HKSI Paper 1 The Securities and Futures Ordinance (Cap. 571) question: Convertible bonds under the SFO

HKSI Paper 1The Securities and Futures Ordinance (Cap. 571)

Tsing Yi Logistics Ltd issues bonds to raise capital for a new warehouse. Holders may convert them into its shares at a fixed price. How are the bonds classified under the SFO?

A As structured products, because their value is determined partly by changes in the issuer's share price
B As neither securities nor structured products, because they are debt instruments rather than shares
C As securities but not structured products, because convertible debentures issued to raise capital are excluded
D As futures contracts, because conversion takes place at an agreed price on a date in the future

Show the answer and explanation

Answer: C. As securities but not structured products, because convertible debentures issued to raise capital are excluded

Bonds and debentures are 'securities' under paragraph (a) of the definition. Section 1A(1) of Part 1 of Schedule 1 defines 'structured product' widely, but section 1A(2)(a) excludes a debenture issued for capital fund raising purposes that is convertible into or exchangeable for shares of the issuer or of a related corporation. So the bonds stay securities and are not structured products, even though their conversion value tracks the share price. Debt instruments such as bonds and notes are expressly within paragraph (a). A futures contract is a contract made under the rules or conventions of a futures market, which a bond issue is not. Source: SFO (Cap. 571) Sch. 1 Pt 1 s.1 ('securities', 'futures contract') and s.1A(2)(a) (as at October 2026).

Common mistake

Candidates see a link to the share price and call it a structured product. Capital-raising convertibles and subscription warrants are carved out by section 1A(2).

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