HSBC debuts capital at risk equity deposit

The UK bank has deployed an alternative to principal-protected structured deposits aimed at Chinese retail investors.

“The prolonged low interest rates in China makes it challenging to provide competitive pricing for principalprotected structured deposits.

“In addition, the recent volatility of the H-share market allows ELIs to offer attractive pricing at this point of time.”

HSBC has issued its first equity-linked investment (ELI) with zero capital protection in China following a one-year development.

With a six-month tenor starting from 2 November, the first tranche of the Feng Rui - CNY Convertible Non-Principal Protected Structured Deposit 6-001 (丰瑞 系列 -人民币可转换非保本结构性存款 产) struck on 31 October after a three-day subscription period. The new product offers an annualised coupon of four percent to 14%, indicative at 9% as of 24 October.

The prolonged low interest rates in China makes it challenging to provide competitive pricing for principalprotected structured deposits

“The launch marks the first equitylinked structured deposits with no capital protection at HSBC China,” an HSBC spokesperson told SRP without disclosing the traded notional.

Linked to the H-shares of Tencent and Alibaba, the ELI required a minimum investment amount of CNY1m (US$138,000) and features 100% autocall trigger level and monthly valuation dates. The knock-in level range from 48% to 68%, indicative at 58% as of 24 October.

If a knock-in event occurs and the final level of the worst performing underlying is lower than the conversion strike level, which was indicative at 87% as of 24 October, the product which comes with a 0.5% transactional fee and a product maintenance fee, will be automatically converted to the underlying shares and. The product is hedged in-house.

The new offering is aimed at investors with a ‘speculative’ risk profile and has two years or more of investment experience, according to the bank.

“The concern shared by investors is about the market entry timing amid the high equity market volatility,” said the HSBC spokesperson. “The derivatives pricing for non-principal-protected structured deposits has a greater impact to the pricing offered to investors, which requires more updated quotes.”

HSBC spent around one year to develop the required systems including end-toend trading, operation flows and client journey, and will continue to improve the ELI terms with an aim to provide tailormade ELI structures in 2023.

The ELIs, which are known as ‘snowball’, have gained great traction among retail and corporate investors in China since 2021. The autocall market has been dominated by local security houses with an estimated outstanding balance of approximately CNY111 billion as of April, mainly tracking the CSI 500 Index or CSI 300 Index.

Shortly after the first launch, the bank traded another tranche with a 12-month tenor on 31 October, featuring the same autocall and coupon levels. The knock-in level and the conversion strike level were indicative at 55% and 85%, respectively.

Two more tranches were open for subscription over the past week with investment periods of six or 12 months. All the four products track the H-share underliers of Tencent and Alibaba.

The addition of new payoff for structured deposits comes after HSBC rolled out the ‘Ying+’ series, or generic growth, which are deployed with an uncapped call offering partial principal protection in January 2021.