The HKEx Callable Bull/Bear Contract (CBBC) market

THE HKEx CALLABLE BULL/BEAR CONTRACT (CBBC) MARKET*

By Research & Corporate Development Department Launched in the HKEx securities market on 12 June 2006, Callable Bull/Bear Contracts (CBBCs) have seen rapid growth and have already become a large market segment. So far, the issuance and trading of CBBCs has concentrated on a small number of underlying assets mainly the local indices and a few single stocks and the market has been dominated by a few issuers. Nonetheless, the issued number, amount and trading of CBBCs have surpassed those of derivative warrants in recent months. There may be room for the HKEx CBBC market to broaden in terms of asset coverage and issuer participation.

CONTENTS

Page

INTRODUCTION....................................................................................................................2 1. 2. 3. 4. BASIC FEATURES ........................................................................................................2 PRODUCTS OF SIMILAR NATURE IN OVERSEAS MARKETS ........................3 DEVELOPMENT OF THE HKEx CBBC MARKET ................................................5 PROFILE OF THE HKEx CBBC MARKET ..............................................................9 4.1 4.2 4.3 4.5 Underlying asset types .............................................................................................9 Issued amount per CBBC.......................................................................................11 Maturity..................................................................................................................13 Issuers ....................................................................................................................14

4.4 Single-stock CBBCs ..............................................................................................13 CONCLUSION ......................................................................................................................17 APPENDIX. Comparison between CBBCs, DWs, futures and options...........................18

* The analysis and framework of this report are developed by Research & Corporate Development (RCD); the views and comments, if any, captured within the framework are generally those of market practitioners or other experts and not necessarily those of RCD or HKEx.
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The HKEx Callable Bull/Bear Contract (CBBC) market

INTRODUCTION Callable Bull/Bear contracts (CBBCs) are a type of structured product that tracks the performance of an underlying asset without requiring investors to pay the assets full price. The CBBC market has grown rapidly since it was launched in the HKEx securities market on 12 June 2006. From 24 at the end of 2006, the number of CBBCs increased 62-fold to 1,525 at the end of May 2009. The market share of CBBCs in the turnover of HKExs Main Board increased from 0.2% in 2006 to 12% during the first five months of 2009. This paper provides a brief account on the basic features of CBBCs, a snapshot of similar products in overseas markets and an overview of the development of the HKEx CBBC market from its launch to the end of May 2009. It examines the profile of the CBBCs listed during the period in terms of underlying assets, issued amount, maturity and issuers. 1. BASIC FEATURES CBBCs are issued either as Bull or Bear contracts with a fixed expiry date, allowing investors to take bullish or bearish positions on the underlying asset. The listing of CBBCs is governed by Chapter 15A of the Main Board Listing Rules on structured products products that provide their holders with economic, legal or other interests in the underlying assets and hence derive their values by reference to those assets prices and values. The issuers of CBBCs are third parties, usually investment banks, independent of the underlying asset issuers (if any) and of HKEx. CBBCs are issued with the condition that during their lifespan they will be called back (i.e. terminated) by the issuers if the price of the underlying asset reaches a level known as the call price specified in the listing document. Another price level of the underlying asset fixed at the time of issuance the strike price determines the residual value of the CBBC at expiry or at call. For Bull contracts, the call price must be equal to or above the strike price (for Bear contracts, equal to or below). If the call price is reached before expiry, the CBBC will be terminated immediately. The specified expiry date from the listing document will no longer be valid. Such event is referred to as a mandatory call event (MCE). There are 2 categories of CBBCs Category N and Category R. A Category N CBBC has no residual value at call, i.e. its call price equals its strike price. A Category R CBBC has residual value at expiry or at call, i.e. its call price is higher than its strike price for a bull contract (lower for a bear contract). Category N CBBCs are rare in Hong Kong up to the end of May 2009 only two Category N CBBCs were issued. All CBBCs listed in the HKEx securities market at the end of May 2009 were Category R. CBBCs may be issued with a lifespan of 3 months to 5 years. They are traded on the HKEx securities market in the same manner as other securities market products and are settled in cash only. HKEx determines, in consultation with the Securities and Futures Commission (SFC), the eligible assets for CBBC issuance; these include highly liquid stocks listed on the HKEx securities market, local and foreign indices, overseas stocks and contracts listed on reputable commodity and derivatives exchanges, and foreign currencies. Effective 17 April 2009, 29 Hong Kong stocks, 3 local indices and 4 overseas stock indices are eligible assets for CBBC issuance.

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CBBCs and derivative warrants (DWs) in Hong Kong have similarities in their nature and their regulatory and trading arrangements 1 . Both are regarded as structured products under the Main Board Listing Rules. Both are issued by third parties, are traded on the HKEx securities market, are of a maturity of not more than 5 years, and have a Liquidity Provider arrangement (one per issue). Like cash-settled DWs, CBBCs are not subject to stamp duty. The contract parameters for both CBBCs and DWs will be adjusted for capital changes in the underlying security. There are differences between CBBCs and DWs. CBBCs can have maturities as short as 3 months while the minimum maturity period for DWs is 6 months. The price movement of a CBBC tends to track closely the price of the underlying asset (i.e. delta2 close to one) while the price of a DW depends on various factors including the volatility of the underlying asset price and time to maturity. DWs do not have the mandatory call feature of CBBCs; standard warrants expire on their maturity dates. All CBBCs are cash-settled on expiry or on call while some DWs are physically settled or provide the option of physical delivery of the underlying asset on maturity or exercise. Effectively, a CBBC functions as a securitised futures contract with a stop-loss mechanism and no right or obligation to buy or sell the underlying asset; a DW functions as a securitised option contract with such right or obligation. Like DWs, CBBCs issued so far are mainly on local stocks and indices (see Section 4 below). However, DWs have a wider coverage of eligible stocks (125 stocks, effective 27 April 2009). 2. PRODUCTS OF SIMILAR NATURE IN OVERSEAS MARKETS A CBBC allows the holder to take a view on the price movement of the underlying asset with leverage, without the need for ownership of the underlying asset. Products of a similar nature traded in overseas markets are commonly known as contracts for difference (CFDs) or knock-out/stop-loss certificates. The short name CFD is used hereinafter to refer to this kind of product. It is now available under various names in many markets including the UK, Germany, Switzerland, Italy, Australia, New Zealand, Singapore and South Africa 3 . Due to restrictions imposed by the US Securities and Exchange Commission (SEC) on over-the-counter (OTC) financial instruments, CFDs are not permitted in the US4. CFDs originated in the UK in early 1990s, offering a tax-efficient way of obtaining economic exposure to an underlying instrument since they are exempt from UK stamp duty (0.5%). Now, CFDs are traded around the world mainly in the OTC market, where trading can take place round the clock on the electronic trading platforms of the CFD providers. OTC CFDs are mainly traded on margin and can have flexible contract designs to suit the needs of different investors. They can be issued on a wide range of
1

Please refer to the article, The Profile of Derivative Warrants listed in Hong Kong, in the October 2006 Exchange for details about DWs in Hong Kong. Delta is the ratio of the change in the price of a derivative relative to that in the underlying asset. It is sometimes referred to as the hedge ratio. Reuters Financial Glossary (http://glossary.reuters.com/index.php/Contract_for_Difference), viewed on 17 March 2009. Wikipedia (http://en.wikipedia.org/wiki/Contract_for_difference), viewed on 24 March 2009. -3-

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underlying assets, including overseas equities and indices, which may not be directly accessible by investors. CFDs can also be issued on non-financial and non-commodity underlying assets, e.g. the electricity CFDs of Nord Pool (a Nordic power exchange)5. The UK has a big OTC market for CFDs. The trading volume of CFDs in the UK has been growing rapidly it was estimated that there were over 5 million transactions in the UK in 20076 and about 30% of exchange equity trades were in some way driven by CFD transactions referenced to the underlying shares7. While OTC CFDs offer flexibility to investors, they may arouse regulatory concern about market transparency. In the UK, there has been so-called secret stake-building through CFDs by potential acquirers of listed companies. For example, a potential acquirer can target a firm by entering into a CFD with a bank, which as the CFD writer will buy the targets equity as a hedge. The CFD does not give the holder ownership of the referenced shares or voting rights and usually does not grant any right to take delivery of the shares in place of cash settlement at expiry of the CFD. Under the preexisting UK regulatory regime, such CFD position did not have to be disclosed as the disclosure requirements were mainly applicable to financial instruments with explicit rights to the underlying shares or physical delivery on expiry. However, in practice when the acquirer closes a large CFD position, the bank will have a strong incentive to sell the shares to the CFD holder despite the lack of a formal agreement because a large equity position may otherwise be difficult to unwind. In this way, the acquirer is suddenly revealed as having taken up a large stake in a listed company ie there is no prior disclosure as would be required in a normal stake-building process. In view of this problem, the UK FSA has tightened the disclosure requirements for derivatives. From 1 June 2009, investor holdings of CFDs in a stock have to comply with new disclosure rules in the same way as shareholdings8. In the light of the popularity of CFDs among investors, many overseas exchanges started to offer exchange trading in similar instruments. The London Stock Exchange (LSE) currently lists stop-loss warrants (otherwise known as listed CFDs) pioneered by Socit Gnrale (SG) as SG Turbos in 20019. Like CFDs, stop-loss warrants allow investors to take a leveraged bullish or bearish view on the underlying asset, with an inbuilt stop-loss mechanism like the mandatory call feature of Hong Kong CBBCs. Examples of exchanges offering similar products include OMX Nordic Exchange, the Vienna Stock Exchange (VSE), Scoach (a structured products trading joint venture of Deutsche Brse (DB) and the Swiss SIX Group, which is the operator of SIX Swiss Exchange), the Nordic Derivatives Market (NDM) and the Stuttgart Stock Exchange. These products are known as knock-out warrants/certificates, leverage certificates or simply knockouts or turbos.

6 7 8

Power derivatives NordPool, Nord Pool website (http://www.nordpool.com/en/asa/Markets/Powerderivatives/), viewed on 6 May 2009. Leaflet on Exchange Traded CFDs of London Stock Exchange, LSE website, viewed on 17 March 2009. Consultation Paper CP07/20: Disclosure of Contracts for Difference, UK FSA, viewed on 8 May 2009. FSA brings forward CFD rule, FT.com (http://www.ft.com/cms/s/0/a6928c0a-085c-11de-8a330000779fd2ac.html), 4 March 2009. London Stock Exchange Covered warrants, LSE website (http://www.londonstockexchange.com/engb/pricesnews/prices/coveredwarrants/), viewed on 18-24 March 2009; Socit Gnrales website for SG Turbo trading (http://www.sgturbos.co.uk), viewed on 24 March 2009. -4-

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In some markets, these CFD-type products have seen quite active trading. In 2008, knock-out warrants on OMX Nordic Exchange had a trading value of US$2.3 billion, constituting 59% of trading in all warrants and 57% of trading in all structured products on the exchange10. In the same year, knock-out products on Scoach had a trading value of US$4 billion, constituting 49% of trading in all leveraged products and 11% of trading in all structured products on the exchange11. In comparison, CBBCs on HKEx had a much higher trading value of US$133 billion in 2008 but constituted only 23% of the combined trading value of DWs and CBBCs. The OTC CFDs and the knock-out products on exchanges mentioned above are issued by third parties. In contrast to these, the Australian Securities Exchange (ASX) was the first exchange to offer standardised exchange-traded CFDs ASX Listed CFDs in November 200712. The currently available underlying assets of the ASX CFDs are equities, indices, foreign currencies and commodities. Unlike CBBCs in Hong Kong, the market for ASX Listed CFDs is operated by the Sydney Futures Exchange (SFE), an ASX subsidiary, separate from the ASX equity market. In fact, ASX Listed CFDs are operated in a similar manner to futures products on ASX they are standardised contracts; they do not have an expiry date (a position is closed only by trading the opposite side of the position); and initial margins (upon opening a contract) and variation margins (upon adverse price movements) are applied. In addition, traders can convert their ASX Equity CFD position into stocks. CBBCs in Hong Kong have contract specifications determined by the issuer, are cash-settled only, and are traded as securities market products without margin requirements. In the 14 months from launch to 2 January 2009, there were a total of 93,987 transactions in the exchange-traded CFD market segment in Australia13. The LSE had also planned to launch its own CFD service in mid-2009. The plan was revealed in the beginning of 2008 and was fleshed out later to offer Exchange-Traded CFDs (ETcfds) based on FTSE 100 stocks. The planned service involved standardised contracts, a combined order book for ETcfds and the underlying equities and central clearing with netting and central margining. The plan was aborted by the LSE because of deteriorating global market condition that impaired the development capacity of the brokers14. 3. DEVELOPMENT OF THE HKEx CBBC MARKET At the end of May 2009, HKEx listed 1,525 CBBCs, constituting 28% of the total number of its listed securities (see Figure 1). Despite mandatory call events impacting a significant proportion of CBBCs, the month-end number of listed CBBCs has grown at a fast pace (see Figure 2). The rapid growth of this market segment is also apparent
10

11 12

13

14

Based on monthly turnover statistics of warrants and certificates of OMX Nordic Exchange (http://www.omxnordicexchange.com), viewed on 15 May 2009. Based on monthly turnover statistics of Scoach (http://www.scoach.de), viewed on 15 May 2009. Information about ASX Listed CFDs, ASX website (http://www.asx.com.au/products/cfds/index.htm), viewed on 18 March 2009. ASX Listed CFD Market Update 02 January 2009, ASX website (http://www.asx.com.au/products/cfds/market_update/20090102.htm), viewed on 18 March 2009. LSE Drops Plan to Offer CFD, Stock Trading on Same Platform, Bloomberg.com, 2 April 2009, viewed on 3 April 2009. -5-

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from the growing monthly number and amount issued of newly listed CBBCs during the study period, especially since September 2008. (See Figures 3 and 4.)
Figure 1. Number of listed securities by type on HKEx securities market (Main Board) (as at 31 May 2009)

Debt securities 167 (3%)

Total no. of securities: 5,503

CBBCs 1,525 (28%)

Equities 1,101 (20%)

Unit trusts 38 (1%) Equity warrants 32 (1%) Derivative warrants 2,640 (48%)

Note: Percentages may not add up to 100% due to rounding

Figure 2. Month-end number of listed CBBCs by bull/bear type (Jun 2006 - May 2009)
2,000

Bear
1,800 1,600 1,400 1,200

Bull
(1,513) (1,525) (1,504) (1,510) (1,365) (1,314)
544 450 724

( ) Total b

(1,068) 1,000 800 600 400

290 (836) (759) 91

514

850 1,019

(604) (566) 243 (453)

220 915 960 789

(350) 268 162 745 778 800 (260) (214) 184 (191) 516 (149) (131) 200 384 (119) 152 (96) 81 80 291 298 (50)(62) (44)(41) (41) (39)(35)(37)(42) (37) (35)(34) 65 (27) (24) 61 (18) (11) 78 58 66 96 110 134 108 166 0 06/2006 07/2006 08/2006 09/2006 10/2006 11/2006 12/2006 01/2007 02/2007 03/2007 04/2007 05/2007 06/2007 07/2007 08/2007 09/2007 10/2007 11/2007 12/2007 01/2008 02/2008 03/2008 04/2008 05/2008 06/2008 07/2008 08/2008 09/2008 10/2008 11/2008 12/2008

660 506

01/2009

02/2009

03/2009

04/2009

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The HKEx Callable Bull/Bear Contract (CBBC) market

Figure 3. Monthly number of newly listed CBBCs by bull/bear type and DWs against month-end HSI level (Jun 2006 - May 2009)
1,200 CBBCs (Bull) CBBCs (Bear) DWs Month-end HSI level ( ) Total number of CBBCs 868 800 No. of new listings 675 600 451 400 346 318 521 561 484 396 287 507 632 612 501
(661) (644) (630) (638) (706) (632) (764)

35000

1,000

1,020

30000

25000

336 476 374362 (402) 400 337357330

(494) (428)

392 312

15000

349 192 424 10000 391 190 261 249 350 228 224205 219205 322 313 153 274 176188 428 (187) 200 144 240 231 5000 (132) 164 307304300302 314320 (112) (126) 106 (86)(77) (85) 238 238 87 84 (43) 69 158174139 (41)(49) 32 56 (11) (8) (13) (8) (6) (27)(10)(22)(11)(12) (4) (8) (17)(21) 81 54 49 43 39 48 30 0 0
(311) (303)
06/2006 07/2006 08/2006 09/2006 10/2006 11/2006 12/2006 01/2007 02/2007 03/2007 04/2007 05/2007 06/2007 07/2007 08/2007 09/2007 10/2007 11/2007 12/2007 01/2008 02/2008 03/2008 04/2008 05/2008 06/2008 07/2008 08/2008 09/2008 10/2008 11/2008 12/2008 01/2009 02/2009 03/2009 04/2009 05/2009

Figure 4. Monthly amount issued* of CBBCs by bull/bear type and DWs against month-end HSI level (Jun 2006 - May 2009)
180

2009) CBBCs (Bull) CBBCs (Bear) DWs Month-end HSI level ( ) Total amount issued of CBBCs 158 144

35000

160

30000

140

Monthly amount issued (HK$ Bil)

25000 120

111
100

89
80

100 (71) (64) (64) 40 43 35 (51)

15000

59
60

61 62 42 (41) 46

(52) (52) 10000 (44) (38) 53 25 (39) 37 34 21 40 32 28 32 (30) 37 26 (42) 20 24 23 15 13 21 18 20 36 (20) 18 23 5000 (19) 17 31 17 14 (16) 13 25 20 (14) (12) 25 17 31 11 (8) 20 (7) 23 19 20 (5) 9 8 13 10 19 21 29 25 24 25 23 24 31 (.9) (.4)(.6)(.3)(.4) (1) (.4) (.9)(.6)(.5) (.2)(.4) (.8) (1) (3) (4) 13 6 6 9 0 0 41 48
06/2006 07/2006 08/2006 09/2006 10/2006 11/2006 12/2006 01/2007 02/2007 03/2007 04/2007 05/2007 06/2007 07/2007 08/2007 09/2007 10/2007 11/2007 12/2007 01/2008 02/2008 03/2008 04/2008 05/2008 06/2008 07/2008 08/2008 09/2008 10/2008 11/2008 12/2008 01/2009 02/2009 03/2009 04/2009 05/2009

52

* Includes further issuance in the month of prior-issued CBBCs/DWs.

A total of 7,729 CBBCs were issued during the 3 years from launch to 31 May 2009 with a total issued amount of HK$704 billion. During the study period, slightly more CBBCs were issued as bull contracts (52% by number and amount issued) than as bear contracts, mostly in 2008 when the market was bearish. (See Table 1.)

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HSI level

20000

HSI level

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The HKEx Callable Bull/Bear Contract (CBBC) market

Table 1. Annual amount issued* and number of new issues of DWs and bull/bear CBBCs (2006-2009)
DWs* No. of Amount new issued issues (HK$m) 1,855 171,166 6,312 791,311 4,822 555,887 1,167 89,335 14,156 1,607,698 Bull No. of new issues 32 168 2,371 1,422 3,993 Amount issued (HK$m) 1,797 12,622 251,134 97,982 363,536 CBBCs Bear No. of Amount new issued issues (HK$m) 51 2,281 223 18,858 1,860 192,166 1,602 127,021 3,736 340,326 No. of new issues 83 391 4,231 3,024 7,729 Total Amount issued (HK$m) 4,078 31,480 443,300 225,003 703,862

Year 06-12/2006 2007 2008 01-05/2009 Total

* Include further issuance Note: Amount issued may not add up to total due to rounding

In terms of number and amount issued, CBBCs surpassed DWs from August 2008 (see Figures 3 and 4). During the study period, CBBC issues represented in aggregate 55% of the number and 44% of the amount of DW issues. The ratio of CBBC to DW issues rose from 4% by number and 2% by amount issued in the seven months of 2006 to 250% by number and by amount issued in the first five months of 2009. In terms of turnover value, the monthly market share of CBBC turnover climbed high during 2008 and has fluctuated at high levels since September 2008 and the collapse of Lehman Brothers which triggered the global financial crisis. Meanwhile, the monthly market share of DW turnover was on a downward trend from early 2008 until October 2008 when it fell below that of CBBC turnover. It then fluctuated thereafter at lower levels than CBBCs. (See Figure 5.)
Figure 5. Monthly market share of CBBCs and DWs in Main Board (MB) turnover value (Jun 2006 - May 2009)
35%

CBBCs
30%

DWs

DWs + CBBCs

27% 28% 27% 26% 26% 26% 29% 29% 26% 24% 24% 24% 27% 27% 24% 27% 25% 25% 25% 22% 25% 21% 21% 21% 24% 20% 20% 20% 20% 24% 23% 20% 22% 20% 20% 20% 21% 21% 18% 21% 18% 20% 20% 20% 20% 20% 16% 18% 17% 17% 17% 15% 15% 15%
10%

31% 30% 28% 28%

29% 26% 24% 22% 22% 22% 19%

19%

16% 14% 13% 13% 12% 12% 14% 10% 10% 9% 9%12% 12% 12% 10% 6% 10%9% 9% 9% 9%

5%

4% .0%.3%.3%.4%.2%.2%.2%.1%.2%.1%.1%.2%.1%.2%.4%.2%.3% 1.0%1% .8%.7% 2% 2%

0%
06 /2 0 07 06 /2 00 08 6 /2 0 09 06 /2 0 10 06 /2 0 11 06 /2 00 12 6 /2 0 01 06 /2 0 02 07 /2 0 03 07 /2 00 04 7 /2 0 05 07 /2 0 06 07 /2 0 07 07 /2 0 08 07 /2 0 09 07 /2 0 10 07 /2 0 11 07 /2 00 12 7 /2 0 01 07 /2 00 02 8 /2 0 03 08 /2 0 04 08 /2 0 05 08 /2 0 06 08 /2 0 07 08 /2 0 08 08 /2 00 09 8 /2 0 10 08 /2 0 11 08 /2 00 12 8 /2 0 01 08 /2 0 02 09 /2 0 03 09 /2 0 04 09 /2 0 05 09 /2 00 9

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4. 4.1

PROFILE OF THE HKEx CBBC MARKET Underlying asset types The 7,729 CBBCs issued during June 2006 to May 2009 were based on three major types of assets single stocks, indices and ETFs. (See Figure 6.)
Figure 6. CBBCs issued by underlying asset type (12 Jun 2006 - 31 May 2009)
(a) By number
Total no. of CBBCs: 7,729
Hong Kong stocks: 715 (9%) H shares: 1,114 (14%) Red chips: 378 (5%)

Exchange-traded funds (ETFs) 273 (4%) Foreign indices 61 (1%)

Dow Jones Industrial Average (DJIA): 37 (0.5%) NASDAQ-100 Index (NQ100): 9 (0.1%) Nikkei 225 Stock Average Index (N225): 15 (0.2%)

Single stocks 2,207 (29%)

Hang Seng China Enterprises Index (HSCEI) 905 (12%)

Hang Seng Index (HSI) 4,283 (55%)

(b) By amount issued

Total amount issued of CBBCs: HK$703,862m

Exchange-traded funds (ETFs) HK$19,303m (3%)

Single stocks HK$149,246m (21%)

Foreign indices HK$6,048m (1%)

Hang Seng China Enterprises Index (HSCEI) HK$94,161m (13%)

Hang Seng Index (HSI) HK$435,104m (62%)

Note: Percentages may not add up to 100% or sub-total due to rounding.

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The HKEx Callable Bull/Bear Contract (CBBC) market

CBBCs on Hang Seng Index (HSI) were the most popular 4,283 CBBCs (55% by number) with a total amount issued of HK$435 billion (62%). They were followed by single-stock CBBCs 29% by number and 21% by amount issued. Hang Seng China Enterprises Index (HSCEI) CBBCs were also popular 12% by number and 13% by amount issued. CBBCs on foreign indices were first offered in 2007 and the number of issues grew from 3 in 2007 to 37 in 2008 and 21 in 2009 up to May. Three major foreign indices were involved Dow Jones Industrial Average (DJIA), NASDAQ-100 Index (NQ100) and Nikkei 225 Stock Average Index (N225). CBBCs on ETFs were first issued in 2008, involving only one ETF which is the iShares FTSE/Xinhua A50 China Tracker. During the study period, both single-stock and index CBBCs experienced tremendous growth by number and amount issued. (See Figure 7.)
Figure 7. Yearly new issues of CBBCs by underlying asset type (2006-2009)
(a) By number
4,500

( ) Total
4,000 3,500 3,000 No. of issues 2,500 2,000 1,500 1,000 500 0

140

(4,231)

1,021 (3,024) 133 1,173

3,070 1,718 (391) 78 (83)

Jun-Dec 2006

383
2007 2008 Jan-May 2009

Index

Single-stock

ETF

(b) By amount issued

500 450 400 350
Amount issued (HK$ Bil)

( ) Total 11

(443) 80

300 250 200 150 100 50 0 Jun-Dec 2006

(225) 352 68

(32) (4) 31
2007 2008

148

Jan-May 2009

Index

Single-stock

ETF

Note: Amount issued may not add up to total due to rounding.

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The trading of CBBCs was dominated by index CBBCs, mostly CBBCs on the HSI. The share of CBBCs on HSI in the turnover of all CBBCs increased from 56% in 2006 to 80% in 2009 up to May while that of single-stock CBBCs dropped from 35% in 2006 to 17% in 2009 up to May. (See Figure 8.)
Figure 8. Yearly percentage share in turnover value of CBBCs by underlying asset type (12 Jun 2006 - 31 May 2009)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jun-Dec 2006
Single-stock Hang Seng Index (HSI) 34.9% (HK$3,951m)
Single-stock 0.2% (HK$152m)

9.4% (HK$1,070m)

Foreign indices 0.2% (HK$143m)

25.1% 1.0% (HK$10,235m) (HK$17,905m)

Foreign indices 0.1% (HK$607m) HSCEI 3.3% (HK$34,545m)

ETFs

ETFs 2.9% (HK$18,731m) Foreign indices 0.0% (HK$265m) HSCEI 0.5% (HK$3,181m)

55.7% (HK$6,315m)

89.2% (HK$926,975m) 74.5% (HK$53,180m)

80.0% (HK$521,697m)

6.5% (HK$67,194m)

16.6% (HK$108,517m)

2007

2008
Foreign indices

Jan-May 2009
Exchange-traded funds

Hang Seng China Enterprises Index (HSCEI)

Note: Percentages may not add up to 100% due to rounding.

4.2

Issued amount per CBBC The expected market capitalisation (i.e. value or amount issued) of a CBBC must normally be at least HK$10 million as required by the Main Board Listing Rules. The majority of the CBBCs issued (about 52% by number) during the study period had an issue size of HK$75 million or less (see Figure 9). The average amount issued per CBBC increased from HK$49 million in 2006 to HK$105 million in 2008 and decreased to HK$74 million in 2009 up to May. However, it has to be noted that nearly 40% of CBBCs issued during the study period were issued in the first five months of 2009. Relatively recent new issues might have further issuance beyond the study period which would impact the foregoing statistics. (See Figure 10.)

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Figure 9. Number of issues by amount issued per CBBC (12 Jun 2006 - 31 May 2009)
2,800 2,600 2,400 2,200 2,000 1,800

Total no. of issues: 7,729 ( ) % of total number

2,109 1,964 1,867

No. of issues

1,600 1,400 1,200 1,000 800 600 400 200 0 <=$50m >$50m - $75m >$75m - $100m >$100m - $125m

1,081 (25%) (27%) (14%)

(24%) 465 243 (3%)

>$125m - $150m

(6%)
>$150m

Amount issued per CBBC

Notes: - The amount issued of a CBBC includes further issuance within the study period. - Percentages may not add up to 100% due to rounding.

Figure 10. Statistics on amount issued per CBBC per year (12 Jun 2006 - 31 May 2009)
700 600
Amount issued per CBBC (HK$ Mil)

Maximum Mean Median Minimum

580

600

500 440 400 300 243 200 100 39 0 49 10 100 105 10

2008

68

81 25

75

74 10

Jun-Dec 2006

2007

Jan-May 2009

Note: The amount issued of a CBBC includes further issuance within the study period.

The average amount issued per CBBC during the study period was HK$91 million. CBBCs on the HSI had the widest range of issued amount from HK$10 million to $600 million. CBBCs on local indices (HSCEI and HSI) were on average larger in issued amount than CBBCs on single stocks or ETFs. (See Table 2.)

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Table 2. Amount issued per CBBC by underlying asset type (12 Jun 2006 - 31 May 2009)
Underlying asset Hang Seng Index (HSI) Single stocks Hang Seng China Enterprises Index (HSCEI) Exchange-traded funds (ETFs) Foreign indices Overall No. of CBBCs 4,283 2,207 905 273 61 7,729 Amount issued per CBBC (HK$m) Min Max Mean Median 10 600 102 98 20 386 68 54 13 565 104 100 20 330 71 75 10 435 99 56 10 600 91 75

4.3

Maturity The Listing Rules permit the maturity of a CBBC to range from 3 months to 5 years. Almost all CBBCs issued during the study period expired within a year after listing. More than half (53%) expired in 7 to 9 months. (See Figure 11.)
Figure 11. Number of CBBCs by maturity at issue (12 Jun 2006 - 31 May 2009)
4,500 4,000 3,500 3,000
No. of issues

Bull Bear Total

4,109

( ) In percentage of the respective category

3,213

2,500 2,000 1,500 1,000 500 0

2,122 1,663 1,550 (42%)

1,987

(53%)

(42%) (41%)

(53%) (53%) 193 (5%) 152 (4%) 345 (4%) 15 47

> 1 year

62

<= 6 months

7 - 9 months Maturity*

10 - 12 months

* Counting in full months. Days in excess of the last full month were not counted. Note: Percentages may not add up to 100% due to rounding.

4.4

Single-stock CBBCs During June 2006 to May 2009 a total of 2,207 CBBCs were issued on 34 single stocks 7 Hong Kong stocks, 22 H shares and 5 red chips. CBBCs on H shares constituted the most by number of issues (50%), amount issued (55%) and turnover value (53%). Although there were fewer CBBCs on red chips than on Hong Kong stocks by number and amount issued, their turnover was close to that of CBBCs on Hong Kong stocks. (See Table 3.) China Life Insurance Co. Ltd. was the most popular underlying stock among singlestock CBBCs in terms of number (15%), amount issued (21%) and turnover value (27%). The top 10 underlying stocks had in aggregate the dominating shares of 78%,

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80% and 90% respectively in terms of number of CBBC issues, amount issued and turnover value. (See Table 4.)
Table 3. Single-stock CBBCs by stock type (12 Jun 2006 31 May 2009)
No. of underlying stocks involved % No. share 7 21% 22 65% 5 15% 34 100% No. of issues No. 715 1,114 378 2,207 % share 32% 50% 17% 100% Amount issued % HK$m share 43,091 29% 82,130 55% 24,026 16% 149,246 100% Turnover value % HK$m share 42,762 24% 94,650 53% 42,402 24% 179,814 100%

Underlying stock type Hong Kong stocks H shares Red chips Total

Note: Percentages may not add up to 100 per cent due to rounding.

Table 4. The most popular underlying stocks of single-stock CBBCs (12 Jun 2006 - 31 May 2009)
(a) By number No. of issues
340 272 268 226 144 126 107 82 81 77 1,723 (c) By turnover value Rank 1 2 3 4 5 6 7 8 9 10 Stock name China Life Insurance Co. Ltd. China Mobile Ltd. Hong Kong Exchanges and Clearing Ltd. HSBC Holdings plc China Construction Bank Corporation PetroChina Co. Ltd. CNOOC Ltd. Industrial and Commercial Bank of China Ltd. Ping An Insurance (Group) Co. of China Ltd. China Merchants Bank Co., Ltd. Turnover (HK$m) 49,378 36,154 19,586 17,715 11,659 8,222 5,811 4,949 4,637 4,588 162,699 % of total 27.46% 20.11% 10.89% 9.85% 6.48% 4.57% 3.23% 2.75% 2.58% 2.55% 90.47%

(b) By amount issued % of total

15.41% 12.32% 12.14% 10.24% 6.52% 5.71% 4.85% 3.72% 3.67% 3.49% 78.07%

Rank
1 2 3 4 5 6 7 8 9 10

Stock name
China Life Insurance Co. Ltd. HSBC Holdings plc Hong Kong Exchanges and Clearing Ltd. China Mobile Ltd. PetroChina Co. Ltd. CNOOC Ltd. China Construction Bank Corporation China Petroleum & Chemical Corporation Industrial and Commercial Bank of China Ltd. China Merchants Bank Co., Ltd.

Stock name
China Life Insurance Co. Ltd. HSBC Holdings plc Hong Kong Exchanges and Clearing Ltd. China Mobile Ltd. PetroChina Co. Ltd. CNOOC Ltd. China Construction Bank Corporation China Merchants Bank Co., Ltd. Industrial and Commercial Bank of China Ltd. China Petroleum & Chemical Corporation Total for top 10 Hong Kong stocks H shares Red chips

Amount issued (HK$m)

31,692 17,123 16,850 15,427 10,344 7,452 6,101 5,561 5,155 4,200 119,905

% of total
21.24% 11.47% 11.29% 10.34% 6.93% 4.99% 4.09% 3.73% 3.45% 2.81% 80.34%

Total for top 10

Note: Numbers may not add up to total due to rounding.

Total for top 10

4.5

Issuers There were totally 12 issuers of CBBCs during the study period. Eleven of them issued CBBCs on indices; 10 issuers issued CBBCs on single stocks; and 9 issuers issued CBBCs on ETFs. The HSI was the most popular underlying asset for CBBC used by 11 issuers. Only 2 issuers issued CBBCs on foreign indices. (See Table 5.)

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The issuance of CBBCs was dominated by 3 issuers (about 68% by number and 76% by amount issued) UBS AG, Deutsche Bank AG and SGA Socit Gnrale Acceptance N.V. (see Table 6). In terms of number and amount issued, UBS was the most active issuer for single-stock CBBCs (and for each of the Hong Kong stocks, H shares and red chips), index CBBCs (and for each of the HSI and the HSCEI), and CBBCs on ETFs. However, it did not issue any CBBCs on foreign indices. (See Tables 7, 8 and 9.)
Table 5. Number of CBBC issuers by underlying asset type (12 Jun 2006 - 31 May 2009)
Underlying asset type Non-Mainland-related Single stocks Mainland-related Single stocks total Hong Kong indices Indices Hang Seng Index (HSI) Hang Seng China Enterprises Index (HSCEI) Dow Jones Industrial Average (DJIA) NASDAQ-100 Index (NQ100) Nikkei 225 Index (N225) Hong Kong stocks H shares Red chips No. of issuers

10 8 8
10

Foreign indices

11 8 1 1 2
11 9 12

Indices total Exchange-traded funds (ETFs) Overall

Table 6. Ranking of issuers by number and amount issued of all CBBCs (12 Jun 2006 - 31 May 2009)
By number Issuer name UBS AG Deutsche Bank AG SGA Socit Gnrale Acceptance N.V. KBC Financial Products International Ltd. ABN AMRO Bank N.V. BNP Paribas Arbitrage Issuance B.V. Goldman Sachs Structured Products (Asia) Ltd. Coperatieve Centrale Raiffeisen-Boerenleenbank B.A. Hongkong and Shanghai Banking Corporation Ltd. Macquarie Bank Ltd. Barclays Bank plc BOCI Asia Ltd. Total Rank 1 2 3 4 5 6 7 8 9 10 11 12 No. of issues 3,129 1,093 1,049 781 721 387 179 170 148 64 7 1 7,729 By amount issued % of total Rank 40.5% 14.1% 13.6% 10.1% 9.3% 5.0% 2.3% 2.2% 1.9% 0.8% 0.1% 0.0% 100% 1 2 3 4 5 6 8 9 7 10 11 12 HK$mil 356,617 93,007 81,806 62,901 44,734 27,441 8,786 6,055 17,215 4,477 773 50 703,862 % of total 50.7% 13.2% 11.6% 8.9% 6.4% 3.9% 1.2% 0.9% 2.4% 0.6% 0.1% 0.0% 100%

Note: Numbers may not add up to total or 100% due to rounding.

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Table 7. Ranking of issuers by number and amount issued of single-stock CBBCs (12 Jun 2006 - 31 May 2009)
By number Issuer name UBS AG SGA Socit Gnrale Acceptance N.V. Deutsche Bank AG KBC Financial Products International Ltd. BNP Paribas Arbitrage Issuance B.V. ABN AMRO Bank N.V. Coperatieve Centrale Raiffeisen-Boerenleenbank B.A. Hongkong and Shanghai Banking Corporation Ltd. Macquarie Bank Ltd. BOCI Asia Ltd. Total Rank 1 2 3 4 5 6 7 8 9 10 No. of issues 1,034 471 283 214 88 62 30 21 3 1 2,207 By amount issued % of total Rank 46.9% 21.3% 12.8% 9.7% 4.0% 2.8% 1.4% 1.0% 0.1% 0.0% 100% 1 2 4 3 5 6 7 8 9 10 HK$mil 80,157 29,520 15,002 15,305 4,525 2,636 1,036 889 125 50 149,245 % of total 53.7% 19.8% 10.1% 10.3% 3.0% 1.8% 0.7% 0.6% 0.1% 0.0% 100%

Note: Numbers may not add up to total or 100% due to rounding.

Table 8. Ranking of issuers by number and amount issued of index CBBCs (12 Jun 2006 - 31 May 2009)
By number Issuer name UBS AG Deutsche Bank AG ABN AMRO Bank N.V. KBC Financial Products International Ltd. SGA Socit Gnrale Acceptance N.V. BNP Paribas Arbitrage Issuance B.V. Goldman Sachs Structured Products (Asia) Ltd. Coperatieve Centrale Raiffeisen-Boerenleenbank B.A. Hongkong and Shanghai Banking Corporation Ltd. Macquarie Bank Ltd. Barclays Bank plc Total Rank 1 2 3 4 5 6 7 8 9 10 11 No. of issues 2,004 762 638 543 533 286 179 126 112 59 7 5,249 By amount issued % of total Rank 38.2% 14.5% 12.2% 10.3% 10.2% 5.4% 3.4% 2.4% 2.1% 1.1% 0.1% 100% 1 2 5 4 3 6 8 9 7 10 11 HK$mil 268,616 75,381 41,255 45,756 48,848 22,391 8,786 4,556 14,749 4,201 773 535,312 % of total 50.2% 14.1% 7.7% 8.5% 9.1% 4.2% 1.6% 0.9% 2.8% 0.8% 0.1% 100%

Note: Numbers may not add up to total or 100% due to rounding.

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Table 9. Ranking of issuers by number and amount issued of ETF CBBCs (12 Jun 2006 - 31 May 2009)
By number Issuer name UBS AG Deutsche Bank AG SGA Socit Gnrale Acceptance N.V. KBC Financial Products International Ltd. ABN AMRO Bank N.V. Hongkong and Shanghai Banking Corporation Ltd. Coperatieve Centrale Raiffeisen-Boerenleenbank B.A. BNP Paribas Arbitrage Issuance B.V. Macquarie Bank Ltd. Total Rank 1 2 3 4 5 6 7 8 9 No. of issues 91 48 45 24 21 15 14 13 2 273 By amount issued % of total Rank 33.3% 17.6% 16.5% 8.8% 7.7% 5.5% 5.1% 4.8% 0.7% 100% 1 3 2 4 6 5 8 7 9 HK$mil 7,844 2,624 3,438 1,840 843 1,577 463 525 150 19,304 % of total 40.6% 13.6% 17.8% 9.5% 4.4% 8.2% 2.4% 2.7% 0.8% 100%

Note: Numbers may not add up to total or 100% due to rounding.

CONCLUSION The HKEx CBBC market has experienced strong growth since its launch in June 2006. It now constitutes a significant segment of the HKEx securities market in terms of number of issues and turnover value. Single stock and local stock indices are popular underlying assets for CBBCs. CBBCs on the HSI are by far the most popular in terms of number of issues, amount issued and trading value. CBBCs on Mainland-related stocks and indices are also popular. However, the CBBC issuance market is dominated by a few issuers. Since the market is currently quite concentrated in terms of issuers and underlying asset types, there may be room for the market to broaden in these respects.

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APPENDIX. Comparison between CBBCs, DWs, futures and options

CBBCs Issuer Trading platform Trading currency Minimum issuance size and issue price Response to price movement in underlying asset Implied volatility Funding costs DWs Futures & options

Duration Capital adjustment

Eligible issuers AMS/3 of HKEx securities market Either HK dollars or US dollars Minimum size HK$10 million and minimum issue price HK$0.25 per unit Changes in value by Depends on various approximately the same factors amount as the underlying asset Insignificant to pricing Affects pricing The formula for The funding costs are calculating funding built into the premium costs is specified in the of the DW listing document 3 months to 5 years 6 months to 5 years For CBBC on Hong Kong-listed stocks, adjustments follow prevailing principles of stock futures/stock options, where applicable. As stated in the listing documents issued by the issuers; usually no adjustment for ordinary dividends. Some issuers may adjust for special dividends, some may not. Limited to the amount invested.

Standard products of HKEx HKATS of HKEx derivatives market US dollars for gold futures / HK dollars for others Not applicable Futures: Changes in value by approximately the same amount as the underlying asset. Options: Depends on various factors Affects pricing of options but not futures The funding costs (cost of carry) are built into pricing

Contract months as specified by HKEx (1 month to 3.5 years) Usually no adjustment for ordinary dividends; standard capital adjustment procedures are stated in the exchange rules for common corporate actions. Special corporate actions will be considered on a case by case basis in consultation with the SFC.

Maximum loss

Mandatory call

Early termination when the underlying asset's price hits the Call Price. Stock CBBCs: closing price of the underlying on last trading day. Index CBBCs: index level for settling the corresponding index future contract of the same expiry month. Others: refer to the listing document.

Standard (i.e. nonexotic) DWs will not be terminated early. Stock DWs: five days average closing price before expiry day. Index DWs: index level for settling the corresponding index future contract of the same expiry month if the DW and futures contract have the same expiry day. Others: refer to the listing documents for DWs. Holding put warrants No Effective 27 Apr 2009: 125 Hong Kong-listed stocks for single-stock warrants (including 7 ETFs, 1 REIT); 6 local indices; 18 foreign indices (including nonequity indices); 6 commodities; 5 currencies

Settlement price/level at expiry

Short position Margin requirement Underlying assets

Holding bear contracts

Limited to the premium traded for long option positions. For futures and short options positions, losses are subject to market movements and depend on size of the contract traded. Futures and index options: No early termination. Stock options: Subject to early exercise of option holders; random assignment upon option exercise. Stock options: physical delivery of underlying shares on stock option exercise with payment of exercise price. Stock futures: an average based on the mid-points of the best bid and best ask taken at five-minute intervals and the closing price on the last trading day. Index futures/options: an average based on 5minute quotation and the closing index on the last trading day. HIBOR futures: Hong Kong Association of Banks interest settlement rate on the last trading day. EFN futures: volume-weighted average traded price during 5-minute intervals on last trading day. Gold futures: London gold fixing on last trading day Yes Yes As at the end of May 2009: 2 local indices; 42 stocks for stock futures; 49 stocks for stock options; Hong Kong Interbank Offered Rate (HIBOR); Exchange Fund Note (EFN); Gold

Effective 17 Apr 2009: 29 Hong Kong-listed stocks (including one ETF); 3 local indices; 4 foreign indices

* * *
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