Warrants Expiry and Settlement: A Comprehensive Guide to Cash Settlement Mechanisms

Settlement at maturity is a critical process every CBBC investor must understand. Whether you hold a bull or bear CBBC, being familiar with the cash settlement mechanism, calculation methods, and the key dates involved will help you more effectively manage your investment portfolio. This article provides an in-depth analysis of the full CBBC maturity settlement process—from core concepts to practical examples—enabling you to fully grasp the settlement details of this structured product.

What is CBBC Maturity Settlement?

CBBC maturity settlement refers to the process where, once a CBBC reaches its scheduled maturity date, the issuer calculates the cash amount due to the holder based on a predefined formula, and transfers the payment to the investor’s securities account. Similar to warrants, all CBBCs in the Hong Kong market are cash settled—the physical delivery of the underlying asset does not occur.

There are two settlement scenarios: (1) the CBBC does not reach the mandatory call price before maturity, so investors hold it to maturity for regular settlement; or (2) the CBBC hits the mandatory call price before maturity and is forcefully called, at which point the issuer calculates the residual value. This article focuses on the first scenario: the cash settlement process for CBBCs that reach maturity.

It’s important to note that not every matured CBBC will have cash value. Only those with intrinsic value at maturity are eligible for a cash payout. “Intrinsic value” means the difference between the settlement price of the underlying asset and the exercise price (adjusted by the conversion ratio). If this difference is zero or negative, investors receive no payment.

Key Dates for CBBC Maturity

Successfully managing CBBCs requires careful attention to three key dates: the maturity date, the last trading day, and the valuation day. The relationship between these dates directly determines how the settlement price is set.

Maturity Date

The maturity date marks the end of a CBBC’s validity period, and is set in advance by the issuer in the listing documents. Different issuers may assign different maturity dates for their CBBCs. Most index CBBCs select a date that coincides with the settlement day of the relevant index futures. Investors can check specific maturity dates on the Hong Kong Exchange’s website or the issuer’s official website.

Last Trading Day

The last trading day is the final day investors can buy or sell the CBBC in the market, typically the trading day immediately before maturity. After the market closes on this day, the CBBC ceases to trade and investors cannot transact it in the secondary market. If you still hold the CBBC after market close on the last trading day, you must hold it through to maturity for cash settlement.

Valuation Day

The valuation day is the date used to determine the settlement price and is the most critical among the three. The valuation day varies between equity CBBCs and index CBBCs:

Equity CBBCs: The valuation day is the last trading day, using the closing price of the underlying stock.

Index CBBCs: The valuation day is the maturity date, using the final settlement price of the relevant month’s index futures contract as the settlement price.

Important Reminder: Pay close attention to whether a CBBC’s valuation day is the last trading day or the maturity date, as this directly determines when the settlement price is fixed, affecting the final amount you receive.

How to Calculate CBBC Maturity Settlement

The heart of the cash settlement mechanism is the accurate computation of each CBBC unit’s settlement value. Although the formulas are straightforward, investors must clearly understand how the parameters work.

Bull CBBC Settlement Value Formula

Bull CBBC cash value = (Settlement Price − Exercise Price) / Conversion Ratio

The logic: When the underlying asset price is above the exercise price, holders of bull CBBCs earn the difference. For example, suppose a Stock A bull CBBC has an exercise price of HK$297 and a conversion ratio of 500:1. If at maturity the stock (i.e., the settlement price) is HK$320, then the cash value per CBBC is: (320 − 297) / 500 = HK$0.046.

Bear CBBC Settlement Value Formula

Bear CBBC cash value = (Exercise Price − Settlement Price) / Conversion Ratio

The formula is reversed for bear CBBCs: When the underlying asset falls below the exercise price, holders of bear CBBCs capture the price difference. For instance, suppose an Index A bear CBBC has an exercise price of 22,100 and a conversion ratio of 10,000:1. If the settlement price at maturity is 20,000, then the cash value per CBBC is: (22,100 − 20,000) / 10,000 = HK$0.21.

Understanding the Conversion Ratio

The conversion ratio determines how many CBBC units are equivalent to one unit of the underlying asset. For example, a 100:1 conversion ratio means 100 CBBCs are equivalent to one share or one index unit. The larger the conversion ratio, the smaller the settlement value per CBBC. Always factor the conversion ratio into your potential return calculations.

Practical Tip: Before investing, use the calculator offered by the issuer to simulate returns under various settlement price scenarios—this helps you better weigh risks and returns.

Settlement Differences Between N-Type and R-Type CBBCs

While this article focuses on regular maturity settlement, understanding the differences between N-type and R-type CBBCs is still important since this impacts your risk.

N-Type CBBCs

For N-type CBBCs, the call price (mandatory call price) equals the exercise price. This means if the call price is triggered, the CBBC will be forcefully called and the investor receives no residual value, losing the entire principal. If held to maturity, N-type CBBCs are settled according to the same method as other CBBCs.

R-Type CBBCs

For R-type CBBCs, the call price is different from the exercise price. For bull CBBCs, the call price is always higher than the exercise price; for bear CBBCs, it is always lower. This design provides an additional buffer for investors.

If an R-type CBBC is forcefully called before maturity, the issuer initiates an "observation period" to determine any residual value. The observation period runs from the trigger event until the end of the next full trading session. For bull CBBCs, the residual value is calculated using the lowest price during the observation period; for bear CBBCs, it’s the highest.

R-Type Bull CBBC Residual Value = (Lowest Price during Observation Period − Exercise Price) / Conversion Ratio

R-Type Bear CBBC Residual Value = (Exercise Price − Highest Price during Observation Period) / Conversion Ratio

If, during the observation period, the price of the underlying asset touches or goes beyond the exercise price, the residual value is zero. If there is residual value, it is usually paid to the investor’s account around three settlement days after the valuation.

Note that even with R-type CBBCs, residual value may be zero if the market is very volatile. Do not rely solely on this buffer as risk protection.

Key Considerations for CBBC Maturity Settlement

To ensure the settlement process goes smoothly and to avoid unnecessary loss, investors should remember these points:

Keep Track of Key Dates

Always clearly record the CBBC's maturity date and last trading day. If you don't plan to hold until maturity, sell before the market closes on the last trading day. Both HKEX and the issuers' websites publish maturity notices—use reminders.

Confirm the Type of Settlement Price

Equity CBBCs use the closing price of the underlying stock, while index CBBCs use the estimated average settlement price. Understand this difference to better anticipate settlement results. For index CBBCs, don't rely only on the closing index level—always consider the average through the day.

Assess Intrinsic Value

Before the last trading day, judge whether the CBBC still has intrinsic value. If the underlying is already close to or below the exercise price (for bull CBBCs) or above it (for bear CBBCs), holding to maturity may mean forfeiting any payout. In such cases, it can be wiser to sell early and cut your losses.

Be Aware of Settlement Timing

Cash settlement payments are usually credited to your account on the third settlement day after maturity. If you need the funds for other investments, plan ahead. Note that you earn no interest on funds awaiting settlement.

Risk Warning: CBBCs are high-risk, leveraged products; their prices can fluctuate sharply and you may lose your entire principal. Be sure you fully understand the product’s features and risks, and confirm it matches your investment goals and risk tolerance before investing.

Differences Between CBBC Maturity Settlement and Mandatory Call Settlement

Many investors confuse standard maturity settlement with settlement after a mandatory call. The distinction is as follows:

Standard Maturity Settlement

Condition: The CBBC is not forcefully called and is held to maturity.

Settlement Price Determination: Equity CBBCs use the underlying stock’s closing price on the last trading day; index CBBCs use the estimated average settlement price on the maturity date.

Settlement Timing: About three settlement days after maturity.

Investor Action: No action needed; the funds are deposited automatically.

Mandatory Call Settlement

Condition: The price of the underlying reaches the mandatory call (knockout) price before maturity.

Settlement Price Determination: An observation period is triggered, and for bull CBBCs, the lowest price during this period is used; for bear CBBCs, the highest price.

Settlement Timing: About three settlement days after the valuation.

Investor Action: The CBBC is suspended immediately and cannot be traded. Investors simply wait for settlement (only R-type may have some residual value; N-type does not).

The main difference is in how the settlement price is calculated. Normal maturity uses a predefined point in time, while mandatory call uses the most extreme price during the observation period, which is typically less favorable to investors.

Trading CBBCs with Longbridge Securities

Longbridge Securities provides access to the Hong Kong market for trading CBBCs, warrants, and other structured products. The platform holds Type 1, 2, 4, and 9 licenses from the Hong Kong Securities and Futures Commission (SFC), ensuring a compliant and secure environment. Through Longbridge Securities’ investment products, you can trade various CBBCs. The platform also provides real-time market data and product screening tools to help you manage your CBBC portfolio.

Frequently Asked Questions

How long after maturity will I receive the settlement for my CBBC?

Generally, the cash settlement payment is automatically credited to your securities account about three settlement days after maturity, with no need for further action. Timing may vary slightly by issuer, so check the listing documents or contact the issuer for confirmation. If the funds do not arrive as expected, contact your broker promptly.

What if my CBBC has no intrinsic value at maturity?

If the CBBC has no intrinsic value at maturity—meaning the settlement price of the underlying is less than or equal to the exercise price (for bull CBBCs) or greater than or equal to the exercise price (for bear CBBCs)—no cash payout will be made and you will lose your full principal. It is therefore crucial to assess the CBBC's intrinsic value before the last trading day; if you expect there will be no value at maturity, consider selling early to minimize losses.

How is the estimated average settlement price for index CBBCs calculated?

For index CBBCs, the estimated average settlement price (EAS) is based on the Hang Seng Index futures for the relevant expiry day. Specifically, it’s the average of index levels recorded every five minutes from 9:35 a.m. to 3:55 p.m. on the expiry day, including the final closing value. This prevents price manipulation at any single point and aims to provide fairer settlement for investors.

Is there any difference between N-type and R-type CBBCs at maturity settlement?

If the CBBC is held until regular maturity (not forcefully called), both N-type and R-type CBBCs are settled using exactly the same formulas and methods for calculating cash value. Their main difference arises only if a mandatory call event occurs: N-type CBBCs have no residual value after a call, whereas R-types may have some. In terms of maturity settlement, there is no difference.

Can I decide whether to hold a CBBC to maturity after the last trading day closes?

No. After the last trading day’s market close, CBBCs cease trading and cannot be sold. You must decide before market close on the last trading day whether to sell or to hold through to maturity. If you do not wish to hold to maturity, ensure you sell by 4 p.m. on the last trading day. Plan ahead—don’t leave it to the last minute.

Conclusion

While the CBBC maturity settlement mechanism may seem complex, mastering the basics allows you to manage your investment risks effectively. The key is to understand the relationships and timing of the maturity date, last trading day, and valuation day, use settlement formulas accurately, and assess the CBBC’s intrinsic value before the last trading day.

There are clear differences between equity CBBCs and index CBBCs in terms of valuation day and settlement price calculation, so investors must strategize accordingly. CBBCs are leveraged products with significant price swings—always ensure you fully understand their features and risks, and make investment choices that match your goals and risk appetite.

Which tool you choose depends on your investment objectives, risk tolerance, market outlook, and experience. Whatever you select, make sure you understand its mechanics, risk features, and trading rules—and have a solid risk management plan. Discover more investment knowledge through the Longbridge Academy or by downloading the Longbridge App.