counterparties, and contract series involved, to determine whether the claim should be handled as a LET claim. A product specific requirement for LET is that the LET price must deviate at least 4% from the Notation Price.

Block trades consist of large buy and sell orders that are privately negotiated outside of the public auction market. The minimum volume threshold for a block trade is set at 50 contracts, and the permissible price range for these trades is within 2%.

Please refer to HKEX’s Block Trade Facility webpage for further details.

HKATS set order size limits for each product to maintain market integrity. Orders that exceed the prescribed limit will be rejected by the system. The maximum order size limit for entering orders into HKATS is 1,000 contracts.

Please refer to HKEX’s Order Size Limit webpage for further details.

HKEX has appointed Liquidity Providers (“LP”) and Active Traders (“AT”) to support the product. LP are responsible for providing continuous two-way price quotations for all outstanding futures contracts, thereby facilitating trading activities. AT contributes to building stable liquidity for investors.

Please refer to the Liquidity Providers section of HKEX’s CGB Futures product webpage for further details.

Exchange Participants (“EP”) are required to adhere to position limits. For the 5-Year HKEX's CGB Futures, the position limit is set at 22,000 net contracts in all Contract Months combined, per Exchange Participant for the Exchange Participant’s own behalf; and 22,000 net contracts in all Contract Months combined per Client.

EP holding positions in excess of the Reporting Level for its own account or for any client shall file a LOP report. The threshold for LOP reporting for HKEX's CGB Futures is 2,500 open contracts in any one Contract Month, per EP for the EP’s own behalf; and 2,500 open contracts in any one Contract Month per Client.

Please refer to HKEX’s Large Open Positions and Position Limits webpage for further details.

The daily settlement price of the product is determined based on the latest available market price before Market closes, if it is not available the daily settlement price shall be calculated in accordance with the HKCC’s waterfall methodology.

Similar to other HKFE products, HKCC shall calculate the margin requirements of its participants at the end of each trading day.

Chinese Mainland holiday margin will be implemented during trading days over Chinese Mainland holidays. It will be different to the margin level on normal trading days to cater for the overnight risks in the onshore market.

Please refer to the Margin table section of HKEX’s CGB Futures product webpage for further details.

Acceptable collaterals for initial margin include cash collateral (in HKD, EUR, RMB, and USD) and non-cash collateral (such as Exchange Fund Bills and Notes, and US Treasuries). For variation adjustment, only cash collateral in the settlement currency (i.e. RMB) is accepted.

When the currency of the cash or non-cash collateral is different from the settlement currency of the contract, a haircut will be applied to the collateral at a pre-determined rate.

HKEX’s website contains the necessary information in relation to the futures contract as well as its Bond Basket. Participants may refer to information vendors’ platform for China Government Bond data, where the historical Bond Basket and theoretical contract price can be constructed and calculated accordingly.

Eligibility is consistent to HKFE’s current guidelines for listed derivatives; investors may refer to HKFE’s rules and procedures for requirements. EPs shall perform due diligence on their clients to ensure trading eligibility. Investors should also perform their own trading eligibility assessment.

For instance, HKEX’s CGB Futures are considered to be foreign security futures products by the U.S. SEC and the U.S. CFTC. As the underliers of HKEX’s CGB Futures are bonds issued by a foreign government eligible to be registered with the U.S. SEC under Schedule B of the Securities Act of 1933, HKEX’S CGB Futures are qualified to be exempted from registration by the U.S. SEC under its order issued on 30 June 2009 (the “SEC Order”). Only eligible U.S. market participants (primarily “qualified institutional buyers”) may trade these foreign security futures products in accordance with the terms and conditions of the SEC Order and subsequent guidance issued by the U.S. CFTC in 2010. U.S. persons and persons located in the United States should review carefully the eligibility requirements and make their own determination. Additional information is available at HKEX’s CGB Futures product webpage.

• Commodities are one of the three core pillars of HKEX’s multi-asset strategy
• The launch of commodities products is to promote commodity market in the Asian time zone to reflect Asian supply and demand
• It will give customers of HKEX exposure to the commodities sector

• It facilitates hedging and arbitrage in the Asian time zone
• It gives exposure to a network of over 30 HKFE participants with Mainland backgrounds and their ability to attract Mainland commodity investors
• Exposure to liquidity from global financial market players who trade commodities

• Physical end users and sector participants looking to hedge their market exposure
• Cross-market arbitrageurs
• Retail and Financial investors with an appetite to invest in the commodities sector

• Gold Futures are futures contracts based on the precious metal market to help build Hong Kong into a mature, comprehensive capital market that can serve as a risk management centre for both Mainland investors and international participants.
• HKEX Gold Futures are designed to help gold end users, like refiners, fabricators, and jewelers, hedge gold price risk, as well as for banks, fund managers and traders to invest in the precious metals market. HKEX's Gold Futures underlying is a 1 kilogram gold bar of at least 0.9999 fineness.
• HKEX Gold Futures are quoted in USD and off shore RMB (CNH), and are the first physically delivered commodity futures contract in Hong Kong. The final settlement price is the volume weighted average price of all trades in the expiring Contract Month during the last thirty minutes of trading on the Last Trading Day.
• For more information, investors can refer to "Gold Futures" under"Products - Listed Derivatives - Commodities"on the HKEX website.

• Iron Ore Futures are futures contracts based on seaborne iron ore that is the raw material for steel making. HKEX’s iron ore futures underlying is the seaborne TSI index 62% Fe CFR China, which is a medium-high grade iron ore.

• HKEX Iron Ore Futures contracts are designed to provide a way for financial and physical investors to hedge their iron ore price exposure and invest in the commodity.

• HKEX Iron Ore Futures contract is quoted in USD, cash settled and the final settlement price is based on the arithmetic average of all TSI index 62% Fe CFR China index values published in that contract month. The last trading day is the last Hong Kong business day of a calendar month that is not a Singapore public holiday. Both monthly and quarterly contracts are provided in HKEX to enhance exposure.

• For more information, investors can refer to "Gold Futures" under"Products - Listed Derivatives - Commodities"on the HKEX website.

• London Metal Mini Futures are based on six base metals (Copper, Aluminum, Zinc, Nickel, Tin and Lead) on the London Metal Exchange, the world premier industrial metals trading exchange.

• HKEX London Metal Mini Futures offers Asia time zone trading facilities and are designed to give the market another channel to hedge against adverse price movements. HKEX aims to develop commodities trading in Hong Kong in cooperation with LME, to bring together both the physical and financial communities.

• HKEX London Metal Mini Futures are quoted in USD and off-shore RMB (CNH), cash settled and are a smaller size than the LME contracts. The final settlement price is based on the LME’s Official Settlement Price which is established during the 2^nd Ring Close

• For more information, investors can refer to "London Metal Mini Futures" under "Products & Services - Derivatives Products" on the HKEX website.

• HKATS’s Block Trade Facility allows participants to execute a large-sized order with price and execution certainty; and reduction of counter-party risk through central clearing.
• The minimum block trade volume threshold for commodities are as follows:
• London Metal Mini Futures (USD and CNH): 50 contracts
• Gold Futures (USD and CNH): 30 contracts
• Iron Ore Futures: 50 contracts
• Criteria for Block Trades, Information Dissemination, Clearing Arrangements and Market Surveillance can be found

  https://www.hkex.com.hk/Services/Trading/Derivatives/Overview/Trading-Mechanism/Block-Trade-Facility?sc_lang=en

• TMA is Hong Kong’s Treasury Markets Association
• The pricing is the benchmark of the spot USD/CNH rates in Hong Kong published at 11:15 am each business day
• The pricing is determined by averaging the middle quotes after excluding the highest 3 quotes and lowest 3 quotes from the 18 contributing banks (subject to changes by TMA from time to time)

For HKEX Gold Futures contracts entering the spot month, the Participants are required to have internal controls to manage their own /clients’ positions and such control should aim to mitigate risks of carrying excessive positions.

Non-Delivery Participants (“NDPs”) should ensure no open positions by end of LTD-1, no trading or accepting any transfer of any spot month contracts after the T Session on LTD-1 (except for closing existing open positions). A 0.25% fine of the Final Settlement Price multiplied by the Contract Size will be imposed and warning letter might be issued for NDPs breaching position restrictions on LTD-1 and LTD.

Delivery Participants (“DP”) should ensure Acceptance/Delivery Notice is submitted to HKCC by LTD 17:00.

The Seller CP needs to confirm the delivery details with HKCC by LTD+1 10:00 and ensure the gold is ready for earmark by LTD+1 noon. For any failure to receive the full amount of gold, Buyer CP should notify HKCC by LTD+2 14:30.

From morning of LTD-2 onwards, a physical delivery charge (10% of contract value) will be applied to any open positions held by the end of LTD-3 as additional margin, serving as early alert for all CPs to close /roll over positions should there be no intention of delivery.

To become DPs, who have physical delivery capability for final settlement of USD Gold Futures Contracts, participants should

1. Have USD settlement capability,
2. Set up physical settlement arrangement with each of the Approved Depositories i.e. Open a depository account with each of the Approved Depositories (i.e. Brink’s HK initially); or Line up Delivery Agreement with Delivery Agent i.e. Appoint another HKCC Participant who has depository accounts with all Approved Depositories as Delivery Agents.

To become NDPs, who do not have physical delivery capability for final settlement of Gold Futures Contracts, participants should

1. Have USD settlement capability,
2. Restrictions - subject to HKCC Rule 606A, NDP should not
   
   • Carry the spot month contracts by the end of LTD-1
   • Trade or accept any transfer of spot month contracts after T session on LTD-1 unless for the purpose of closing out existing open positions of the NDP

A physical delivery contract charge in the amount of approximately 10% of the contract value is imposed on all open spot month Gold Futures Contracts from the morning of the second business day prior to the Last Trading Day (i.e., LTD-2) until such contracts are closed out or settled, to mitigate the risk of physical delivery.

The physical delivery contract charges for Gold Futures are reviewed and updated by the Clearing House on a regular basis and are published in the Margin Tables - Margin Levels for Futures Contracts - Current.  For details on the margin calculation for Gold Futures, please refer to the PRiME Margining Guide.

Warning letters and fines will be issued to NDP who:

1. Maintain open positions by the end of LTD-1^[1];
2. Trade or accept any transfer of any spot month contracts after the T Session on LTD-1 (not for closing existing open positions); or
3. Maintain open positions by the end of LTD

^[1] After the System Input Cutoff time (i.e. 20:30) on LTD-1

No, the earmarking does not extend to the CP’s client depository account. Accordingly, the CP is not required to specify the end client’s individual depository account details for this purpose. The earmarking requirement is fulfilled at the CP level, and there is no obligation to look through to, or disclose, the underlying client account information.

HKCC’s matching process with Clearing Participants is designed based on below considerations:

1. In order to maximise the chances of physical delivery, DP will be pooled and matched amongst themselves first; the same applies for NDP.
2. If there is more than one Approved Depository, priority will be given to deliveries in the same depository for the convenience of DP.
3. For efficiency, short and long positions of the same quantity will be matched first.

For fairness, in case there are multiple positions of the same quantity, the positions will be matched on a random basis.

NDP is required to pay non-delivery charge (7% of the Reference Price multiplied by the Contract Size) to HKCC, and make Cash Compensation to the matched, performing CP including:

1. Price Differential with reference to Final Settlement Value and contract value of spot month contract on FSD and
2. 3% of contract value of spot month contract on FSD, where applicable

The matching process is based on DCASS accounts. Therefore, if the underlying clients’ positions are held in separate DCASS accounts, they will not be netted in the matching process. In such cases, long and short positions maintained for different clients will be treated independently, and the CP should follow the matching results from the clearing house for submission.

If the seller CP cannot fulfil delivery obligation, they will need to pay cash compensation (price differential on top of 3% of contract value of spot month contract on FSD compensation) to the buyer CP, and a 7% of the Reference Price multiplied by the Contract Size non-delivery charge to HKCC. The buyer CP may also follow up with the seller CP and seek arbitration with HKCC facilitating the process. Further details are available in HKCC Procedures 2A.3.3(a) and 2A.3.5(k).

The relevant forms (e.g. MF04, MF05, MF06) can be found under the Operations & Technical section of our webpage here.