HONG KONG, July 24 : Hong Kong’s securities regulator moved on Friday to smooth volatility in the booming market for leveraged and inverse exchange-traded products by giving issuers more flexibility to adjust the leverage factor during turbulent trading while requiring clearer daily disclosure for investors.
• Leveraged and inverse ETPs 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.
• 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.
• The Securities and Futures Commission will now require L&I products with “highly dynamic capacity” 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.
• Issuers will have more room to manage their products and mitigate tracking difference risk during high-volume trading sessions by lowering the targeted leverage factor when necessary.
• Capacity refers to the size of leveraged or inverse exposure a product can support, based on factors such as swap exposure, futures and options position limits, and rebalancing liquidity needs.
• 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.
• 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 — the biggest fund of its type globally, with $6.6 billion in assets — have tumbled some 75 per cent from their all-time high within a month.
