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Last updated in January 2022

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Home › Warrants › Hong Kong listed structured products market - Frequently asked questions › Product risks

Product risks

2.1 What are the risks I need to consider before investing in structured products?

Investing in structured products is not suitable for everyone.

Structured products 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 structured products. 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:

  1. Non-collateralisation – Structured products are not secured by any asset of the issuer or the guarantor (if any) or supported by any other collateral.
  2. Credit risk – Holders of structured products 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 structured products, you are relying upon the creditworthiness of the issuer and/or a guarantor (if any).
  3. Gearing risk
    1. Standard warrants and CBBCs – 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.
    2. Inline warrants – the level of effective gearing embedded in an inline warrant depends on a variety of factors including but not limited to time-to-expiry and spot price or level of the underlying asset compared to the lower and upper strike prices or levels. An inline warrant will be expected to have a high effective gearing when trading close to its lower strike price or level or its upper strike price or level, and a relatively low effective gearing in other cases. These differences in effective gearing are amplified when inline warrants are close to expiry.
  4. Limited life – Unlike stocks, structured products have an expiry date and therefore a limited life.
  5. Time value

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

    Inline warrants, generally –

    1. when the underlying asset is within or at the upper and lower strike prices or levels and their likelihood of falling in-the-range at expiry increases over time; thus, in such cases, the value of inline warrants increases over time because investors receive the time value of inline warrants.
    2. when the underlying asset is outside the upper and lower strike prices or levels and their likelihood of falling in-the-range at expiry decreases over time; thus, in such cases, the value of inline warrants decreases over time because investors pay time value of inline warrants.
  6. Market forces – In addition to the basic factors that determine the theoretical price of a structured product, prices of structured products are also affected by the demand for and supply of the structured products. This is particularly the case when the existing issuance of a single series of structured products are almost sold out and when there are further issues in that single series of structured products.
  7. Turnover – High turnover should not be regarded as an indication that the price of a structured product will go up. The price of a structured product 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.
  8. Possibly limited secondary market – The liquidity provider may be the only market participant for a particular structured product. The more limited the secondary market, the more difficult it may be for you to realise the value in the structured product before expiry.
  9. 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.
  10. Corporate action of the underlying stocks – Corporate actions affect the value of the underlying stocks which in turn affect the value of the structured products. Adjustments may or may not be made to the terms of the structured products (such as entitlement ratio, exercise price, etc.) depending on the terms and conditions set out in the listing documents. Adjustments will not be made to the entitlement ratio of inline warrants due to its product nature.

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

Please also refer to FAQ 2.6 for additional risks of trading inline warrants and CBBCs. You should read carefully the risk disclosure in the relevant listing documents of the structured products before investing in such products.

2.2 If an issuer or its guarantor (if any) (or their respective holding company, where such credit rating is relied upon by the issuer or the guarantor (if any) for satisfying the eligibility requirements in the Listing Rules) suffers from a credit rating downgrade such that it no longer meets the eligibility requirements in the Listing Rules, what would happen to its outstanding structured products?

The issuer’s existing structured products 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 structured products 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 structured products launched but not yet listed and all structured products with no outstanding positions held by the public.

You should be cautious that prices of structured products 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 structured products.

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.

2.3 Can structured products be traded during closing auction session?

No, structured products 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 structured product 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 structured product. 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.

2.4 Can structured products be traded during the 5-minute cooling-off period after the triggering of the VCM?

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 structured products 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. Please refer to FAQs 4.20 and 4.35 for more explanations.

2.5 If an issuer defaults, can I claim back my investment?

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 structured products 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).

2.6 What is the additional risk for trading inline warrants and CBBCs as opposed to standard warrants?

CBBCs are a type of leveraged investment. They may involve a higher degree of risk and are not suitable for all types of investors. You should consider your risk appetite prior to trading in any CBBC. In any case, you should not trade in a CBBC unless you understand the nature of the product and the related transaction costs involved and are prepared to lose your entire investment amount, 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.

An inline warrant is an instrument that entitles its holder to receive a fixed pre-determined amount which depends on whether the spot price or level of an underlying asset is at or falls within (“in-the-range”) or outside (“out-of-the-range”) the upper and lower strike prices or levels at expiry. Therefore at expiry, there are only two possible scenarios: if the inline warrant expires in-the-range, investor will receive HK$1 per inline warrant held; if the inline warrant expires out-of-the-range, investor will receive HK$0.25 per inline warrant held. Due to the nature of inline warrants, investors should be aware that inline warrant prices will react differently to movements in underlying price or level, time to maturity, implied volatility as compared to standard warrants. Furthermore, movement of inline warrant prices may move in the same direction or the inverse of the underlying price or level movement during the life of the product, depending on where the underlying price or level is compared to the upper and lower strike prices or levels.

2.7 What are the additional risks in trading structured products with overseas underlying assets that investors should be aware of?

  1. Exchange rate risk

    Structured products 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 structured products with overseas underlying assets may be exposed to an exchange rate risk during the term of the structured products when the price and cash settlement amount of such structured products 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) structured products with overseas underlying assets corresponding to structured products trading currency may still be exposed to an exchange rate risk if their primary funding income is in a different currency.

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

  3. 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.

  4. Foreign tax implications

    Investors trading in structured products 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.

  5. 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.

  6. 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.

  7. Potential differences between structured products denominated in foreign currency and in HKD

    i. Differences in spread

    Foreign currency-denominated structured products 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 structured products.

    Trading currency Price range (in trading currency unit) 1 tick of bid-ask spread
    HKD From HK$0.01 to HK$0.25 HK$0.001
    USD From US$0.01 to US$0.25 US$0.001 (equivalent to approximately HK$ 0.0078)

    ii. Differences in minimum trading price and liquidity

    Structured products are not tradable on the Exchange if the trading price is below 0.01 unit of trading currency. The minimum trading price of structured products denominated in foreign currency (in terms of monetary value based on the relevant exchange rate) may therefore be different from that of structured products denominated in HKD. Below is an illustrative example:

    Trading currency No trading if the trading price is less than:
    HKD HK$0.01
    USD US$0.01 (equivalent to approximately HK$ 0.078)

    In addition to the minimum trading price, liquidity providers are also not obliged to provide liquidity if the theoretical value of the structured product is less than 0.01 unit of trading currency (see FAQ 4.16(e)). Consequently, liquidity in foreign currency denominated structured products may be more limited than that of HKD-denominated structured products. Below is an illustrative example:

    Currency
    Theoretical value in HKD
    HKD
    Price
    00.010.020.030.040.050.060.070.078
    USD(0.01 USD is approximately equal to 0.078 HKD)
    Liquidity providers are NOT obliged to provide liquidity
    Liquidity providers ARE obliged to provide liquidity

2.8 I hold a warrant and note that the credit rating of the issuer’s holding company is disclosed in the listing document. What does this mean for my investment? If the issuer defaults, do I have any claim against the holding company?

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 structured products.

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.

2.9 Does high turnover indicate that a structured product is popular and liquid? Should I select a structured product based on its turnover?

Not necessarily. While high turnover may suggest that a structured product 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 structured products where trading activity is concentrated among a small group of investors.

No, investors should not rely solely on turnover when selecting structured products. 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.

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