The Securities and Futures Commission (SFC) today sets out new regulatory requirements in a circular for product issuers, with a view to broadening the range of listed structured funds that may be offered to the public in Hong Kong, notably adding to their product mix Single Stock Leveraged and Inverse (L&I) Products and Defined Outcome Listed Structured Funds (Notes 1 and 2).
Single Stock L&I Products and Defined Outcome Listed Structured Funds are listed structured fund products that have become increasingly popular in overseas markets. 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.
These products would come in handy for investors looking for trading or hedging tools for popular individual stocks listed overseas, as well as for those seeking price discovery tools for overseas exposure during Asian trading hours. They can also provide investors with more customised investment exposures (Notes 3 and 4).
In balancing the potential benefits and risks associated with Hong Kong investors’ exposure to these complex and novel products, the SFC has built into the enhanced regulatory framework additional safeguards and measures. For Single Stock L&I Products, the SFC will only accept those referencing a highly liquid mega-cap stock listed on a major overseas exchange. They should also generally be subject to a maximum leverage factor of 2x to -2x (Notes 5 and 6).
“The enhanced regulatory framework for listed structured funds reflects the importance the SFC attaches to market development and investor protection. Not only does it lay down a clear pathway for those seeking product authorisation, but it also spells out our expectation for adhering to the robust regulatory standards considering the novel and complex features of these products,” said Ms Christina Choi, the SFC’s Executive Director of Investment Products. “We will continue to engage the industry on product initiatives beneficial to Hong Kong investors and the market as a whole.”
Notes:
- This circular supplements the structured fund related requirements in 8.8 of the Code on Unit Trusts and Mutual Funds. It sets out additional requirements under which the SFC would consider authorising listed structured funds for public offerings in Hong Kong under sections 104 and 105 of the Securities and Futures Ordinance. It incorporates and supersedes the SFC’s Circular on Leveraged and Inverse Products and the related supplemental circular both dated 22 May 2020.
- The framework comprises general requirements for listed structured funds, covering product naming, product structure, offering documents disclosure, market making arrangements, performance simulators, investor education and distribution, as well as additional safeguards for specific types of listed structured funds.
- Single Stock L&I Products are a sub-set of L&I products, which aim to deliver a daily return equivalent to a multiple of a single stock’s daily price return.
- Defined Outcome Listed Structured Funds refer to options-based listed structured funds that typically provide long exposure to an underlying asset with capped upside potential in exchange for downside protection.
- This excludes overseas listed stocks which may be dually listed in Hong Kong, as well as stocks listed on any Mainland exchange.
- Subject to an underlying stock’s volatility, only a lower leverage factor may be allowed for Single Stock L&I Products.
