“Those products will benefit Hong Kong investors who want a payout structure similar to the unlisted structured products already offered, namely: discount certificates (a yield enhancement product) and bonus certificates (a participation product),” FSDC stated in a report released yesterday.
Discount certificates allow investors to obtain exposure to an underlying asset below its current market price, but in exchange, their return is capped at a predetermined amount.
Bonus certificates, on the other hand, offer investors a minimum amount of payout (the bonus level) provided the price of the underlying asset does not fall to, or below, a pre-set level.
These products suit investors who have a lower risk appetite, who desire a yield higher than that of an ordinary time deposit and who have a neutral to slightly bullish view on the underlying asset, the FSDC said.
The council said it had invited the stock exchange and Hong Kong’s Securities and Futures Commission to introduce the two new structured products in the SAR after a successful listing in Germany.
Commenting about the FSDC’s proposal, Nicholas Ronalds, head of equities at Asia Securities Industry & Financial Markets Association (ASIFMA) said: “The current listed structured products offering on HKEx is limited to warrants and CBBCs, which are short-term trading type products. We believe that investment type products which offer a different product risk profile are currently a missing piece of the Hong Kong listed structured products market.”
“However the key demand driver will not be limited to just high net worth investors as these investment type products once listed, they can be easily accessible to any individual investors with a securities brokerage account. And the minimum investment size should be lower compared to similar products offered in the non-listed structured products market,” added Keith Chan, Societe Generale Asia-Pacific head of cross asset listed distribution.
Listed vs unlisted structured products
Hong Kong saw HK$167bn ($21.5bn) worth of unlisted structured products sold to individual investors in the year ended March 2016, according to a survey by Securities & Futures Commission.
They were mostly bought over-the-counter by professional investors who trade through private banks and by retail investors who trade through banks and securities brokers.
Meanwhile, the listed structured product market in Hong Kong had a higher average daily turnover (HK$6.3m or $810,000) in 2015, even though only two types of products are traded today: vanilla warrants and Callable Bull/Bear Contracts (CBBCs), the report said.
Underlying assets of these products in Hong Kong are limited to stocks, forex and commodities.
“The most actively traded warrants and CBBCs are linked to a small number of local Hong Kong blue-chip stocks and the Hang Seng Index,” the report noted.
In Europe, “the types of assets to which structured products are linked include global indices, proprietary indices, regional and global stocks, American Depositary Receipts, foreign currencies, commodities, interest rates, fixed income bonds and funds,” the report stated.
The council hopes that development of the listed market in structured products will help achieve product standardization, as well as provide pricing transparency, mandatory liquidity services and easy trading access for investors.
The FSDC pointed out in its report the difficulties in listing such products in Hong Kong: the manual issuance and listing process, strict requirements around liquidity provisioning and the lack of discounts or incentives from the exchange or the SFC that would encourage issuers to launch new products.
The council has proposed that the stock exchange approve new products within three months, and that it issue guidance on the underlying asset classes eligible for such products.
The council also hopes that both the exchange and SFC will consider lowering the fees and allow flexible liquidity requirements.
