Important Facts Statement for Currency-Linked and Interest Rate-Linked Instruments Issued by Authorized Institutions

Ref: B1/15C
G16/1C
18 April 2011
The Chief Executive
All Authorized Institutions
Dear Sir/ Madam,
Important Facts Statement (IFS) for Currency-Linked Instruments and Interest Rate-Linked Instruments Issued by Authorized Institutions (AIs) (“ILCL instruments”)1 I am writing to introduce a new investor protection measure that requires AIs to produce an IFS for ILCL instruments, to enhance product disclosure to retail customers2 purchasing such instruments. ILCL instruments are popular investment products with retail customers. These products are exempted from the authorization requirements under the Securities and Futures Ordinance (SFO), and the Code on Unlisted Structured Investment Products (SIP Code) issued by the Securities and Futures Commission (SFC) is not applicable as ILCL instruments are not regarded as “structured investment products” for the purposes of the SIP Code. Nevertheless, as stipulated in the HKMA’s circular of 13 July 2009 “Selling of Investment Products”, for marketing materials of non-SFO regulated investment products including ILCL instruments, AIs should follow standards similar to those issued by the SFC on marketing materials. 1 For the purpose of this circular, ILCL instruments refer to currency-linked and interest rate-linked structured investment products whose return is linked to the exchange rates of currency(ies) and interest rate movements, respectively. These products may take different forms, e.g. structured deposits, structured notes, etc. 2 Following the Hong Kong Monetary Authority (HKMA) circular of 20 May 2010, “retail customers” exclude corporate customers, sole proprietors, partnerships and private banking customers. An AI should classify an individual as a “private banking customer” only if he/she maintains a personalized relationship with the AI, receives personalized banking services or a portfolio management services from the AI, and has assets under the AI’s management (AUM) of at least US$ 1 million. The HKMA expects private banks to observe the AUM threshold requirement on a reasonable basis. A holistic and pragmatic approach should be adopted. In essence, one should look at the real substance of the banking relationship and service. As long as there is no material deviation, it is considered reasonable to allow exemption from the IFS requirement for clients with AUM that is occasionally below the US$1 million threshold due to market movements or other practical justifications.

In addition, the SFC’s new Product Key Facts Statement (KFS) measure requires issuers of publicly offered unlisted structured investment products to provide concise product summaries written in plain language to help investors understand the key features and risks of the products. The HKMA considers that for better protection of retail investors, AIs should apply these same principles and produce IFS to enhance product disclosure for ILCL instruments for retail distribution. After consultation with the banking industry, the HKMA has developed IFS templates for ILCL instruments to facilitate more standardised disclosure across AIs. The templates have adopted the SFC’s principles for KFS and, to the extent applicable and appropriate, made reference to the SFC’s illustrative template for KFS in respect of unlisted structured investment products. The IFS templates for currency-linked instruments and interest rate-linked instruments are enclosed as Annex 1 and Annex 2, respectively. The details of the IFS requirements are set out below. IFS is required for ILCL instruments distributed to retail customers. The IFS may form part of the product brochure or marketing materials for distribution to retail customers and need not be a standalone document. Where an ILCL instrument is issued without an IFS, the AI should not sell the ILCL instrument to retail customers, and should ensure that its distributing agents will not sell such instrument to retail customers. Similarly, where an AI acts as a distributing agent for an ILCL instrument issued without an IFS, the distributing AI should not distribute such an instrument to retail customers. AIs should offer to provide IFS to a retail customer in relation to every relevant transaction, unless the customer declines the IFS in which case a proper audit trail of this should be maintained. This requirement is applicable to transactions conducted through branches and non-branch channels. For transactions through non-branch channels, AIs should provide IFS via fax, email, post, Internet or other proper means. Preparation of IFS AIs should adopt the templates set out in the Annexes when preparing the IFS. When preparing the actual IFS for specific ILCL instruments, AIs are reminded to follow the guidance notes stated in the templates as well as the principles below:
¾ the IFS must be specific enough to bring out the key features, risks and investment objective of the product in a clear and concise manner; ¾ the IFS should be accurate and not contain any false or misleading information;

¾ the IFS should contain information that enables investors to comprehend the key features and risks of the product; and ¾ the IFS should be produced in both Chinese and English languages, and AIs should provide the IFS in accordance with the language preference of each relevant retail customer. The IFS templates cover the key facts and risks (including the health warning statement) that should be disclosed pursuant to the HKMA’s circular of 13 July 2009. Therefore, where an IFS is provided to the customer, it is not necessary for the AI to attach a separate health warning statement to the product document. Implementation date AIs should put in place control procedures and measures to ensure that the requirements in this circular are properly implemented. Taking into account the preparatory work to be carried out by AIs, the HKMA expects that the IFS arrangements should be implemented by all AIs not later than 4 June 2011. AIs are required to comply with the IFS requirement for all ILCL instruments which will be offered to retail customers on or after 4 June 2011, regardless of the date of issue or product launch. If you have any questions on this letter, please contact Ms Alice Lee at 2878-1603 or Ms Florence To at 2878-1582. Yours faithfully, Meena Datwani Executive Director (Banking Conduct) Encl. Annex 1 - standardized template for currency-linked instruments
Annex 2 - standardized template for interest rate-linked instruments
c.c. Securities and Futures Commission (Attn: Mr Stephen Po, Senior Director of Intermediaries Supervision and Ms Alice Law, Senior Director of Policy, China & Investment Products)

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Annex 1
1
Important Facts
[Issuer/Bank’s name & logo] [Product name &
[Issuer/Bank] 1 type]
[Date]
This is a structured investment product 2 which is NOT protected by the Deposit Protection Scheme in Hong Kong. [This product is NOT principal protected.] 3 The contents of this statement have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution before investing in this product. This statement is a part of the offering documents for this product. You should not invest in this product based on this statement alone. If you are in any doubt, you should obtain independent professional advice. If English is not your preferred language, you may request for the Chinese version of this statement from our [sales staff]. 倘若英文並非閣下屬意的語言，閣下可向本行的 ，閣下可向本行的[銷售人員]索取本 概要的中文版本。 This is a structured investment product involving derivatives. The investment decision is yours but you should not invest in this product unless the intermediary who sells it to you has explained to you that the product is suitable for you having regard to your financial situation, investment experience and investment objectives. Quick facts [Issuer/Bank]: [Name], [insert branch] Product type: Currency-linked [instrument type, e.g.deposit] Minimum [deposit/investment]: [HKD][●] (or its equivalent) Tenor: [●] – [●] [Available] [P/p]rincipal currency: [●] [Available] [L/l]inked currency: [●] [Coupon rate: [●]% per annum (Actual coupon rate: [●])] [Coupon period/ payment date: [●]] Principal protection at maturity: [Yes/No] Callable by the [Issuer/Bank]: [Yes/No] [If yes, when earliest] Early termination right by the customer: [Yes/No] [If yes, under what situations] Embedded derivatives: [Yes/No] [If yes, insert the type of embedded derivatives e.g. customer selling a put option over the linked currency] Maximum potential gain: [●]% [of deposit/investment amount] Maximum potential loss: [●]% [of deposit/investment amount] What is this product and how does it work? [Briefly describe the nature of the product (e.g. This is a structured investment product that consists of a time deposit (in the principal currency) and selling a put option on a linked currency of your choice) and how it works, in particular the situations under which investors will make gains/incur losses (with reference to the scenario analysis below)]

1
[‘Bank’ to be used for deposits]
2 Currency-linked instruments are not “structured investment products” for the purposes of the Code of Unlisted Structured Investment Products (SIP Code) of the Securities and Futures Commission (SFC) and the SIP Code does not apply to currency-linked instruments. 3 [Applicable if the product is non-principal protected]

Annex 1
2
What are the key risks?
[Describe the key risks of the product. The following should be covered as a minimum if applicable:

• Not a time deposit – [Product name] is NOT equivalent to, nor should it be treated as a
  substitute for, time deposit. It is NOT a protected deposit and is NOT protected by the Deposit Protection Scheme in Hong Kong.
• Derivatives risk – [Please elaborate as appropriate, e.g. [Product name] is embedded with FX
  option(s). Option transactions involve risks, especially when selling an option. Although the premium received from selling an option is fixed, you may sustain a loss well in excess of such premium amount, and your loss could be substantial.]
• Limited potential gain – The maximum potential gain is limited to [●].
• [Maximum potential loss – [Product name] is not principal protected: you could lose all of
  your [deposit/investment] amount. [Otherwise please explain the worst case scenario]] 3
• [Principal protection at maturity only – The principal protection feature is only applicable if this
  product is held to maturity. [Please explain the circumstances whereby there is no principal protection, e.g. if this product is early terminated]] 4
• Not the same as buying the linked currency – Investing in [product name] is not the same as
  buying the linked currency directly. [Please elaborate as appropriate]
• Market risk – [Please elaborate as appropriate, e.g. The return of [product name] is linked to the
  exchange rates of the principal currency against the linked currency. Movements in exchange rates can be unpredictable, sudden and drastic, and affected by complex political and economic factors.]
• Liquidity risk – [Product name] is designed to be held till maturity. [The [Issuer/Bank] may at its
  absolute discretion refuse to consent to any withdrawal request before maturity/ You do not have a right to request early termination of this product before maturity.]
• Credit risk of the [Issuer/Bank] – [[Product name] is not secured by any collateral.] When you
  invest in this product, you will be relying on the [Issuer/ Bank]’s creditworthiness. If the [Issuer/ Bank] becomes insolvent or defaults on its obligations under this product, [you can only claim as an unsecured creditor of the [Issuer/Bank].] In the worst case, you could suffer a total loss of your [deposit/investment] amount.
• Currency risk – [Please elaborate as appropriate, e.g. If the principal currency and/or linked
  currency is not in your home currency, and you choose to convert it back to your home currency upon maturity, you may make a gain or loss due to exchange rate fluctuations.]
• [Please specify any risk for early termination: [For example: Risks of early termination by the
  [Issuer/ Bank] – the [Issuer/Bank] has the right (but not the obligation) to terminate this product early upon occurrence of certain events. If this product is terminated by the Bank early, you may suffer a substantial loss under this product. [See “Can the [Issuer/ Bank] adjust the terms or early terminate this product?” below]]]
• [Please specify any risks in relation to principal/ linked currency(ies) which is/are restricted
  currency(ies). In particular, if the principal/ linked currency is RMB, please specify any RMB￾related risks in accordance with the HKMA circular dated 16 September 2010: [For example:
  Risks relating to RMB - You should note that the value of RMB against other foreign currencies fluctuates and will be affected by, amongst other things, the PRC government’s control (for example, the PRC government regulates conversion between RMB and foreign currencies), which may adversely affect your return under this product when you convert RMB into your home currency. RMB is currently not freely convertible and conversion of RMB in Hong Kong is subject to certain restrictions. In particular, the conversion of RMB by an individual customer is subject to a daily limit. If you intend to convert an amount of RMB from/to another currency exceeding such daily limit, you should allow sufficient period for the conversion.]]] What are the key features? [Describe the features of the product (e.g. call feature, embedded options, tenor range, currency choice, whether early termination is allowed (describe how this works)), interest/ coupons (how and

4
[Applicable if the product is principal protected]

Annex 1
3 when it will be determined and the conditions for this to be achieved)] Scenario analysis [A default scenario, worst case scenario, middle-of-the road/ gain scenario and best case scenario (for a product with a capped potential return) [Note: Only a gain scenario (rather than the best case scenario) can be shown if the potential return of the product is unlimited] should be covered. Use of example to illustrate the scenarios is encouraged] Scenario [x]: Best case scenario [insert illustration] Scenario [x]: Middle-of-the road/ gain scenario [insert illustration] Scenario [x]: Worst case scenario [insert illustration] Scenario [x]: The [Issuer/ Bank] becomes insolvent or defaults on its obligations Assuming that the [Issuer/Bank] becomes insolvent during the tenor of this product or defaults on its obligations under this product, you can only claim as its unsecured creditor. You may get nothing back and suffer a total loss of your [deposit/investment] amount. How can you buy this product?

• [You can purchase this product by visiting any of our branches, internet banking, or by calling us
  on [insert phone no].]
• [Choose the principal currency, the linked currency and the tenor. We will then quote the interest
  rate and conversion rate, which are fixed when you place an order for this product.] Fees and charges [This section is only applicable if there are explicit fees and charges associated with this product] Can you request for early termination before maturity? [This section is only applicable if early termination by customer is allowed - describe the frequency and how the investor can obtain the indicative termination price and the arrangement on early termination. It should be stated clearly that the indicative price quoted by the Issuer/Bank is not binding and may not reflect the final termination price] [The final termination price offered by the [Issuer/Bank] may be substantially less than your [deposit/investment] amount.] Pre-Investment Cooling-off Period for retail customers Pre-Investment Cooling-off Period (PICOP) is applicable to each particular dealing of this product if you are one of the following retail customer types:
  (1) An elderly customer aged 65 or above, unless you are not a first-time buyer of currency￾linked structured investment products AND your asset concentration 5 is below 20% AND you opt out from the PICOP arrangement; or (2) A non-elderly customer who is a first time buyer of currency-linked structured investment

5
For the purpose of determining whether PICOP is applicable, asset concentration refers to the percentage of total net worth (excluding real estate properties) to be invested in this product.

Annex 1
4 products AND your asset concentration is 20% or above.
Can the [Issuer/Bank] adjust the terms or early terminate this product?
[Insert description of key events that may trigger adjustment to, or early termination of, this product, such as imposition of exchange controls, events of default, or other events] [Such adjustments or early termination events may negatively affect your return or loss under this product.] Offering documents for this product [The following documents for this product (“Offering Documents”) contain detailed information about the [Issuer/Bank] and the terms of this product. You should read and understand all of the Offering Documents before deciding whether to invest in this product:
[Insert the disclosure documents for this product]] Additional information [Insert any other additional important information] [Guidance notes for completing this statement:

• The Important Facts Statement (IFS) can be a standalone document. It can also be part of the
  product brochure / marketing materials.
• There is a very broad spectrum of currency-linked instruments. Depending on the actual
  circumstances of the product, the contents in this statement may differ. The actual IFS for each product must be specific enough to bring out the key features, risks and investment objective of that product in a clear and concise manner. Nevertheless, the headings set out in the template are generally expected to be observed unless there are good reasons to do otherwise. Words inside the square brackets in the template are drafting notes. They should be construed as examples rather than suggestions, and are not meant to be exclusive or prescriptive. Issuers/Banks are responsible for what is, and what is not, to be included in this statement.
• Issuers/Banks may state the headlines in the IFS with cross reference to the main text of the
  offering documents if a detailed explanation in the IFS will make it too lengthy.
• This statement should be visually reader-friendly, written in plain language so that investors can
  easily read and understand it. Use of technical jargon or complex sentences shall be avoided. Information should be presented in a font that is easy to read and highly legible. The font size adopted should also be reasonably legible taking into account the language used.
• Use of examples (e.g. under scenario analysis), graphs and charts is generally encouraged to
  illustrate the product structure and features.]

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Annex 2
1
Important Facts
[Issuer/Bank’s name & logo] [Product name &
[Issuer/Bank] 1 type]
[Date]
This is a structured investment product 2 which is NOT protected by the Deposit Protection Scheme in Hong Kong. [This product is NOT principal protected.] 3 The contents of this statement have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution before investing in this product. This statement is a part of the offering documents for this product. You should not invest in this product based on this statement alone. If you are in any doubt, you should obtain independent professional advice. If English is not your preferred language, you may request for the Chinese version of this statement from our [sales staff]. 倘若英文並非閣下屬意的語言，閣下可向本行的 ，閣下可向本行的[銷售人員]索取本 概要的中文版本。 This is a structured investment product involving derivatives. The investment decision is yours but you should not invest in this product unless the intermediary who sells it to you has explained to you that the product is suitable for you having regard to your financial situation, investment experience and investment objectives. Quick facts [Issuer/Bank]: [Name], [insert branch] Product type: Interest rate-linked [instrument type, e.g. deposit] Minimum [deposit/ investment]: [HKD][●] (or its equivalent) Tenor: [●] – [●] [Available] [[D/d]eposit/[I/i]nvestment]] currency: [●] [Coupon rate: [●]% per annum (Actual coupon rate: [●])] [Coupon period/ payment date: [●]] Principal protection at maturity: [Yes/No] Callable by the [Issuer/ Bank]: [Yes/No] [If yes, when earliest] Early termination right by the customer: [Yes/No] [If yes, under what situations] Embedded derivatives: [Yes/No] [If yes, insert the type of embedded derivatives e.g. customer selling an interest rate option] Maximum potential gain: [●]% [of deposit/investment amount] Maximum potential loss: [●]% [of deposit/investment amount] What is this product and how does it work? [Briefly describe the nature of the product (e.g. This is a structured investment product that consists of a time deposit (in the deposit currency) and selling an interest rate option) and how it works, in particular the situations under which investors will make gains/incur losses (with reference to the scenario analysis below)]

1
[‘Bank’ to be used for deposits]
2
Interest rate-linked instruments are not “structured investment products” for the purposes of the Code of Unlisted Structured Investment Products (SIP Code) of the Securities and Futures Commission (SFC) and the SIP Code does not apply to interest rate-linked instruments. 3 [Applicable if the product is non-principal protected]

Annex 2
2
What are the key risks?
[Describe the key risks of the product. The following should be covered as a minimum if applicable:

• Not a time deposit – [Product name] is NOT equivalent to, nor should it be treated as a
  substitute for, time deposit. It is NOT a protected deposit and is NOT protected by the Deposit Protection Scheme in Hong Kong.
• Derivatives risk – [Please elaborate as appropriate, e.g. [Product name] is embedded with
  interest rate option(s). Option transactions involve risks, especially when selling an option. Although the premium received from selling an option is fixed, you may sustain a loss well in excess of such premium amount, and your loss could be substantial.]
• Limited potential gain – The maximum potential gain is limited to [●].
• [Maximum potential loss – [Product name] is not principal protected: you could lose all of
  your [deposit/investment] amount. [Otherwise please explain the worst case scenario]] 3
• [Principal protection at maturity only – The principal protection feature is only applicable if this
  product is held to maturity. [Please explain the circumstances whereby there is no principal protection, e.g. if this product is early terminated]] 4
• Market risk – [Please elaborate as appropriate, e.g. The return of [product name] is linked to the
  interest rate movements which can be unexpected, sudden and drastic. Movements in interest rates can be affected by complex political and economic factors.]
• Liquidity risk – [Product name] is designed to be held till maturity. [The [Issuer/Bank] may at its
  absolute discretion refuse to consent to any withdrawal request before maturity / You do not have a right to request early termination of this product before maturity.]
• Credit risk of the [Issuer/Bank] – [[Product name] is not secured by any collateral.] When you
  invest in this product, you will be relying on the [Issuer/ Bank]’s creditworthiness. If the [Issuer/Bank] becomes insolvent or defaults on its obligations under this product, [you can only claim as an unsecured creditor of the [Issuer/Bank].] In the worst case, you could suffer a total loss of your [deposit/investment] amount.
• Currency risk – [Please elaborate as appropriate, e.g. If the [deposit/investment] is not in your
  home currency, and you choose to convert it back to your home currency upon maturity, you may make a gain or loss due to exchange rate fluctuations.]
• [Please specify any risk for early termination: [For example: Risks of early termination by the
  [Issuer/ Bank] – the [Issuer/Bank] has the right (but not the obligation) to terminate this product early upon occurrence of certain events. If this product is terminated by the Bank early, you may suffer a substantial loss under this product. [See “Can the [Issuer/ Bank] adjust the terms or early terminate this product?” below]]]
• [Please specify any risks in relation to deposit/ investment currency which is restricted currency.
  In particular, if the deposit/ investment currency is RMB, please specify any RMB-related risks in accordance with the HKMA circular dated 16 September 2010: [For example: Risks relating to RMB - You should note that the value of RMB against other foreign currencies fluctuates and will be affected by, amongst other things, the PRC government’s control (for example, the PRC government regulates conversion between RMB and foreign currencies), which may adversely affect your return under this product when you convert RMB into your home currency. RMB is currently not freely convertible and conversion of RMB in Hong Kong is subject to certain restrictions. In particular, the conversion of RMB by an individual customer is subject to a daily limit. If you intend to convert an amount of RMB from/to another currency exceeding such daily limit, you should allow sufficient period for the conversion.]]] What are the key features?

4
[Applicable if the product is principal protected]

Annex 2
3
[Describe the features of the product (e.g. call feature, embedded options, tenor range, currency choice, whether early termination is allowed (describe how this works)), interest/ coupons (how and when it will be determined and the conditions for this to be achieved)] Scenario analysis [A default scenario, worst case scenario, middle-of-the road/ gain scenario and best case scenario (for a product with a capped potential return) [Note: Only a gain scenario (rather than the best case scenario) can be shown if the potential return of the product is unlimited] should be covered. Use of example to illustrate the scenarios is encouraged] Scenario [x]: Best case scenario [insert illustration] Scenario [x]: Middle-of-the-road/ gain scenario [insert illustration] Scenario [x]: Worst case scenario [insert illustration] Scenario [x]: The [Issuer/ Bank] becomes insolvent or defaults on its obligations Assuming that the [Issuer/Bank] becomes insolvent during the tenor of this product or defaults on its obligations under this product, you can only claim as its unsecured creditor. You may get nothing back and suffer a total loss of your [deposit/investment] amount. How can you buy this product?

• [You can purchase this product by visiting any of our branches, internet banking, or by calling us
  on [insert phone no].]
• [Choose the [deposit/investment] currency and the tenor. We will then quote the interest rate
  which is fixed when you place an order for this product.]
  Fees and charges
  [This section is only applicable if there are explicit fees and charges associated with this product] Can you request for early termination before maturity? [This section is only applicable if early termination by customer is allowed - describe the frequency and how the investor can obtain the indicative termination price and the arrangement on early termination. It should be stated clearly that the indicative price quoted by the Issuer/Bank is not binding and may not reflect the final termination price] [The final termination price offered by the [Issuer/Bank] may be substantially less than your [deposit/investment] amount.] Pre-Investment Cooling-off Period for retail customers Pre-Investment Cooling-off Period (PICOP) is applicable to each particular dealing of this product if you are one of the following retail customer types:

Annex 2
4
(1) An elderly customer aged 65 or above unless you are not a first-time buyer of interest rate￾linked structured investment products AND your asset concentration 5 is below 20% AND you opt out from the PICOP arrangement; or (2) A non-elderly customer who is a first time buyer of interest rate-linked structured investment products AND your asset concentration is 20% or above. Can the [Issuer/Bank] adjust the terms or early terminate this product? [Insert description of key events that may trigger adjustment to, or early termination of, this product, such as imposition of exchange controls, events of default, or other events] [Such adjustments or early termination events may negatively affect your return or loss under this product.] Offering documents for this product [The following documents for this product (“Offering Documents”) contain detailed information about the [Issuer/Bank] and the terms of this product. You should read and understand all of the Offering Documents before deciding whether to invest in this product:
[Insert the disclosure documents for this product]] Additional information [Insert any other additional important information] [Guidance notes for completing this statement:

• The Important Facts Statement (IFS) can be a standalone document. It can also be part of the
  product brochure / marketing materials.
• There is a very broad spectrum of interest rate-linked instruments. Depending on the actual
  circumstances of the product, the contents in this statement may differ. The actual IFS for each product must be specific enough to bring out the key features, risks and investment objective of that product in a clear and concise manner. Nevertheless, the headings set out in the template are generally expected to be observed unless there are good reasons to do otherwise. Words inside the square brackets in the template are drafting notes. They should be construed as examples rather than suggestions, and are not meant to be exclusive or prescriptive. Issuers/Banks are responsible for what is, and what is not, to be included in this statement.
• Issuers/Banks may state the headlines in the IFS with cross reference to the main text of the
  offering documents if a detailed explanation in the IFS will make it too lengthy.
• This statement should be visually reader-friendly, written in plain language so that investors can
  easily read and understand it. Use of technical jargon or complex sentences shall be avoided. Information should be presented in a font that is easy to read and highly legible. The font size adopted should also be reasonably legible taking into account the language used.
• Use of examples (e.g. under scenario analysis), graphs and charts is generally encouraged to
  illustrate the product structure and features.]

5
For the purpose of determining whether PICOP is applicable, asset concentration refers to the percentage of total net worth (excluding real estate properties) to be invested in this product.