On 23 January 2025, the Securities and Futures Commission (SFC) issued a circular on listed structured funds (Circular), which supplements the regulatory framework regarding listed structured funds in Hong Kong, and sets out the requirements under which the SFC would consider authorising listed structured funds for public offerings in Hong Kong. We discuss below the key requirements specified in the Circular.
Prior to the issuance of the Circular, listed structured funds authorised by the SFC in Hong Kong could be structured as leveraged and inverse products (L&I Products) that track broad-based equity or commodity indices. In light of the increasing popularity and market demand of (i) L&I Products that aim to deliver a daily return equivalent to a multiple of a single stock’s price return (Single Stock L&I Products); and (ii) products which use options-based strategies to obtain long exposure to an underlying asset (such as an equity index) with capped upside potential in exchange for downside protection (Defined Outcome Listed Structured Funds), the SFC is now prepared to consider the authorisation of these listed structured funds.
Specific requirements for listed structured funds
In view of the novelty and technical complexity, the SFC requires listed structured funds to comply with additional requirements on top of the usual requirements under the Code on Unit Trusts and Mutual Funds. Specific requirements relating to listed structured funds as set out in the Circular include:
- Product naming: Listed structured funds should be named or identified differently to differentiate them from conventional exchange-traded funds and other listed collective investment schemes, and to reflect their product features.
- Product structure: Extensive use of financial derivative instruments to achieve their investment objectives or outcomes, including the adoption of futures-based or swap-based replication structures or options-based investment strategies, is allowed.
- Offering documents disclosure: There must beupfront disclosure of key risks and features in the product key facts statement (KFS).
Clear disclosure of the costs of entering into the swap with the counterparty for swap-based synthetic replication structures, including all costs which are not captured by the ongoing charges figure disclosed in the KFS. The SFC also expects clear disclosure of the maximum redemption fee. - Market making arrangements: There must be at least one market maker for the fund when its trading commences and on an ongoing basis.
- Performance simulator: Required to make available for listed structured funds (excluding a delta-one product whose price movements are expected to mirror those of its underlying assets on a one-to-one basis) a “performance simulator”, which allows investors to select a historical time period and simulate the performance of the fund during that period based on historical data.
- Investor education: Extensive investor education is expected before launching the fund in Hong Kong.
- Distribution: Listed structured funds are derivative products. Distributors are therefore subject to the applicable requirements in relation to providing services to clients with respect to derivative products.
Additional requirements for L&I Products
The scope of acceptable L&I Products is now extended to cover Single Stock L&I Products, which carry the following features:
- Acceptable underlying stock: Currently, the SFC will only consider applications for Single Stock L&I Products that reference a highly liquid mega-cap stock listed on a major overseas exchange (excluding overseas listed stocks which may be dually listed in Hong Kong or on any Mainland exchange).
The SFC will generally assess (i) the liquidity of underlying assets, (ii) costs internalised by the products, and (iii) fairness of product design, among other factors. - Leverage factor: Single Stock L&I Products are generally subject to a maximum leverage factor of 2x to -2x, with a potentially lower leverage factor subject to the underlying stock’s volatility.
- Product naming: SFC-authorised L&I Products must be named “Leveraged Product” or “Inverse Product”, and reflect the leverage or inverse factor and the word “daily” to emphasise their daily rebalancing structure. For example:
(a) a two-time Leveraged Product should be called “[Issuer] [Index / Stock Name] Daily (2x) Leveraged Product”; and
(b) a one-time Inverse Product should be called “[Issuer] [Index / Stock Name] Daily (-1x) Inverse Product”.
The Circular also impose requirements such as specific offering documents disclosure and market making arrangements, as well as expectations regarding margin financing.
Outlook for issuers
The updated regulatory framework, outlined in the Circular, offers issuers a strategic opportunity to align with global industry trends and meet the rising demand for Single Stock L&I Products and Defined Outcome Listed Structured Funds in Hong Kong. Issuers are encouraged to explore these opportunities while adhering to the SFC’s regulatory standards to ensure robust investor protection.
