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Hong Kong’s securities regulator has announced that asset managers will be permitted to launch leveraged and inverse exchange traded funds tracking single stocks overseas, as well as defined outcome listed structured funds.
The Securities and Futures Commission said in a circular that single stock leveraged and inverse ETFs and defined outcome listed structured funds had become “increasingly popular in overseas markets”.
Single stock leveraged and inverse products have been available in Europe since 2018, with the US following suit in 2022, where they have proved popular with international investors looking to trade or hedge positions in large-cap stocks such as Nvidia and Tesla.
“Against this backdrop, there has been growing interest among product issuers in launching them in Hong Kong, in the light of their distinct appeal to investors,” said the SFC.
This article was previously published by Ignites Asia, a title owned by the FT Group.
Single stock leveraged and inverse products use derivatives to deliver multiples of the performance of a single stock’s daily price return, or profit from declines in their value.
Defined outcome listed structured funds use options contracts to protect investors against losses, while capping their potential investment gains.
Single stock leveraged and inverse products could allow investors to trade or hedge their positions in individual stocks listed overseas and provide price discovery tools for overseas exposure during Asian trading hours, continued the regulator.
Christina Choi, the SFC’s executive director of investment products, said the circular provided a “clear pathway for those seeking product authorisation”, while also spelling out the regulator’s expectation for products to meet robust regulatory standards.
For single-stock leveraged and inverse products, the SFC said it would only accept those tracking a “highly liquid mega-cap stock listed on a major overseas exchange”, excluding overseas stocks with a dual listing in Hong Kong, and stocks listed on any mainland exchange.
The maximum leverage of these products will be capped at a factor of 2x, or -2x.
Jean-Francois Mesnard-Sense, head of exchange traded products at Hong Kong Exchanges and Clearing, said that Hong Kong had become the first market in Asia to offer single stock leveraged and inverse products.
“This will further enhance our product ecosystem, reinforcing Hong Kong’s role as a leading ETP marketplace in Asia,” said Mesnard-Sense, adding that HKEX would work with issuers and stakeholders towards introducing the new products.
Sally Wong, chief executive of the Hong Kong Investment Funds Association, said she welcomed greater flexibility to allow more innovation in product offering as a general principle.
But she also noted that the complexity and risk profile of these types of products would mean they would only be catering to a “very niche market segment”.
Hong Kong allowed the first leveraged and inverse products in 2016, initially limited to products tracking liquid and broadly based “non-Hong Kong, non-mainland foreign equity indexes”.
Products tracking Hong Kong’s stock market were added in 2017 and the product universe was extended to China’s onshore stock markets in 2020.
Bosera Asset Management, China Asset Management (HK), CSOP Asset Management and Fubon Fund Management have launched a total of 19 leveraged and inverse products in Hong Kong so far, tracking equities indexes and commodities including cryptocurrencies.
In the circular, the SFC said the new product types would have to meet existing rules for listed structured funds and ETFs, in addition to some other requirements for leveraged and inverse products around their naming and other aspects.
The SFC does not allow leveraged and inverse products to be named “ETFs” in order to differentiate them from conventional ETFs. The products are also required to include the leverage or inverse factor and the word “daily” in the name, to emphasise their daily rebalancing feature.
Issuers were also expected to conduct “extensive investor education before launching the funds in Hong Kong”, said the regulator.
The SFC might consider introducing further requirements applicable to specific types of listed structured funds as necessary, according to the circular.
*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com.
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