Hong Kong's securities regulator moved on Friday to smooth volatility in the booming market for leveraged and inverse products (L&I products) by giving issuers more flexibility to adjust the leverage factor during turbulent trading while requiring clearer daily disclosure for investors.
Leveraged and inverse products are funds aimed at delivering a multiple of, or the opposite of, an underlying asset's daily return using derivatives such as swaps or futures.
The Securities and Futures Commission said it will require L&I products with highly dynamic capacity dependent on evolving market conditions to adopt a flexible leverage structure, under which the leverage factor may vary daily within the existing caps of 2 times for leveraged products and minus 2 times for inverse products.
Product providers will therefore have more room to manage L&I products during high-volume trading sessions by lowering the targeted leverage factor when necessary
The potential daily variation in these products’ leverage factors – to be disclosed after market close every day – will also raise investors’ awareness of L&I products’ daily product nature, which are not intended for holding beyond one day, SFC said.
Providers will need to publish the targeted leverage factor for the next trading day after market close every day under the new requirements, allowing investors to get daily clarity on the targeted exposure, the statement said.
This enhancement is a balanced approach that supports L&I products’ orderly operation under varying market conditions while maintaining their effectiveness as daily trading and hedging instruments for investors by providing daily clarity on the targeted exposure and mitigating large tracking difference risk amid a dynamic market environment, SFC added.
Single-stock leveraged ETFs are booming in Asia as investors use them to juice bets on chipmakers such as Samsung Electronics and SK Hynix, driving massive flows that are reshaping markets, lifting volatility and worrying regulators.
Recent volatility in global tech shares has fueled extreme swings in leveraged and inverse ETFs, driving up derivative costs and causing steep deviations from funds' targeted returns.
Shares of CSOP Asset Management's Hong Kong-listed CSOP SK Hynix tracking product (7709) — the biggest fund of its type globally, with US$6.6 billion (HK$51.48 billion) in assets — have tumbled some 75 percent from their all-time high within a month.
Staff reporter and Reuters
