RISK DISCLOSURE STATEMENT
Warning:
The contents of this document have not been reviewed by any regulatory authority of Hong Kong or any other jurisdiction. You (“Counterparty”,or “Client”) are advised to exercise caution in relation to any offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.
This Risk Disclosure Statement forms an integral part of the MCA entered into between SilkyWater Asset Management Limited(“SilkyWater”) and the Client. The terms defined in the MCA shall have the same meanings when used herein. The risk factors in this Risk Disclosure Statement are not exhaustive and may be amended or supplemented by additional risk disclosures from time to time. TheClient should refrain from making any investment or Transaction unless the Client fully understands the risks involved and has obtained independent advice from the Client’s own advisors as the Client considers appropriate.
Swap Transactions transacted under these terms are complex products that involve substantial risks and are suitable only for sophisticated investors who have sufficient knowledge and experience and access to such professional advisers as they shall consider necessary in order to make their own evaluation of the risks and the merits of such an investment (including, without limitation, the tax, accounting, credit, legal, regulatory and financial implications for them of such an investment) and who have considered the suitability of such products in light of their own circumstances and financial condition. In the worst case scenario, you may lose more than the amount you have invested and your potential gain is not capped. Do not invest unless you fully understand and are willing to assume the associated risks.
Swap Transactions transacted under these terms are available to professional investors (as defined in the Securities And FuturesOrdinance (CAP. 571) and the rules made thereunder) only.
Nature of product and Key terms and features:
Transactions documented under this MCA are Share Swaps and ShareBasket Swaps offered by SilkyWater. The Underlying assets are shares or baskets of shares listed in stock exchanges (including stock exchanges in Hong Kong and China, the “Securities”). The performance of theTransactions are linked to the performance of the underlying Securities.The prices of the Securities can and do fluctuate, sometimes dramatically.The price of a share may move up or down, and may become valueless.It is possible that losses will be incurred rather than profit made as a result of buying and selling Securities.
If the underlier for a Transaction is a share basket, the negative performance of one or more components of the basket may negate any positive performance of other components. For example, while the prices, values, or levels of some components may increase over the term of the Transaction, the prices, values, or levels of other components may not increase during the term of the Transaction as much or may decline.Therefore, in respect of the value of the Transaction or the amount of any payments or deliveries to be made under the Transaction, changes in the prices, value, or levels of one or more of the components may be moderated, or offset, by lesser changes or inverse changes in the prices, values, or levels of one or more of the other components. This effect may be further amplified by differing weights of each component. More heavily weighted components will have a larger impact on the value of the Transaction or the amount of any payments or deliveries to be made under the Transaction than components with lesser weightings.
Settlement mechanism: default settlement is cash settlement unless otherwise agreed by the parties.
Underlying assets: the Securities may include one or more shares listed in stock exchanges such as Hong Kong Stock Exchange, Shanghai StockExchange or Shenzhen Stock Exchange as agreed and specified by the Counterparty and SilkyWater prior to entering into the relevant transactions.
Optional Termination: SilkyWater may elect to terminate theTransaction in whole or in part on any Scheduled Trading Day prior to the Valuation Date by giving you notice orally or in writing specifying the number of Shares (or number of Baskets) in respect of which it wishes to terminate the Transaction and the proposed early termination date.
The description given in this section is for your information only, and is not an exhaustive description of all features of the Transaction.In the event of any conflict between the description given in this section and the other terms of the Transaction, such other terms shall prevail.
Risk Factors:
Market risk: The Securities can and do fluctuate, sometimes dramatically, and therefore you are subject to the market risks in connection with each such underlying Securities. If you have been provided with any past performance information, you should be aware that past performance is not indicative of future performance. No representation or warranty is made that any indicative performance or return indicated will be achieved in the future.
Credit risk: Any Transaction which requires SilkyWater to make payments to you will expose you to the credit risk of SilkyWater (as opposed to the credit risk of a central clearing corporation as would generally be the case with exchange-traded products).
Early termination feature: upon occurrence of certain AdditionalDisruption Event (for instance, if there is a Change in Law event orInsolvency Filing or Hedging Disruption event or Increased Cost ofHedging Event), the relevant transactions may be early terminated. Upon early termination, the Close-out Amount with respect to such terminatedTransaction that would be payable by one party to the other shall be determined by the Calculation Agent in accordance with the determination method provided in the Agreement.
Early exit penalty: the penalty for early exit is the Break Funding Cost, which means in relation to a Transaction, the difference between (a)assuming the Transaction was not early terminated, Fixed Amount payable by the Counterparty calculated on the basis of the scheduledTermination Date, and (b) in the event of an early termination, FixedAmount payable by the Counterparty calculated on the basis of the Early Termination Date.
No secondary market: There is no secondary market available for SwapTransactions transacted under these terms.
Non-Reliance: Neither SilkyWater nor any of its Affiliates has given any sponsorship, consent, sale, recommendation or other advice as to the suitability or appropriateness of entering into the Transaction with respect to the Securities included therein for any particular purpose of the Counterparty (including for accounting, tax, legal investment, regulatory and other purposes), and the Counterparty has not relied, and will not rely, on any statement or other information furnished bySilkyWater nor any of its Affiliates for any such purpose.
Leveraged exposure to performance of the Securities: TheTransactions may provide a leveraged exposure to the performance of the Securities. Leverage increases volatility and amplifies losses and gains. Leveraged securities magnify losses in adverse market conditions compared to an unleveraged or direct investment in the Securities.
Counterparty should be aware that upon termination of the Transactions(whether at early termination, optional termination or final termination),any amount payable to the you will be subject to the deduction of an amount equal to certain percentage of the Excess Interest, leveraged financing amount and/or interest amounts. In each case, the Counterparty may therefore receive less than they would otherwise, and may receive zero and may be required to pay more to SilkyWater upon termination.
Not the same as investing in the Securities: Entering into the SwapTransactions are different from holding the underlying Securities directly.You have no ownership of, or rights to, the underlying Securities referenced by a Transaction. The market value of a Transaction may not reflect movements in the price of such underlying Securities. Payments made under a Transaction may differ from payments made under the underlying Securities.
Additional margin: The investments carry a high degree of risk. The amount of initial margin is small relative to the value of the Transactions so that Transactions are leveraged or geared. A relatively small market movement will have a proportionately larger impact on the funds theClient has deposited or will have to deposit: this may work against theClient as well as for the Client. Client may be called upon by theCalculation Agent to pay substantial additional funds on short notice. If the Client fails to comply with a request for additional funds within the time prescribed, the relevant Transactions may be early terminated at a loss and the Client will be liable for any resulting deficit.
Transfer of Title: Margins transferred by Counterparty to SilkyWater will be on a title transfer basis. Counter party will only have a contractual claim for returning such margin and will not receive any interest from the margin it posts.
Possible conflicts of interest: SilkyWater, and certain named agents (e.g.the Calculation Agent) may be the same or affiliated corporate entities.In their respective roles, SilkyWater or the various named agents may retain various powers of discretion which may have a material impact on the Transactions. These discretions may be exercised (or not be exercised)in a way that could adversely affect the Counterparty. SilkyWater and its affiliates may also from time to time engage in transactions involving the underlying Securities for themselves or their clients. Such trading may adversely affect the value of the Securities.
Risks related to the Securities listed on PRC stock exchanges orChina Connect
China Connect Risk: Foreign investors may invest in A Shares, being securities denominated in CNY that are traded on the securities market of the People’s Republic of China (excluding Hong Kong, Macau andTaiwan) (the “PRC”), through China Connect, if the A Shares are eligible securities listed and traded on the Shanghai Stock Exchange(“SSE”) or the Shenzhen Stock Exchange (“SZSE”) (“China ConnectSecurities”). “China Connect” is a securities trading and clearing programme developed by The Stock Exchange of Hong Kong Limited(“SEHK”), the SSE, SZSE, Hong Kong Securities Clearing CompanyLimited (“HKSCC”) and China Securities Depository and ClearingCorporation Limited (“CSDCC”) for the establishment of mutual market access between (a) SEHK and (b) SSE and SZSE.
If the Securities are China Connect Securities, SilkyWater or its affiliates may (but are not obliged to) choose to hedge its obligations using ChinaConnect. Trading through China Connect is subject to a number of restrictions which may restrict or affect an investment in China ConnectSecurities, including (but not restricted to) the application of PRC laws and regulations to investors in China Connect Securities, pre-trade checking to prevent naked short-selling, the application of daily quotas that apply to Northbound trading through the China Connect Service and restrictions on the ability of an investor to take up certain types of rights issuances through China Connect.
In addition, the application and interpretation of the laws and regulations of Hong Kong and the PRC and the rules, policies or guidelines published or applied by any regulator which regulates China Connect and activities relating to China Connect, or any exchange, clearing system or other entity which provides services relating to China Connect (including without limitation, the SEHK and any relevant subsidiary, HKSCC, SSE,SZSE or CSDCC) in respect of China Connect or any activities arising from China Connect may change or develop from time to time and there is no assurance as to whether or how such changes or developments may restrict or affect an investment in China Connect Securities.
Risks of Investing in the PRC Securities Market and DerivativeInstruments relating to It: The PRC capital market is still at a premature stage. Regulation of the PRC capital market is heavily influenced by government policies and is less transparent and less efficient than the regulation of developed capital markets. There still remain allegations of and convictions for malpractices such as market manipulation and insider trading. The stock price of a PRC listed company may not therefore reasonably reflect its intrinsic value. In addition, the disclosure of information by a PRC company with respect to its financial status may not always be complete and reliable. If the stock price of a PRC listed company does not reasonably reflect its intrinsic value, such pricing inaccuracy will be passed through to derivative instruments. In addition, the revised PRC Securities Law (promulgated on 28 December 2019 and effective as of 1 March 2020) governing the PRC securities market provides that, offshore offering and trading activities of domestic securities, if determined to be disrupting the domestic market order or being detrimental to any legal rights and interests of domestic investors, may also be subject to the provisions and liabilities under the PRC Securities Law. This gives relevant PRC authorities extra-territorial jurisdiction which was not in the previous versions of PRC Securities Law.
China Government and Regulatory Intervention; Suspension ofChina Connect Securities traded through China Connect: ChinaConnect Securities may be affected (which may be positive or negative)by the intervention of the Chinese Government and/or regulatory bodies in the China market. Such intervention mechanisms include, but are not limited to, the introduction and/or suspension of circuit breakers to theChina stock market, the injection of capital into the China market to provide liquidity and increases or decreases to banks’ reserver equirement ratio. China Connect Securities traded through ChinaConnect may also be more volatile and unstable if such China ConnectSecurities are suspended from trading. Such suspension may be prolonged for a considerable period of time and volatility and settlement difficulties relating to such China Connect Securities may also result insignificant fluctuations in the prices, and may adversely affect the value, of the Notes.
PRC Taxation Risk: There is a high degree of uncertainty around the laws and regulations on the taxes to be imposed in relation to investments in China Connect Securities. The PRC tax authorities issued a tax circular (the “China Connect Tax Circular”) on 31 October 2014 to clarify that income tax will be temporarily exempted in respect of the realized gains derived by Hong Kong investors from the transfer of ChinaConnect Securities through China Connect but that dividends paid in respect of China Connect Securities purchased through China Connect will be subject to a 10 per cent. withholding tax. However, the ChinaConnect Tax Circular does not specify an expiry date for such income tax exemption and there can be no assurance that tax will not be payable in the future as a result of any change in applicable laws, treaties, rules or regulations or the interpretation thereof.
CNY Exchange Risk: CNY is currently not a freely convertible currency. It is subject to foreign exchange control policies and repatriation restrictions imposed by the PRC central government.
Any holding or investment in CNY or CNY-related products may be subject to exchange rate risks (including, but not limited to, lower liquidity and higher volatility) which are less common with respect to freely convertible currencies. The rate of exchange of CNY may fluctuate suddenly, unpredictably and significantly, according to the currency policy adopted from time to time by the PRC government.These fluctuations may adversely affect the amount and the value of the investor’s holdings or any payments due to the investor or any payments required to be made by the investor in relation to any investment.
In addition, if the investor’s reference currency is not CNY, changes in the relative value of CNY to the investor’s reference currency will impact the value of CNY holdings and investments to the investor. Foreign exchange rates tend to change suddenly and unpredictably, sometimes by significant amounts.