Hong Kong Exchanges and Clearing Limited (HKEx) is planning to roll out the market infrastructure for the listing, trading, clearing and settlement of Callable Bull / Bear Contracts (CBBC) on the Stock Exchange in June this year.  HKEx now invites issuers wishing to issue CBBC in June to submit draft documentation for review no later than 2 May. 

“The objective of launching the CBBC infrastructure is to provide an additional choice of structured product to issuers and investors,” said Gerald Greiner, HKEx’s Deputy Chief Operating Officer and Head of the Exchange Division. 

“The trading of CBBC at the Stock Exchange will provide central price transparency and efficient trading and clearing facilities,” Mr Greiner added.  “This will in our view provide a better environment for investors than the OTC (over-the-counter) markets overseas for CBBC-style products.”

CBBC are a type of structured or derivative product that tracks the performance of an underlying asset (or assets).  They are issued either as Bull or Bear contracts, allowing investors to take bullish or bearish positions on the underlying asset with a relatively small capital outlay.  As with derivative warrants (DW), issuers will have to obtain Stock Exchange approval before listing their CBBC on the Exchange.  Similar products are already available - and popular - on some exchanges in Europe and Australia, as well as in OTC markets. 

CBBC are similar to margin financing, but there are no margin calls.  They are also similar to DW, but unlike DW, CBBC have a call feature. 

CBBC are issued with a fixed expiration date.  However, they also are issued with the condition that during their life they will be called immediately by the issuers when the price of the underlying asset reaches a level specified in the listing document.  The level is known as the Call Price.  If it is reached before expiry, the CBBC is called and the fixed expiration date is no longer valid.  In the event of a Mandatory Call Event – the calling of a CBBC before the expiration date – the closing of the position may result in the total loss of the original investment, but the investor would not be obligated to make any additional payments. 

Due to their relatively simple and easy-to-understand structure, CBBC generally tend to track the price of the underlying asset closely.  However, investors are cautioned that the price of a CBBC can be volatile at times, in particular when the price of the underlying asset is close to the Call Price, and its liquidity uncertain.

Issuers can apply to list CBBC on the five Hong Kong-listed stocks with highest turnover value last year (HSBC, Hutchison Whampoa, PetroChina, China Mobile, and Cheung Kong), as well as the Hang Seng Index and the H-shares index.  They also can apply to list CBBC on overseas stocks, overseas indices, currencies or commodities.  Additional underlying assets may be considered at a later stage, based on the experience gained after the initial listings.

HKEx will organise educational events on CBBC prior to the first issue to explain to market participants the product’s features and the risks associated with CBBC, and it will allocate resources to further enhance investors’ understanding of the product after the first listings.   The events will include Continuous Professional Training, or CPT, courses on CBBC for Exchange Participants and a media workshop for journalists.  HKEx also will help familiarise investors with the product through the publication of CBBC-related information on the HKEx website, leaflets and educational articles in newspapers. In addition, issuers are expected to provide information to the market on their CBBC.

Major features of CBBC market