Definition of CBBC

Like derivative warrants, CBBC are structured products.  They are leveraged investments that track the performance of the underlying assets without requiring investors to pay the full price required to own the actual assets. They are issued either as Bull or Bear contracts, allowing investors to take bullish or bearish positions on the underlying assets. CBBC are issued by a third party, usually an investment bank, independent of HKEX and of the underlying assets.

CBBC may be issued with a lifespan of three months to five years and are settled in cash only.  CBBC are issued with the condition that during their lifespan they will be called by the issuers when the price of the underlying assets reaches a level (known as the Call Price) specified in the listing document.  If the Call Price is reached before expiry, the CBBC will expire early and the trading of that CBBC will be terminated immediately.  The specified expiry date from the listing document will no longer be valid.

What are the major features of CBBC?

1. CBBC price moves tend to track the price moves of the underlying assets closely

The price of a CBBC tends to follow closely the price of the underlying assets (ie delta close to one).Thus, if the underlying assets increase in value, a Bull CBBC with entitlement ratio of 1 to 1 generally increases in value by approximately the same amount, whereas a Bear CBBC with entitlement ratio of 1 to 1 generally decreases in value by approximately the same amount. Due to this property, CBBC issuers offer investors a product which tracks the price movement of the underlying assets more closely and with higher price transparency than some other structured products. However, when the underlying assets of a CBBC are trading at a price close to its Call Price, the value of CBBC may become more volatile and the change in its value may be disproportionate to the change in the value of the underlying assets.

2. CBBC have a Call Price and a mandatory call feature

For Bull contracts, the Call Price must be either equal to or above the strike price. For Bear contracts, the Call Price must be equal to or below the strike price.If the underlying assets’ price reaches the Call Price at any time prior to expiry, the CBBC will expire early.The issuer must then call the CBBC and trading of the CBBC will be terminated immediately. Such an event is referred to as a mandatory call event (MCE).

3. Categories of CBBC

There are two categories of CBBC, namely Category N CBBC and Category R CBBC.

• A Category N CBBC refers to a CBBC where its Call Price is equal to its strike price, and the CBBC holder will not receive any cash payment once the price of the underlying assets reach or go beyond the Call Price.
• A Category R CBBC refers to a CBBC where its Call Price is different from its strike price, and the CBBC holder may receive a small cash payment (called "residual value") upon the occurrence of an MCE but in the worst case, no residual value will be paid (Category N CBBC do not have residue value).

When a Category R Bull contract is called, the residual value will be the positive amount of the settlement price as determined according to the terms in the listing document less the strike price. The settlement price of a Bull contract must not be lower than the minimum trade price of the underlying assets after the MCE and up to the next trading session. Similarly, when a Category R Bear contract is called, the residual value will be the positive amount of the strike price less the settlement price as determined according to the terms in the listing document. The settlement price of a Bear contract must not be higher than the maximum trade price of the underlying asset after the MCE and up to the next trading session. For this purpose, the pre-opening session and morning session are considered as one trading session. In the cases where the settlement price is at or goes beyond the strike price, there may be no residual value.

Comparing a Category N CBBC and a Category R CBBC with the same strike price, the Category R CBBC may be called at a lower level than the Category N CBBC.

4. Valuation at Expiry

CBBC can be held until maturity (if not called before expiry) or sold on the Exchange during trading hours before expiry.

a. In the case of a Bull contract, the cash settlement amount at normal expiry will be the positive amount of the settlement price of the underlying assets as determined on the valuation day less the strike price.

b. In the case of a Bear contract, the cash settlement amount at normal expiry will be the positive amount of the strike price less the settlement price of the underlying assets on valuation day.

For CBBC with shares of a Hong Kong-listed company as underlying assets, the settlement price of the CBBC will be the closing price of the underlying shares on the last trading day. For CBBC linked to the Hang Seng Index or Hang Seng China Enterprises Index, the settlement level of the CBBC will be the same as the index level for settling the relevant expiring index futures contract. There will be no cash settlement if the amounts calculated under a and b are negative. For the settlement price of CBBC with overseas stocks, commodities or other indices as underlying assets, investors should refer to the details in the listing documents.