Hong Kong's Securities And Futures Commission Explains How Credit Rating Effects Issuance, Trading Of Warrants, CBBCs

In the latest issue of InvestEd Intelligence, the Securities and Futures Commission (SFC) reminds those who invest in derivative warrants and callable bull/bear contracts (CBBCs) to stay abreast of the issuer’s credit worthiness and understand how a credit rating downgrade may affect their investments.

When downgraded to a notch below the top three investment grades of credit rating agencies (CRAs) recognised by the Stock Exchange of Hong Kong Ltd (SEHK), issuers of derivative warrants and CBBCs listed locally may not be allowed to offer new issues (Note 1). These issuers will continue to provide liquidity to investors unless they go into default or become insolvent.

“As derivative warrants and CBBCs are not asset-backed, investors must honestly assess whether they can afford the higher risks involved before making a commitment,” said Mr Ashley Alder, the SFC’s Chief Executive Officer. “Those who’ve invested should keep track of the issuer’s credit worthiness, including monitoring its credit rating, so that they can make timely informed investment decisions.”

Penning this issue’s “Sounding Board” column, Mr Andrew Wan, the SFC’s Chief Financial Officer and Senior Director of Corporate Affairs, offers some guidance for investors to avoid a common mistake – signing a document without fully understanding the implication and consequences. He also encourages investors to find out more about how to exercise their rights in the sales process through our latest television commercial.

In the “Words of Wisdom” column, Dr Wise urges those who invest overseas through a local brokerage to pay attention to the extra risks arising from the overseas counterparty of their local brokerages. The “Case in Point” column explains why once the underlying asset’s price hits or goes through the pre-determined call price, the trading of a CBBC will be terminated before its expiry date.

January’s “IE Activities Planner” invites the public to enjoy Outsmart II, a game show challenging celebrities and artistes about their investing know-how and featuring academic experts’ advice. It will be aired on TVB Jade every weekday at 10.30pm –11.00pm from 27 February to 9 March 2012. Through the planner, the public also may register for the SFC’s annual Investor Day to be held on 11 February, and access new materials on Renminbi Qualified Foreign Institutional Investor funds and other topical investment issues posted on our InvestEd site (www.InvestEd.hk). 

InvestEd Intelligence is a bimonthly newsletter for investors, which provides a diverse range of educational information about investing. Topical market issues, product development information and regulatory updates are among topics to be covered regularly. The newsletter is published at the SFC’s InvestEd site on the 20th day of every odd month, or the business day after, if the 20th falls on a Saturday or a public holiday.

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Notes:
1. Under the Listing Rules of SEHK, issuers of uncollateralised structured products such as derivative warrants and CBBCs are required to be rated one of the top three investment grades awarded by SEHK-recognised CRAs, or regulated by the Hong Kong Monetary Authority or the SFC. 
2. News media are welcome to reproduce materials in InvestEd Intelligence upon acknowledging the source of the information.