Guidance on Selling of Accumulators Annex 1: Regulatory requirements on selling of accumulators

Introduction

On 14 Mar 2025, the Hong Kong Monetary Authority (HKMA) issued guidance on the regulatory requirements for selling accumulators, clarifying existing obligations under the HKMA’s regulatory framework and providing detailed operational instructions for authorized institutions (AIs). The guidance addresses classification, suitability, risk rating, concentration risk management, disclosure, and specific provisions for foreign exchange (FX) accumulators.

Classification of Accumulators

AIs must classify products as accumulators based on structural features, including periodic obligations to purchase/sell underlying assets at predetermined strike prices within a specified period, with capped upside and potential for substantial losses. The guidance provides a general definition and an illustrative FX example in Appendix A, emphasizing that AIs must exercise professional judgment for classification, noting that accumulators may or may not include knock-out features or multipliers.

Suitability and Risk Rating Requirements

AIs must sell accumulators exclusively to Professional Investors, ensuring customers possess sufficient risk appetite, understanding of derivative risks, and net worth to bear potential losses. AIs must conduct thorough suitability assessments, including verifying investment experience with structured products or options writing, and assign the highest risk rating to accumulators. Exceptions for non-professional investors require strong justification and are strictly limited.

Concentration Risk Management

AIs must assess customers’ total maximum exposure (using full notional amount) for concentration risk, including existing accumulator contracts and underlying asset exposure. AIs must refrain from soliciting or recommending accumulators to customers with high concentration risk, requiring clear internal criteria and thresholds. For FX accumulators involving major currency pairs, AIs may use a flexible expected exposure framework (2% for USDHKD, 40% for other major pairs, 100% for others) if they meet specific methodology and verification conditions; otherwise, full notional must be used.

Disclosure and Product Information

AIs must provide comprehensive, balanced disclosure of key features and risks, including knock-out clauses, loss magnification (especially multipliers), contract tenor, margin risks, and the absence of hedging utility. Specific warnings must be prominently displayed, and AIs must avoid misrepresenting accumulators as simple accumulation schemes. For Professional Investors, rationale for choosing accumulators over alternatives must be documented and acknowledged, with clear audit trails maintained.

FX Accumulator-Specific Provisions

For FX accumulators used for hedging existing exposure, only the properly hedged amount is excluded from concentration risk calculations, requiring rigorous assessment of hedging need, product suitability, and tenor alignment. Non-hedging transactions must comply with all standard requirements. Corporate banking customers may be exempt from certain suitability and disclosure requirements (e.g., experience assessment, alternative product provision) for hedging FX accumulators, provided they are classified as 'large/sophisticated' corporate customers, but not for non-hedging transactions.