RMB Products

RMB products are getting hot in our city. Therefore HKMA recently issued a circular to remind all banks to ensure that the material features and risks of such products are adequately taken into account in the product due diligence process and the suitability assessment of customers. Key points are summarized below:

Proper disclosure of the nature of RMB products

Banks should ensure that customers understand the nature of the RMB product including any underlying investments and whether any deposit protection is available.

Proper disclosure of the risks of RMB products

The following paragraphs highlight some of the key risks relevant to RMB products.

RMB currency risk

When a customer opens a RMB deposit account, the bank should disclose to the customer the RMB exchange rate risk and the fact that RMB is currently not freely convertible and conversion of RMB through banks in Hong Kong is subject to certain restrictions. Such risks should also be disclosed to its customers during the marketing and selling process of RMB investment and insurance products. In particular, for personal customers, the bank should explain that as the conversion of RMB is subject to a daily limit, the customer may have to allow time for conversion of RMB from/to another currency of an amount exceeding the daily limit.

For RMB products which are not denominated in RMB or with underlying investments which are not RMB-denominated, banks should disclose to their customers that such products will be subject 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 (e.g. settling operating expenses).

Other risks associated with RMB products

• Limited availability of underlying investments denominated in RMB – For RMB products that do not have access to invest directly in Mainland China, their available choice of underlying investments denominated in RMB outside Mainland China may be limited. Banks should explain to the customers that such llimitation may adversely affect the return and performance of the RMB products.
• Projected returns which are not guaranteed – If the RMB investment product (e.g. RMB ILAS) is attached with a statement of illustrative return which is (partly) not guaranteed, banks should clearly disclose to their customers that the return which is not guaranteed and the assumptions on which the illustrations are based, including, e.g. any future bonus or dividend declaration.
• Long term commitment to investment products – For RMB products which involve a long period of investment (e.g. RMB ILAS), banks should remind customers that if they redeem their investment before the maturity date or during the lock-up period, they may incur a significant loss of principal where the proceeds may be substantially lower than their invested amount. Customers should be reminded of the early surrender/withdrawal fees and charges as well as the loss of bonuses as a result of redemption before the maturity date or during the lock-up period.
• Credit risk of counterparties – Banks should disclose to their customers the credit risk of counterparties involved in the RMB products. To the extent that the RMB products may invest in RMB debt instruments not supported by any collateral, AIs should ensure customers' understanding that such products are fully exposed to the credit risk of the relevant counterparties. Where a RMB 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 product and result in substantial loss.
• Interest rate risk – For RMB products which are, or may invest in, RMB debt instruments, banks should disclose to their customers that such instruments are susceptible to interest rate fluctuations, which may adversely affect the return and performance of the RMB products.
• Liquidity risk – Banks should remind customers of the liquidity risk associated with the RMB products, and where applicable, the possibility that the RMB products may suffer significant losses in liquidating the underlying investments, especially if such investments do not have an active secondary market and their prices have large bid/offer spreads.
• Possibility of not receiving RMB upon redemption – For RMB products with a significant portion of non-RMB denominated underlying investments, banks should disclose to their customers that there is a possibility of not receiving the full amount in RMB upon redemption. This may be the case if the issuer is not able to obtain sufficient amount of RMB in a timely manner due to the exchange controls and restrictions applicable to the currency.
• Additional risks associated with leveraged trading – Banks should note that leveraged trading facilities should not be offered to personal customers and Designated Business Customers (DBCs) in respect of RMB products. While banks may extend RMB loans to corporate customers, prior to conducting leveraged trading of RMB products for corporate customers, banks should ensure that the customers understand and are willing to accept the risks and the terms and conditions of the borrowing arrangement. Banks should explain to customers that leveraging heightens the investment risk by magnifying prospective losses. Customers should be properly informed of the circumstances under which they will be required to place additional margin deposits at short notice and that their collateral may be liquidated without their consent. Banks should also ensure their customers' understanding of the risk that market conditions may make it impossible to execute contingent orders, such as "stop-loss" orders. In addition, customers should be reminded of their exposure to interest rate risk, and in particular, their cost of borrowing may increase due to interest rate movements.

Jack's comment: HKMA almost treats RMB products like Lehman minibonds. My concern is that people buying RMB products are too distracted by the expectation of RMB appreciation, ignoring the scene behind these products.