General Risks of Structured Products (SP)

Credit Risk

Investors assume the credit risk of the issue and/or guarantor (if applicable). The issuer’s/guarantor’s credit rating reflects the independent opinion of the relevant rating agencies, and is not a guarantee of the issuer's/guarantor’s  credit quality. And the credit rating is not a recommendation, is not necessarily an indication of liquidity or volatility, and may be downgraded if the credit quality of the relevant entity or asset or obligation declines.

Liquidity Risk

It may be difficult to sell the product prior to maturity. There may be limited secondary market for this product. Investors must be prepared to hold the product up to maturity.

Market Disruption

Markets may become disrupted. Local market disruptions can have a global effect. Market disruption can adversely affect the performance of the product.

Mark-to-market Risk      

The market value of the product is expected to fluctuate significantly according to various factors including but not limited to the financial, political, economic and other events as well as level of the performance of the underlying, option, interest rates and time remaining to maturity. Investors seeking to sell the product prior to maturity may be subject to the prevailing market value quoted by the issuer which may be substantially less than the original purchase price.

Interest Rate Risk

This product may carry interest rate risk. Changes in interest rates will impact the performance of the product. Interest rates tend to change suddenly and unpredictably.

Foreign Exchange Risk

This product may carry foreign exchange risk. Changes in the values between your home currency and the product currency, and changes in the values between the product currency and the underlying reference asset’s currency may impact the performance of the product and your return. Foreign exchange rates may change suddenly and unpredictably.

No direct claim and no investment in underlying assets

You have no claim to the underlying assets. Unless the product gives a right to receive underlying assets, you have no interest or right in the underlying assets referenced. Buying the product is not the same as a direct investment in the underlying assets. The market value of this product may not reflect movements in the price of the underlying assets.

Settlements

Payments and deliveries may be interrupted. There is a risk of failure or delay in payments or deliveries by the Issuer, the custodian, clearing system or other third party paying agents or intermediaries.

Conflicts of interest

Various potential and actual conflicts of interest may arise from the overall investment activities or the roles of the parties involved in any investment product or transaction, their investment professionals and/or their affiliates. In particular, the counterparty / issuer / provider or its related entities or affiliates can offer or manage other investments which interests may be different to the interest of your investments in that investment product or transaction; or for cases where the product counterparty or issuer is BNP Paribas or its related entity or affiliate, BNP Paribas may also act as distributor, guarantor, calculation agent and/or arranger of the same product.

Leverage Risk  

Leveraged investment with the use of some form of credit may increase the risk significantly. A relatively small price movement could have a proportionally larger impact on the mark to market value of the transaction and could affect the margin requirements for your account. Failure to meet the margin requirement may result in forceful unwind of the trade and may therefore lead to significant loss of the investment.

Re-investment Risk

Investors may be exposed to the risk that the investment proceeds from the product may have to be reinvested at a lower potential interest rate or into a product with less attractive terms due to market changes.

Risks associated with structured products that invest in or are linked to bonds with loss-absorption features

Structured products that invest mainly in, or whose returns are closely linked to the performance of, bonds or debt instruments (i.e. underlyings) with features of contingent write-down or conversion to ordinary shares on the occurrence of (1) when a financial institution is near or at the point of non-viability (PONV); or (2) when the capital ratio of a financial institution falls to a specified level, are considered as loss absorption products and would be subject to additional risks.

Investors should take note that such underlyings are subject to the risk of being written down or converted to ordinary shares (as the case may be). For Tier 1/Tier 2/Tier 3 bonds as underlyings, the loss absorption mechanism is triggered at the PONV, whereas for Coco bonds as underlyings, the loss absorption mechanism is triggered with a mechanical trigger as specified in the prospectus or at PONV.

Regardless of the triggering mechanism in respect of the underlyings, it may potentially result in substantial losses to your investment.  Please note that the priority of claims for reimbursement depends on the subordination hierarchy of the various capital and financing buffers  in respect of the underlyings, at which for example, the holders of subordinated debts are only repaid after the holders of senior debts have been fully reimbursed. Please take note that investing in underlyings with loss absorption features may potentially result in substantial losses.  Accordingly, products investing in or are linked to such underlyings are high risk and complex, as the circumstances in which such products may be required to bear losses are difficult to predict and ex ante assessments of the quantum of losses will be highly uncertain. Such products are generally not suitable for retail investors.

Possible adjustments to the terms and conditions and investor’s rights over collateral

Investors should note that there could be some possible adjustments to the terms and conditions of the product under certain situations, for example but not limited to extraordinary events, market disruption events, certain circumstances which may have a concentrating or diluting effect on the value of the underlying and the product, merger or insolvency of the issuer of the underlying assets, or settlement disruptions, etc. In such events, the issuer/counterparties/calculation agents may have the discretion to determine any adjustments or actions necessary, including the termination or early redemption of the product.

Investors should also note their rights over any available collaterals placed by the issuer to secure (whether wholly or partially) relevant financial obligations under the product (if applicable), and also their priority of claims to the proceeds of realization of the collaterals. Investors should pay attention to the nature of the collaterals, and whether they are held in a segregated pool of assets held by a trustee which is separated from the issuer of the product.

Please refer to the relevant Documents for details.

Other Risks

THIS DOCUMENT CANNOT DISCLOSE ALL POSSIBLE RISKS OF THE PRODUCT. Investors should not invest in the product based on this document alone. Investors should note that the product is unlisted, not collateralized and that the product may not be covered and protected by the Investor Compensation Fund established under the Hong Kong Securities & Futures Ordinance. Presently, the Investor Compensation Fund covers only exchange-traded products in Hong Kong.

General Risks of Bonds

Risk of investing in debt and debt-related securities

Where the investor invests in debt and debt-related securities, such investments are exposed to credit risk and interest rate risk. Credit risk is the risk of default on a debt that a borrower (bond issuer) fails to meet its obligations (pay principal and/or interest on redemption date). The issuer’s credit quality and security values may be adversely affected by factors which include, but are not limited to, changes in economic and political conditions or the issuer’s (and/or the guarantor’s) financial conditions. It should also be noted that credit ratings assigned by credit rating agencies do not guarantee the creditworthiness of the issuer.

Changes in interest rates will impact the performance of the investor’s investments. As long term interest rates rise, the capital value will likely to decrease. In general, securities with longer maturities and higher interest rate sensitivity involve higher degree of risk.

Sovereign debt risk

Where the investor invests in sovereign debts, the investor should note that sovereign debt issued by governments of certain developing countries or their agencies and instrumentalities (“government entities”) is a riskier investment than sovereign debt issued by governments of developed countries.

The stability of the issuing government is an important factor to consider as they may not be able or willing to repay the principal and/or interest. Key factors affecting the governmental entity’s possibility or willingness to repay the principal and interest include, but are not limited to, its variance of cash flow, debt service ratio, foreign reserves, the probability of sufficiently foreign exchange on payment day and the political risk.

A governmental entity will be requested to conduct sovereign debt restructuring and to extend further loans if it cannot meet its debt obligations.

Certificates of deposit are not protected deposits

Certificates of deposit are not equivalent and should not be treated as a substitute for a term deposit. They are not a protected deposit and is not protected or insured under the Deposit Protection Scheme in Hong Kong and the Deposit Insurance Scheme in Singapore.

Financial bonds (bonds related to the financial sector)

Where the investor invests in financial bonds with convertible or exchangeable features, such investments will be subject to both equity and bond investment risk.  Bonds that have contingent write down or loss absorption features may be written-off fully or partially or converted to common stock on the occurrence of a trigger event.  Some financial bonds (including subordinated or even senior bonds), though are not classified by the market as Contingent Convertibles (Cocos) with explicit capital trigger for loss absorption, may also have loss absorption features, including (1) those with contractual loss absorption at point of non-viability (PONV), (2) those in countries with statutory bail-in, and/or (3) those in countries that are likely to have statutory bail-in before the maturities of these bonds.

Holders of subordinated debentures will bear higher risks than holders of senior debentures of the issuer due to a lower priority of claim in the event of the issuer’s liquidation.

Contingent convertible or bail-in debenture

Where the investor invests in (deeply subordinated) contingent convertible debenture / bail-in debentures, such investments have coupon payments that may be deferred or even suspended subject to the terms and conditions of the issue. Contingent convertible and bail-in debentures are hybrid debt-equity instruments that may be written off or converted to common stock on the occurrence of a trigger event.

Perpetual bonds

Where the investor invests in (deeply subordinated) perpetual bonds with no maturity, such investments have coupon payments that may be deferred or even suspended subject to the terms and conditions of each bond issue. Perpetual debentures are often callable (and/or subordinated) and there could be reinvestment risk, and/or a lower priority of claims (e.g. on liquidation of the issuer).

Bonds with discretionary coupons, variable / deferred interest payment terms or extendable maturity dates

Some bonds have discretionary coupons, variable and/or deferral of interest payment terms. For any such bonds, investors would face uncertainty over the amount and time of the interest payments to be received, or investors may not receive any coupons.

Some bonds have an extendable maturity date and investors would not have a definite schedule of principal repayment.

Risk of Inflation-linked bonds

Where the investor invests in inflation-linked bonds, such investments are subject to deflation risk. The capital value of inflation-linked bonds tends to be lower than other bond categories during deflationary periods. In addition, the full principal invested may not be returned at maturity for inflation-linked bonds during times of deflation. Lastly, inflation-linked bonds are generally less liquid than traditional bonds as they are primarily bought by buy-and-hold investors.

Risks of investing in high-yield bonds

High yield bonds are sub-investment grade bonds or non-rated bonds.  Where the investor invests in high yield bonds, the investor should understand that high-yield bonds are generally of higher risk than investment-grade bonds and hence generally have a higher risk of default and higher price volatility. High yield bonds are issued by companies which might have a greater risk of default on interest and/or principal payments.

Investment in high yield bonds may not be suitable for all investors. In addition to a tolerance for risk, investors should be aware of the elevated volatility of high yield bonds in particular in an adverse market with possible market downturns or unexpected events that negatively impact individual issues. The ability for the bond issuer to meet its obligations may be negatively affected by its unexpected financing needs, or failing to meet its specific projected business forecasts, or its specific developments.

Credit risk and interest rate risk are two main concerns for investors in general.

Credit risk is the risk associated with a bond issuer’s ability to make timely principal and interest payments. For investors in high-yield bonds, credit risk can include, but are not limited to, the default risk, downgrade risk and event risk as follows:

• Default risk: Defaults may occur when a bond issuer fails to pay an interest and/or principal payment to investors as scheduled. The risk of default is greater for high yield bonds than for investment grade bonds.

• Downgrade risk: Downgrades would happen when the respective rating agencies lower the ratings on specific bonds. Downgrade risks may arise if the issuer’s financial condition deteriorates.  Downgrades are usually accompanied by declines in market prices for the downgraded security. During economic downturns high yield bonds typically fall more in value than investment grade bonds as investors become more risk averse and default risk rises.

• Event risk: There is possibility that an issuer misses a coupon payment to investors due to an unexpected event. Credit rating agencies may downgrade the issuer’s credit rating as a result of such event(s).

Where the investor invests in fixed income securities, they are also subject to interest rate risk. If interest rates increase, the value of such investments generally declines.

Where the investor invests in callable high yield bonds, they face reinvestment risk when the issuer exercises its right to redeem the bond before it matures.

Bonds with multiple credit support providers and structures

Bonds with special feature “multiple credit support providers and structures” cover structures such as a bond having multiple guarantors. Such bonds are considered as complex products given that some of these bonds may have multiple credit support providers with no material operations, or may involve complex structures which subordinate the bondholders’ rights to those of the multiple credit support providers.

Liquidity risk

Some investments may not have active secondary markets. Liquidity may become scarce and it would be difficult or impossible to sell these investments before maturity. Unwinding of unlisted investment products before maturity can be expensive and may result in significant loss before maturity. BNP Paribas relies solely on its counterpart(s) (including BNP Paribas' affiliates and/or other third party counterparts, as the case may be) to provide secondary unwinding pricing before maturity and such unwinding costs will also be dependent on the counterpart(s)'s cost of funding, the discounted curve, the market condition, among other considerations, at the point of exit. The investor must be prepared to hold their investments up to maturity.

Currency risk

Where the investor invests in instruments denominated in currencies different to the base currency; such investments may be affected favorably or unfavorably by exchange control regulations or changes in the exchange rates between the base currency and other currencies. Changes in currency exchange rates may influence the value of an investment, the dividends or interest earned and the gains and losses realised. In general, exchange rates between currencies are determined by supply and demand in the currency exchange markets, the international balance of payments, governmental intervention, speculation and other economic and political conditions. If the currency in which an investment is denominated appreciates against the base currency, the value of the investment would increase. Conversely, a decline in the exchange rate of the currency would adversely affect the value of the portfolio.

Where the investor engages in foreign currency transactions in order to hedge against currency exchange risk, there is no guarantee that hedging or protection will be achieved.

Market disruption risk

Markets may become disrupted. Local market disruptions can have a global effect. Market disruption can adversely affect the performance of the investment.

Conflicts of interest

Various potential and actual conflicts of interest may arise from the overall investment activities or the roles of the parties involved in any investment product or transaction, their investment professionals and/or their affiliates. In particular, the counterparty / issuer / provider or its related entities or affiliates can offer or manage other investments which interests may be different to the interest of your investments in that investment product or transaction; or for cases where the product counterparty or issuer is BNP Paribas or its related entity or affiliate, BNP Paribas may also act as distributor, guarantor, calculation agent and/or arranger of the same product.

General Risk Disclosure (RD) for Exchange Traded Funds (“ETFs”), Synthetic ETFs, and Leveraged Products and/or Inverse Products structured as ETFs 

Risk associated with ETFs

The principal objective of an ETF is to track the performance of an underlying index, or a group of assets such as commodities instead of an index, as the case may be.

The performance of units in an ETF is unpredictable. It depends on financial, political, economic and other events as well as the ETF’s earnings, market position, risk situation, shareholder structure and distribution policy.

In case of the transaction that is linked to the performance of an ETF, you should also note that the value of an interest in the ETF will generally decline in line with the decline of any securities which comprise the benchmark portfolio or the value of any benchmark index linked to the relevant ETF. Investment in the transaction linked to an ETF involves risks similar to those of investing in the equity securities traded on an exchange that comprise the benchmark portfolio or index to which the ETF is linked, such as market fluctuations caused by, amongst other things, economic and political developments, changes in interest rates and currency rates and market liquidity. 

Whilst the net asset value of units in an ETF will reflect the market value of the ETF’s portfolio, trading prices of the units in an ETF on the stock exchange may be lower or higher than the net asset value per unit.  Although the investment strategy of an ETF is typically designed to replicate the movements in the benchmark index or the underlying asset pool to which the ETF is linked, there may be divergence between the performance of the ETF and the performance of the benchmark index or portfolio that the ETF is designed to track due to certain tracking errors as a result of a number of factors (or combination thereof). These contributing factors may include, but are not limited to, any failure of the tracking strategy, fees and expenses that are deducted from the ETF’s returns, currency differences in the constituents that comprise the index or the underlying asset pool which the ETF is designed to track. In particular, where the benchmark index or market that the ETF tracks is subject to restricted market access, for instance, an emerging market index, the efficiency in the unit creation or redemption of units/interests in the ETF to keep the price of the ETF in line with its net asset value may be impeded or disrupted due to the lack of liquidity in its constituents, causing the ETF to trade at a higher premium or discount to its net asset value. There is no guarantee of the repayment of principal or that investment objective of the ETF will be met.  

Although the ETF is traded on stock exchange, investors should be aware that there may be no liquid trading market for the units of the ETF. There can be no assurance that active trading markets for units of the ETF will continue to develop, nor is there a certain basis for predicting the actual price levels at, or sizes in, which units may trade.

Following are some risks associated with ETFs with special features. The list is not exhaustive. Investors should always refer to the relevant ETF / product prospectus(es) for details, in particular, the risk factors.

Risk associated with Synthetic ETFs

Due to market accessibility, the efficiency in unit creation or redemption to keep the price of the synthetic ETF in line with its net asset value (“NAV”) may be disrupted, causing the synthetic ETF to trade at a higher premium or discount to its NAV. Such risks may have a negative impact on the potential return of the product. If an ETF adopts a synthetic replication investment strategy to achieve its investment objectives by investing in financial derivative instruments, you should note that (i) by investing in financial derivative instruments, the ETF is exposed to the credit, potential contagion and concentration risks of the counterparties who issued the financial derivative instruments, and the market value of any collateral held by the ETF may have fallen substantially when the ETF seeks to realise such collateral; and (ii) the ETF may be exposed to higher liquidity risk if such financial derivative instruments do not have an active secondary market.

Synthetic ETF products may include different kinds of strategies, including but not limited to index tracking, replication strategy, leverage strategy, or any combination of derivatives with collateral requirements. Investor should refer to the respective ETF prospectus and be familiar with particular features and risk.

The major risks associated with synthetic ETFs are highlighted below:

(1) Market risk – the clients are exposed to the political, economic, currency and other risks related to the synthetic ETF’s underlying index.

(2) Counterparty risk – where a synthetic ETF invests in derivatives to replicate the index performance, the clients are exposed to the credit risk of the counterparties who issued the derivatives, in addition to the risks relating to the index. Further, potential contagion and concentration risks of the derivatives issuers should be taken into account (e.g. since derivative issuers are predominantly international financial institutions, the failure of one derivative counterparty of a synthetic ETF may have a “knock-on” effect on other derivative counterparties of the synthetic ETF). Some synthetic ETFs have collateral to reduce the counterparty risk, but there may be a risk that the market value of the collateral has fallen substantially when the synthetic ETF seeks to realise the collateral.

(3) Liquidity risk – a higher liquidity risk is involved if a synthetic ETF involves derivatives which do not have an active secondary market. Wider bid-offer spreads in the price of the derivatives may result in losses.

(4) Tracking error – there may be disparity between the performance of the synthetic ETF and the performance of the underlying index due to, for instance, failure of the tracking strategy, currency differences, fees and expenses.

(5) Trading at a discount or premium – where the index/market that the synthetic ETF tracks is subject to restricted access, the efficiency in unit creation or redemption to keep the price of the synthetic ETF in line with its NAV may be disrupted, causing the synthetic ETF to trade at a higher premium or discount to its NAV. Investors who buy a synthetic ETF at a premium may not be able to recover the premium in the event of termination.

Risk associated with Leveraged Products and/or Inverse Products structured as ETFs (“L&I Products”)

Leveraged products structured as ETFs (“Leveraged Products”) typically aim to deliver a return equivalent to a multiple of the underlying index return that they track. On the other hand, inverse products structured as ETFs (“Inverse Products”) typically aim to deliver the opposite of the return of the underlying index that they track. To produce the specified leveraged or inverse return, these ETFs have to rebalance their portfolios, typically on a daily basis.  L&I Products are different from the buy-to-hold characteristics of conventional ETFs.  Investors should normally not hold L&I Products for longer than the rebalancing interval, which is typically one day.  L&I Products are designed as a trading tool for short-term market timing or hedging purposes, and are not intended for long term investment.  L&I Products are only suitable for sophisticated trading-oriented investors who constantly monitor the performance of their holdings on a daily basis; and the performance of L&I Products, when held overnight, may deviate from the underlying indices.

Leveraged Products aim to obtain leveraged exposure to an index.  The ETFs may be leveraged by borrowing, by entering into futures contracts and through the use of other financial derivatives. Whilst leveraging provides the ETFs with significantly more market exposure and hence an opportunity for greater total returns than it would have where no leveraging is being used, it also exposes the ETFs to a greater risk of loss arising from adverse movements in the index and a fall in the value of the index will trigger a greater and accelerated fall in the net asset value of the ETFs.  Due to the use of leverage and effects of compounding, the performance of the  ETFs will be magnified (either in an upward or downward market) as compared with that of the index. The performance of the ETFs for periods longer than a single day, especially in periods of volatility, may differ significantly from the performance of the index over the same period of time.

Investors of any Inverse Product shall lose money when the index rises, which is a result that is the opposite from traditional index tracking ETFs. There is no guarantee that the Inverse Product will achieve a high degree of inverse correlation to the index and therefore achieve its inverse leveraged investment objective.

Inverse leveraged products structured as ETFs (“Inverse Leveraged Products”) seek investment results of a certain multiple of the inverse (or opposite) of the performance of an index. The Inverse Leveraged Products are different and much riskier than most ETFs that do not use leverage, and are suitable for investors who have sufficient knowledge and understand the risks associated with shorting and the use of leverage and intend to actively monitor and manage their portfolios.

Risks associated with the Use of Financial Derivatives

Prices of financial derivatives may be affected by many factors. An illiquid market may adversely affect the price of financial derivatives and therefore the value of the ETFs. In particular, over-the-counter financial derivatives are normally less liquid than exchange traded financial derivatives. When an exchange traded financial derivative is de-listed, its liquidity and price may be adversely affected.

ETFs investing in futures contracts are particularly volatile. The prices of futures contracts may be affected by many factors apart from the values of the underlying assets. The low initial margin deposits normally required to establish a position in futures contracts permit a high degree of leverage. As a result, a relatively small movement in the price of a futures contract may result in a profit or loss which is greater than the amount of margin deposits initially placed with the intermediaries. ETFs will be subject to the counterparty risk with regard to financial derivatives which it holds and in the event of the insolvency of any counterparty or of any broker through which the fund manager trades for the account of the ETFs, the ETFs may only rank as an unsecured creditor in respect of the sums due to the ETFs under the relevant margin account or otherwise and any losses arising there from will be borne by the ETFs.

As a result of the above, the price of units in the ETFs may be volatile. Investors should note that whilst the ETFs will use financial derivatives to achieve its investment objective, investors’ liabilities are limited to the amount they invest in the ETFs.

Risk Disclosure Associated with RMB Deposits, Investments and Products

The deposits, investment transactions or financial products you enter into or purchase may be linked to or denominated in RMB (collectively, the “RMB Investment Products”). If that is the case, please note that entering into or investing in the RMB Investments Products entails certain risks. The following are examples of such risks, which are in addition to other risk disclosure statements sent to you, and it should not be viewed as an exhaustive list.

RMB is not freely convertible at present. The government of the People’s Republic of China (“PRC”) continues to regulate conversion between RMB and foreign currencies, including the Hong Kong dollar and Singapore dollar, despite the significant reduction over the years by the PRC government of its control over routine foreign exchange transactions under current accounts. The People’s Bank of China (“PBOC”) has established a clearing and settlement system pursuant to the Settlement Agreement on the Clearing of RMB Business between PBOC and Bank of China (Hong Kong) Limited. However, the current size of RMB and RMB denominated financial assets in Hong Kong and Singapore is limited, and its growth is subject to many constraints which are corollary of PRC laws and regulations on foreign exchange.

RMB currency risk

There can be no assurance that access to RMB funds for the purposes of making payments under the RMB Investment Products or generally may remain or will not become restricted.

Exchange rate risk

The value of the RMB against the Hong Kong dollar, Singapore dollar and other foreign currencies fluctuates and is affected by changes in the PRC and international political and economic conditions and by many other factors. As a result, the value of RMB payments may vary with the prevailing exchange rates in the marketplace. If the value of the RMB depreciates against the Hong Kong dollar, Singapore dollar or other foreign currencies, the value of an investor’s investment in Hong Kong dollar, Singapore dollar or other applicable foreign currency terms will decline.

In addition, if the RMB Investment Products are not denominated in RMB or if the underlying(s) to which the RMB Investment Products are linked is not denominated in RMB, such RMB Investment Products may be subject to multiple currency conversion costs (including but not limited to multiple currency conversion costs involved in making investments and liquidating investments), as well as the RMB exchange rate fluctuations and bid/offer spreads when assets are sold to meet redemption requests and other capital requirements, where applicable. Such costs (if any) will be borne by the investors.

Risk related to the underlying(s)

If the RMB Investment Products you purchase or enter into are linked to the underlying(s), the movements in the price of the underlying(s) may be subject to significant fluctuations that may not correlate with changes in interest rates, currencies or other indices and the timing of changes in the relevant price of the underlying(s) may affect the actual yield to investors, even if the average level is consistent with their expectations.

If the RMB Investment Products you purchase or enter into are denominated in RMB but the underlying(s) is denominated in another currency, investors may lose all or a substantial portion of their investment if (i) the value of the underlying(s) appreciates but RMB depreciates against the Hong Kong dollar, Singapore dollar or other foreign currencies; (ii) RMB appreciates against the Hong Kong dollar, Singapore dollar or other foreign currencies but the value of the underlying(s) depreciates; or (iii) both the underlying(s) and RMB depreciate.

If the RMB Investment Products you purchase or enter into do not have access to invest directly in the Mainland China, their available choice of underlying investments denominated in RMB outside Mainland China may be limited and such limitation may adversely affect the return and performance of such RMB Investment Products.

For RMB Investment Products with a signification portion of non-RMB denominated underlying investments, please note that there is a possibility of not receiving the full amount in RMB upon redemption. This may be the case if the issuer of such RMB Investment Product is not able to obtain sufficient amount of RMB in a timely manner due to the exchange controls and restrictions applicable to the currency.

Interest rate risk

If the RMB Investment Product you purchase or enter into which are, or may invest in, RMB debt instruments, please note that such instruments are susceptible to interest rate fluctuations, which may adversely affect the return and performance of such RMB Investment Product.

Liquidity risk

No representation is made as to the existence of a market for the RMB Investment Products.

The RMB Investment Products may be designed to be held until the maturity date of such RMB Investment Products. You should not make an investment in such RMB Investment Products if you do not intend to invest for its full term. You will not be able to realise the value of your investment if, for example, your view on the underlying(s) to which the RMB Investment Products relates changes after you have made your investment but before its expiry.

The RMB Investments Products may involve a long period of investment. Investors who seek to redeem their investment before the maturity date or during the lock-up period (if applicable) may incur a significant loss of principal where the proceeds may be substantially lower than the invested amount. Investors may incur early surrender/withdrawal fees and charges as well as loss of bonuses (where applicable) as a result of redemption before the maturity date or during the lockup period. In addition, the current size of RMB and RMB denominated financial assets is limited in Hong Kong and Singapore, which may adversely affect the liquidity of the RMB Investment Products. You must therefore realize that the inability to realize the value of your investment prior to its expiry is a significant risk.

The secondary prices (if any) for RMB Investment Products may be at a substantial discount from the principal amount even in the case where the price of the underlying(s) has appreciated since the issue date. The price of the RMB Investment Products including the price at which the bank, the issuer, its affiliate or any other person may be willing to repurchase may be affected by a number of factors including the changes in the price of the  underlying(s) and numerous economic and market factors including the expected volatility of the underlying(s); the outstanding principal amount; the time to maturity of the RMB.

Investment Products; the dividend rate on the underlying(s); the interest and yield rates in the market; the credit spreads, the exchange rate and the volatility of the exchange rate; the economic, financial, political, regulatory or judicial events that affect the underlying(s) or stock markets generally and which may affect the underlying closing prices on any valuation date; and the creditworthiness of the bank or the issuer.

The issue price of a RMB Investment Product may not accurately reflect its market value at the issue date and the price, if any at which the issuer, its affiliate or any other person is willing to purchase the RMB Investment Products in the secondary market (if any), is likely to be lower than the issue price due to the inclusion of agents’ compensation, compensation of an affiliate of the agents, any fees and charges incurred by the issuer and expected profit from hedging in the original issue price. In addition, any such prices may differ from values determined by pricing models used by the agents, as a result of such compensation or other transaction costs. In addition, different market participants may have different pricing models leading to different results.

Non-guaranteed returns

The returns of the RMB Investment Products may not be guaranteed. Where there are any statements of illustrative return which is not guaranteed or partly not guaranteed, investors should note that the return (or the part of the return, as the case may be) is not guaranteed and should take note of the assumptions on which the illustrations are based.

Additional risks associated with leveraged trading

If you use your leveraged trading facilities to purchase or enter into RMB Investment Products, please note that such leveraging heightens the investment risks by magnifying prospective losses. Please ensure you understand the terms and conditions of the borrowing arrangement, including but without limitation to the circumstances under which you will be required to place additional margin deposits (and which may be required at short notice) and that your collateral may be liquidated without your consent.

Moreover, please also be aware that market conditions may make it impossible to execute contingent orders, such as “stop-loss” orders. Moreover, you are also be reminded of your exposure to interest rate risk and for example, your cost of borrowing may increase due to interest rate movements.

Counterparty and Insolvency risk

If you make an investment in RMB Investment Products, you are relying upon the creditworthiness of your counterparty or the issuer (as appropriate). As you are subject to the issuer and the counterparty credit risk and insolvency risk, you may lose your total investment even though the underlying of the RMB Investment Product is performing in the direction and/or magnitude you expect.

Therefore, please ensure that you are aware of the identity of your contractual counterparty, e.g. the issuer, the relevant guarantor (if applicable) or other parties involved in the RMB Investment Products as they may have different rights and obligations under the terms of the RMB Investment Products. You will be purchasing an unsecured obligation of such counterparty (as opposed to an obligation of a central clearing corporation as would be the case with exchange traded futures and options) and should evaluate the comparative credit risk of such counterparty before making an investment in the RMB Investment Products. A RMB Investment Product from the counterparty will not represent a deposit account and will not be insured by any government entity. Your counterparty will not accept any fiduciary obligations towards you, nor is it willing to undertake such obligations.

To the extent that the RMB Investment Products may invest in RMB debt instruments not supported by any collateral, you should note that such products are fully exposed to the credit risk of the relevant counterparties. Where a RMB Investment Product may invest in derivative instruments, counterparty risk may also arise as the default by the derivative issuers may adversely affect the performance of the RMB Investment Product and result in substantial loss.

Credit-ratings

The issuer’s and the counterparty’s long-term credit ratings do not necessarily reflect their credit worthiness and/or their ability of performing their obligations under the RMB Investment Products. Further, there is no assurance that its long-term credit ratings will remain unchanged for any given period of time or that a downgrading, a suspension or withdrawal of any such credit ratings will not occur in the future. An investor should not solely rely on the long-term credit ratings of the Issuer when evaluating its creditworthiness.

Not a deposit

The RMB Investment Products which are investment transactions or financial products (e.g. dual currency structured deposit/investment and the equity linked notes denominated in RMB) are not deposits and are therefore not protected under any legislation applicable to deposits. In particular but without limiting the foregoing, they are neither protected by the Hong Kong Deposit Protection Scheme in Hong Kong nor the Deposit Insurance Scheme in Singapore.

Not an exhaustive list

The risk considerations and disclaimers in relation to the investment of the RMB Investment Products as set out in this document are not intended to be exhaustive and may be supplemented by additional risk disclosures from time to time.

General Risks of Commodities, Equities and Funds

Risk of investing in commodities

Where the client invests in commodities, the market for and trading in commodities is speculative and is volatile. Prices for commodities are affected by a variety of factors. The price volatility of each commodity also affects the value of the futures and forward contracts related to that commodity and therefore its price at any such time. The volatility of commodity prices is often higher than for equity portfolios. The commodities markets are in most cases less liquid as compared to markets of equity, interest or currency-related products. Due to market movements, the client may suffer a substantial loss in his/her investment.

Risk of investing in equities and equity funds

Where the client invests in equities and funds investing in equities, the prices of equity securities and funds investing in equities may decline in response to certain events, including but not limited to those directly affecting the companies; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and currency fluctuations.

Investing in equity securities and funds investing in equities may offer a higher rate of return than other investments. However, the risks associated with investments in equity securities and funds investing in equities may also be higher, because the performance of equity securities and funds investing in equities depends upon factors which are difficult to predict. Such factors include the possibility of sudden or prolonged market declines and risks associated with individual companies. The fundamental risk associated with investments in equities and equity funds is that the value of the investments it holds might decrease in value. Equity value may fluctuate in response to the activities of an individual company or companies or in response to general market and/or economic conditions.

Risk of investing in mutual funds focused on absolute returns

Where the client invests in mutual funds focused on generating absolute returns, financial derivative instruments may be used for efficient portfolio management, for investment purposes to enhance performance and for hedging purposes.  Investors should be aware that financial derivative instrument may carry specific risks, such as the failure of the company issuing the instrument to pay the amount due on maturity or the failure of the instrument to perform the way the investment was intended. Such products and instruments may also carry liquidity risks due to more restrictive market conditions and accordingly greater volatility may result.  Such funds might undertake leveraged transactions, meaning an investment can provide significantly larger market exposure than the money paid when the transaction is executed, so that a relatively small adverse market movement can expose the fund to significant losses.  There could also be risk of early termination of the financial derivative instruments transactions.  Financial derivative instrument may also involve in over-the counter ("OTC") transaction, and sometimes OTC investment's valuation could be difficult to obtain as information of the issuers and the risks associated with the issuers may not be publicly available.

Many financial derivative instruments are complex and may be valued subjectively.  Inappropriate valuations can have an adverse impact on the investments.  There is not always a direct and parallel relationship between an OTC derivative and the value of the underlying assets or indices etc. from which it is derived. 

The mutual funds may engage in transactions involving foreign exchange forward contracts.  A foreign exchange forward contract is a contractually binding obligation to transact a particular currency (either to buy or sell) at a specified date in the future.  Such forward contracts are usually not traded on exchanges, and they are executed through the interbank market.  Accordingly, the funds could be subject to the risk of the inability of its counterparties to execute such contracts which can lead to significant loss to the funds.

The mutual funds may adopt a short selling strategy, where the short selling strategy involves the theoretically unlimited risk of an increase in the market price of the securities sold short.  And there is no guarantee that the securities sold short will be available for purchase to cover the short positions.  There is also risk of loss of key investment managers who are responsible for the development of the investment strategy, where the departure of such senior management may adversely affected the performance of the fund.

No guarantee is made that such funds will achieve their investment objectives, and there is a risk of loss of capital.

Risks associated with funds investing in bonds

Investors are reminded not to treat all bonds as risk free products as they are subject to various risks including the following:

•    Credit risk: bonds are subject to the risk of the issuer defaulting on its obligations. It should also be noted that credit ratings assigned by credit rating agencies do not guarantee the creditworthiness of the issuer;

•    Liquidity risk: some bonds may not have active secondary markets and it would be difficult or impossible for investors to sell the bond before its maturity.

•    Interest rate risk: bonds are more susceptible to fluctuations in interest rates and generally prices of bonds will fall when interest rate rise.

Risks associated with high yield bonds

In particular, Investors should pay attention to funds invest primarily in high yield bonds with following characteristics that (i) they will be subject to the risks associated with investments in bonds as described above; and (ii) the net asset value of a fund that invests in such bonds may decline or be negatively affected if there is a default of any of the high yield bonds that it invests in or if interest rates change. The risks of high yield bonds may also include the following:

•    Higher credit risk: Since high-yield bonds (non-investment grade bonds) are typically rated below investment grade or are unrated and as such are often subject to a higher risk of issuer default, greater possibility of default and greater price volatility.

•    Vulnerability to economic cycles: During economic downturns high-yield bonds (non-investment grade bonds) typically fall more in value than investment grade bonds as (i) investors become more risk averse and (ii) default risk rises.

•    Capital growth risk: some high-yield bond funds may have fees and/ or dividends paid out of capital. As a result, the capital that the fund has available for investment in the future and capital growth may be reduced;

•    Dividend distributions: some high-yield bond funds may not distribute dividends, but instead reinvest the dividends into the fund or alternatively, the investment manager may have discretion on whether or not to make any distribution out of income and/ or capital of the fund. Also, a high distribution yield does not imply a positive or high return on the total investment; and

•    Other key risks that may relate to the relevant fund including concentration of investments in particular types of specialized debt or a specific geographical region or sovereign securities.

Risks associated with bonds with special features

•    Subordinated bonds: Investors should pay attention to the credit information in relation to the bond and the implications of its “subordinated” nature. Investors should note that holders of subordinated bonds will bear higher risks than holders of senior bonds of the issuer due to a lower priority of claim in the event of the issuer’s liquidation.

•    Convertible bonds risk: When investing in such bond funds, such investments may have exposure to convertible bonds that are subject to the risks associated with both debt and equity securities, and to risks specific to convertible securities. Their value may change significantly depending on economic and interest rate conditions, the creditworthiness of the issuer (and/or the guarantor, as applicable), the performance of the underlying equity and general financial market conditions. In addition, issuers (and/or the guarantors, as applicable) of convertible bonds may fail to meet payment obligations and their credit ratings may be downgraded. Convertible bonds may also be subject to lower liquidity than the underlying equity securities.

•    Perpetual bonds: Investors should note that perpetual bonds do not have a maturity date, and the coupon payments may be deferred or even suspended subject to the terms and conditions of the issue. Furthermore, as perpetual bonds are often callable and / or subordinated, investors should note the reinvestment risk, and / or a lower priority of claims (e.g. on liquidation of the issuer), as the case may be.

•    Bonds with other special features - callable, discretionary coupons, variable / deferred interest payment terms or extendable maturity dates: Callable bonds are callable and investors face reinvestment risk when the issuer exercises its right to redeem the bond before it matures. Some bonds have discretionary coupons, variable and/or deferral of interest payment terms. For any such bonds, investors would face uncertainty over the amount and time of the interest payments to be received, or investors may not receive any coupons. Some bonds have an extendable maturity date and investors would not have a definite schedule of principal repayment.

•    Bonds with multiple credit support providers and structures: cover structures such as a bond having multiple guarantors. Such bonds are considered as complex products given that some of these bonds may have multiple credit support providers with no material operations, or may involve complex structures which subordinate the bondholders’ rights to those of the multiple credit support providers.

Risks associated with funds that invest in or are linked to bonds with loss-absorption features

Funds that invest mainly in, or whose returns are closely linked to the performance of, bonds or debt instruments (i.e. underlyings) with features of contingent write-down or conversion to ordinary shares on the occurrence of (1) when a financial institution is near or at the point of non-viability (PONV); or (2) when the capital ratio of a financial institution falls to a specified level, are considered as loss absorption products and would be subject to additional risks. Investors should take note that such underlyings are subject to the risk of being written down or converted to ordinary shares (as the case may be). For Tier 1/Tier 2/Tier 3 bonds as underlyings, the loss absorption mechanism is triggered at PONV, whereas for Coco bonds as underlyings, the loss absorption mechanism is triggered with a mechanical trigger as specified in the prospectus or at PONV. Regardless of the triggering mechanism in respect of the underlyings, it may potentially result in substantial losses to your investment. Please note that the priority of claims for reimbursement depends on the subordination hierarchy of the various capital and financing buffers in respect of the underlyings, at which for example, the holders of subordinated debts are only repaid after the holders of senior debts have been fully reimbursed. Please take note that investing in underlyings with loss absorption features may potentially result in substantial losses. Accordingly, products investing in or are linked to such underlyings are high risk and complex, as the circumstances in which such products may be required to bear losses are difficult to predict and ex ante assessments of the quantum of losses will be highly uncertain. Such products are generally not suitable for retail investors.