CALLABLE BULL/BEAR CERTIFICATES (“CBBC”)

1. What is a CBBC?

CBBC is a variety of structured warrant. Similar to a structured warrant, it tracks the performance of an underlying instrument without requiring investors to pay the full price required to own the underlying instrument. It is issued either as a Bull (equivalent to a call warrant) or Bear (equivalent to a put warrant) certificate with a fixed expiry date, allowing investors to take bullish or bearish positions on the underlying instrument.
For a call warrant, a bullish investor can hold onto the structured warrant until expiry date, regardless of the price direction of the underlying instrument. However, for a Callable Bull Certificate, an investor who is bullish on the underlying instrument can enjoy unlimited potential upside but once the price of the underlying instrument moves in the opposite direction, then the CBBC holder must be alert to a possible exit of his position through the termination of the CBBC. The CBBC will terminate when the underlying instrument reaches a certain pre-specified downward level, much like a “stop-loss” measure. Once the price of the underlying instrument reaches the pre-specified downward level, then the Callable Bull Certificate would be suspended and thereafter terminate and ceases trading. The pre-specified level is made known to investors on the date of launch and also when it is adjusted arising from corporate actions.

2. What is Call Price and Mandatory Call Event?

Unlike a structured warrant which only terminates upon the expiry date, a CBBC could terminate anytime upon listing and before the expiry date should the underlying instrument reaches a pre-specified price/level known as the Call Price/Level. When the underlying instrument reaches a Call Price/Level, the issuer will call in the CBBC, triggering a Mandatory Call Event (“MCE”) where the issuer will request for the suspension of the CBBC, after which the CBBC terminates and ceases trading.

A MCE could occur anytime before the expiry date of the CBBC and is triggered when the transacted price/level of the underlying instrument is
• At or below the Call Price/Level (in respect of a callable bull certificate); or
• At or above the Call Price/Level (in respect of a callable bear certificate).

3. How would the CBBC price move compared to the underlying instrument?

The price of a CBBC tends to follow closely the price of the underlying stock (i.e. delta close to one, e.g. such as in Scenario 1 when the underlying is up 10 sen, then the Callable Bull Certificate will be up approximately 10 sen). Thus, if the underlying stock increases in value, a Callable Bull Certificate with an entitlement ratio of 1 to 1 generally increases in value by approximately the same amount whereas a Callable Bear Certificate with an entitlement ratio of 1 to 1 generally decreases in value by approximately the same amount.

** The actual price change could, however, be impacted by demand and supply of the CBBC in the market, time to expiry and changes in funding cost. Price movement of CBBC tends to be more volatile when the price of underlying instrument moves nearer to the Call Price.

4. What is the underlying instrument allowed for issuance of CBBC?
The underlying financial instrument can either be -
(a) a stock; or
(b) an index; or
(c) an exchange-traded fund.

5. What is the expiry period for a CBBC?
A CBBC has a fixed duration to expiry which ranges between 3 months to 5 years. A CBBC is typically short-term in nature. However, for a CBBC, the lifespan may be shorter if a MCE is triggered and the CBBC terminates early. The CBBC becomes worthless upon expiry or when it is called early before the expiry date.

6. How to identify CBBC?
You can differentiate the different types of structured warrants with reference to the 5th character of the stock code.
The format of the stock code is as follows:-
1st 4 characters - stock code of the underlying share/ETF
5th characters - type of structured warrants
6th characters - sequence/number of listing
The code representing the types of structured warrant are as follows:-

Examples:-
Bursa Call Warrant would have the stock code “1818CA” and stock short name “Bursa-CA”,
Bursa Put Warrant would have the stock code as “1818HC” and stock short name “Bursa-HA”
Bursa Callable Bull Certificate (CBBC Bull) would carry the stock code “1818JA” and stock short name “Bursa-JA”.
Bursa Callable Bear Certificate (CBBC Bear) would carry the stock code “1818KA” and stock short name “Bursa-KA”


7. How CBBC work?
On 1 June 2010, Issuer A issues 100 million of callable bull certificates based on PLC X’s shares listed on Bursa Securities. The certificates have the following features:
Call Price : RM1.50
Exercise Price : RM1.00
Expiry Date : 30 Dec 2010

On 2 August 2010, the transacted prices of PLC X’s shares as at 10.30 a.m. are as follows:

(a) When does the MCE1 for the callable bull certificates occur?
The MCE for the callable bull certificates occurs at 9.30 a.m. on 2 August 2010, when the
transacted price is RM1.40, which is below the call price.

(b) What happens to the callable bull certificate when a MCE occurs?
When a MCE occurs, the certificates will be called by the issuer and immediately
requests for a suspension of the CBBC. Upon suspension, the CBBC is terminated and
ceases trading.


8. How will the cash settlement amount be calculated?
Upon MCE
If the Call Price/Call Level is equal to the exercise price, the investors will not receive any cash
amount. However if the Call Price/Call Level is different from the exercise price, the investors will
receive a cash settlement amount calculated as follows:

At Expiry

Where the Closing Price is either:
(a) The closing price of the underlying instrument on one (1) market day prior to the expiry date;
(b) Average closing price of 5 market days prior to the expiry date; or
(c) Average volume weighted average price for 5 market days prior to the expiry date.

9. Settlement of CBBCs where the call price is different from the exercise price
There are 2 types of CBBC allowed to be listed on Bursa Securities. One is where there is no
pay-out to investors i.e. when the call price equals the exercise price. The other type of CBBC is
when there is a possible pay-out or residual value, i.e. where the call price is different from the
exercise price but the pay-out or settlement is dependent on whether the call price is above the
exercise price for a bull CBBC or where the call price is below the exercise price for a bear
CBBC.
Based on the same features as the callable bull certificate in Question 4, it is assumed that the
next trading session after the MCE occurs at 9.30 a.m. which contains at least 1 hour of
continuous trading for PLC X’s shares as defined in paragraph 5.25A(2) of the Main Listing
Requirement (“LR”).

(a) Cash Settlement Amount if Lowest Price is Higher Than Exercise Price
Assuming the traded prices of PLC X’s shares during the various trading phases on 2
August 2010 are as follows:

Are the callable bull certificate holders in this case entitled to receive a cash amount upon the MCE?

Yes. Pursuant to paragraphs 5.25A(1)(b)(i) and 5.25A(2)(a) of the Main LR, where the call price of a callable bull certificate is different from the exercise price, the certificate holders will receive a cash amount if the lowest traded price transacted during the Main Trading Phase of an underlying financial instrument from the MCE up to the end of the next trading session, is above the exercise price.
In this case, MCE occurs at 9.30 a.m. The lowest traded price transacted during the Main Trading Phase** of PLC X’s shares from the MCE (9.30 a.m.) up to the end of the afternoon trading session, is higher than the exercise price of RM1.00.
**For the purpose of the lowest traded price during the Main Trading Phase, the opening and closing prices are not taken into account. As such, the opening and closing prices of RM0.90 which is lower than the exercise price of RM1.00 is not taken into account. Instead, RM1.20 which is the lowest traded price during the continuous trading phases is regarded as the lowest traded price for settlement purpose.
Note: The requirement that only the lowest/highest traded price that occurs during the “Main Trading Phase” can be taken into account in computing the settlement price of a CBBC, is only applicable when the underlying financial instrument is shares or exchange-traded funds listed on the Exchange.

Examples:
i. Assume conversion ratio is 1:1 and the holder holds 5000 units of CBBC
Cash Settlement Amount = 5000 X {RM1.20 – RM1.00) x 1/1 = RM1000

ii. Assume conversion ratio is 5:1 and the holder holds 5000 units of CBBC
Cash Settlement Amount = 5000 X {RM1.20 – RM1.00) x 1/5 = RM200

(b) Cash Settlement Price if Lowest Price is Below Exercise price
This Question is independent from Question (a) above. Assuming the traded prices of PLC X’s shares during the various trading phases on 2 August 2010 are as follows:

Are the callable bull certificate holders in this case entitled to receive a cash amount upon the MCE?

No. As explained in (a) above, pursuant to paragraph 5.25A(1)(b)(i) of the Main LR, the callable bull certificate holders will only receive a cash amount if the lowest traded price transacted during the Main Trading Phase of PLC X’s shares from the MCE up to the end of the next trading session, is above the exercise price.
In this case, the MCE occurs at 9.30 a.m. The lowest traded price transacted during the Main Trading Phase of PLC X’s shares from the MCE (9.30 a.m.) up to the end of the afternoon trading session (excluding the opening and closing prices), is RM0.90 which occurs during the continuous trading at 3.00 p.m. RM0.90 is below the exercise price of RM1.00.
As such, the callable bull certificate holders in this case are not entitled to receive a cash amount upon the MCE.


10. Settlement of CBBCs where the call price equals exercise price
On 1 June 2010, Issuer B issues 100 million of callable bull certificates based on PLC X’s shares listed on Bursa Securities. The certificates have the following call and exercise price:
Call Price : RM1.00
Exercise Price : RM1.00
Will the callable bull certificate holders receive any cash amount if a MCE occurs?
No. As stipulated in paragraph 5.25A(1)(a) of the Main LR, where the call price of a CBBC is equal to its exercise price, the certificate holder will not receive any cash amount if a MCE occurs.

11. When must a CBBC issuer announce the settlement amount payable to the holders?
Paragraph 5.44A(b) of the Main LR requires a CBBC issuer to announce the settlement amount payable to the holders within 1 market day from the end of the next trading session after the MCE.
Examples:
The examples below are on the assumption that the next trading session after the MCE contains at least 1 hour of continuous trading for the underlying financial instrument.
(a) If a MCE occurs during a morning trading session on Monday, the issuer must announce the settlement amount by Tuesday; and
(b) If the MCE occurs during an afternoon trading session on Monday, the issuer must announce the settlement amount by Wednesday.


12. When will investors receive the cash settlement amount?
The cash settlement amount will be paid to investors within 7 market days from:
(a) the delisting date (in the case of MCE); or
(b) the expiry date.

13. When will the CBBC be de-listed if a MCE occurs?
The CBBC will be de-listed from the Official List on the 4th market day after the MCE occurs.

14. If a MCE occurs, will the CBBC be terminated at the time when the trading of the CBBC is suspended or when the MCE occurs?
Pursuant to paragraph 5.17A(1) of the Main LR, if a MCE occurs, a CBBC will be terminated at the time when its trading is suspended. Investors should be cautioned that orders would continue to be matched from the time of MCE up to the time of suspension. Any trades executed after the MCE but before the suspension of CBBC are valid and will not be cancelled unless in exceptional circumstances prescribed by the Exchange. Therefore, investors should be aware of the risk and are advised to apply special caution when the CBBC is trading close to the Call Price.
Example
If a MCE occurs at 10 a.m. and the suspension is effected at 10.01 a.m., the CBBC will be terminated when it is suspended at 10.01 a.m.. All trades effected until the suspension are valid.

15. What are the transaction fees involved for investing in CBBC?
In general, investing in CBBC is similar to investing in shares. The transaction fees involved include brokerage fees, clearing fee and stamp duty.

16. What are the risks of investing in CBBC?
To ensure that investors understand the risks of investing in structured warrants, Bursa Securities require that all investors sign a risk disclosure form with their brokers before commencing trading in structured warrants. As CBBC falls within the structured warrant framework, this risk disclosure applies to CBBC. The following are the main risks in relation to CBBC.

Leveraged Effect
Similar to a structured warrant, a CBBC is a leveraged product where the percentage gain or loss opportunity compared to its capital outlay is greater than that of investing in the underlying shares. Although the potential profit is amplified when the underlying moves according to investor expectation, the investor also stands to sustain higher percentage losses when the underlying moves contrary to investor expectation.

Mandatory Call Event (“MCE”)
The probability of a MCE is higher when the underlying trades nearer to the call price. Once called, the CBBC will cease trading despite a rebound in the underlying price and there is no further opportunity for future profit on that CBBC. Upon a MCE, the listed issuer is announce the MCE and suspension of the CBBC to the Exchange. The CBBC will terminate with effect from the suspension. In this circumstance, there could be some time lapse between the time when the MCE was triggered and the time when the trading of CBBC is suspended. Investors should be cautioned that orders would continue to be matched from the time of MCE up to the time of suspension. Any trades executed after the MCE but before the suspension of CBBC are valid and will not be cancelled unless in exceptional circumstances prescribed by the Exchange. Therefore, investors should be aware of the risk and are advised to apply special caution when the CBBC is trading close to the Call Price.

Limited life
Similar to a structured warrant, a CBBC has a fixed duration to expiry which ranges between 3 months to 5 years. However, for a CBBC, this may be shorter if a MCE is triggered and the CBBC terminates early. The CBBC becomes worthless upon expiry or when it is called early before the expiry date.

Liquidity
Although there are market makers on CBBCs who are committed to provide liquidity, there will be circumstances where market makers are exempt from their obligations and these are stated in the issuer’s prospectus.

Funding costs
The issue price of a CBBC includes funding costs and this is specified in the issuer’s listing documents. Since the funding costs for each CBBC issue may be different as it includes the issuer's financing /stock borrowing costs after adjustment for expected ordinary dividend of the stock plus the issuer's profit margin, investors are advised to compare the funding costs of different issuers for CBBC with similar underlying instruments and their terms.

Trading of CBBC close to Call Price
When the underlying stock is trading close to the Call Price, the price of a CBBC may be more volatile with wider spreads and uncertain liquidity. In the event a MCE is triggered, the CBBC may be called and terminated.