Accumulators are highly risky, authority warns

PUBLISHED : Thursday, 29 September, 2011, 12:00am
UPDATED : Thursday, 29 September, 2011, 12:00am


Investors should think carefully before investing in accumulators amid the present market turmoil, warned the Hong Kong Monetary Authority (HKMA).

'Given the volatility in the market, investors must think twice before investing in accumulators,' Meena Datwani, executive director of the regulator's banking conduct department, said yesterday at a news conference.

Under accumulator contracts, investors are obliged to buy an agreed amount of an underlying asset, usually a stock, at the 'strike price' within a set time period. The upside price is usually capped at a 'knock-out price', but there is no limit to the downside price.

The investors gain when the market price is above the strike price, but lose money when the market turns sour because they will have to continue buying shares at the strike price.

'While earnings are usually capped, accumulators are associated with significant investment risks,' Datwani said, warning that the loss could be a 'bottomless pit'.

It would be 'unrealistic' to assume that the underlying stock would trade between the 'strike price' and the 'knock-out' price, given the level of volatility in the present market, Datwani said.

The volatility index of the Hang Seng Index edged up 2.3 per cent to close at 40.68 yesterday, indicating that traders expect greater volatility in the next 30 days. The index once spiked over 100 at the end of 2008 during the global financial crisis.

Market sources said the trade volume of accumulators had already plunged by more than 70 per cent, compared with the bull market in 2007, as investors were still deterred by the bitter losses suffered during the financial crisis.

The daily trade volume of accumulators was estimated to have fallen to about US$500 million.

The nominal value of accumulator contracts once reached US$23 billion in early 2008, according to estimates provided by the Securities and Futures Commission.

The HKMA also issued a circular yesterday highlighting the 'high risk' involved in accumulator trading when the market is declining. It urged investors to be more cautious with regards to the stock market's volatility.