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Securities and Futures Commission, Hong Kong
Hong Kong’s principal regulator has set out new rules to widen the range of structured products that can be offered, such as those embedding leverage and which produce “inverse” returns.

The announcement came this week from the Securities and Futures Commission.

As a result of the changes, product issuers can offer single stock leveraged and inverse products, and defined outcome listed structured notes, the SFC said in a statement. 

Single stock L&I products and defined outcome listed structured funds are listed structured fund products that have become increasingly popular in overseas markets, the regulator continued.

“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,” the SFC said. “They can also provide investors with more customised investment exposures.”

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.

The SFC has added safeguards into the rules to balance potential risks and benefits with giving Hong Kong investors exposure to these “complex and novel” products.

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 2 times to minus 2x.

“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,”  Christina Choi, the SFC’s executive director of investment products, said. 

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.