Hang Seng Debuts Gold-Tied Deposits After Hong Kong Rule Change

Hang Seng Bank Ltd. is offering Hong Kong’s first gold-linked deposits since the city began requiring approvals for structured products in 2010, while forecasting the commodity will rise for a 13th straight year.

The lender began marketing the product on Jan. 28 for individuals who have gold-investment accounts with the bank, according to Rosita Lee, head of Hang Seng’s investment-product and advisory business. At maturity, the deposits pay out fixed returns if gold prices rise, while in the opposite case, investors receive credits based on the lower value of gold, according to a prospectus.

Hang Seng is trying to expand its structured product offerings as it works within new regulations aimed at protecting investors from exotic and risky investments. Gold is set to gain for a 13th year, helped by demand from China and India, according to Mark Wan, chief analyst at Hang Seng Investment Services.

“Gold prices actually rose quite a lot since the financial crisis,” Lee said in an interview. “From that moment, we’ve been already very interested in providing more gold-related investment products.”

Spot gold prices surged more than six times to $1,675 an ounce in the 12 years since the end of 2000. They may reach $2,000 by the end of this year, after moving in a $1,620 to $1,720 range in the first half, Wan predicted in an e-mail.

Tighter Regulations

Terms of Hang Seng’s structured deposits include fixed annualized return rates of at least 1 percent that are paid out as long as gold prices are above their initial levels at maturity. If the value of the commodity falls, the investments convert into tradable units for the bank’s gold accounts. Deposit maturities are less than six months.

The bank was preparing for the product when the regulatory change took place in 2010 and had to scrap the plan and revise documentation according to the new requirements, Lee said. The bank resumed talks with the regulators in May, she said.

“We need to have very close discussions with the regulators to make sure they understand how the product operates and to address their requirements into product offering documents,” Lee said.

The Securities and Futures Commission increased scrutiny of structured deposits and notes by requiring all issuers to get its approvals for sales to individual investors. The changes were made in response to losses from securities tied to bankrupt Lehman Brothers Holdings Inc. and the new rules include explicit disclosure of products’ risks in marketing materials.

Hong Kong investors had about HK$579 million ($75 million) locked up in structured deposits at the end of 2012, more than four times the outstanding amount of similar notes, according to the commission.

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