ETFs: Leveraged and inverse products in Singapore

The increase in interest comes on the back of the first batch of leveraged and inverse products (L&I Products) which were authorised by the Hong Kong Securities and Futures Commission and launched in Hong Kong in June 2016. To date, Simmons & Simmons has assisted on most (if not all) of the L&I Products which are listed on The Stock Exchange of Hong Kong.

Features of L&I products

L&I Products are usually structured as open-ended funds and listed on stock exchanges like typical exchange traded funds (ETFs). They generally aim to deliver a daily return that is based on a multiple or opposite of the daily return of the underlying index that is tracked. This is achieved primarily through the use of swaps, futures contracts or other derivative instruments.

L&I Products are meant for sophisticated investors who manage their portfolios on a daily basis. Unlike conventional ETFs, L&I Products are not appropriate for long term investment. They are high risk products which are designed to be used as short-term trading tools for market timing or hedging purposes. The performance of L&I Products may be completely uncorrelated to the percentage change of its relevant underlying indices over a period beyond one day, especially in periods of market volatility due to the compounding effect.

Trading

L&I Products are traded on stock exchanges just like stocks and ETFs. To overcome the problem of insufficient liquidity, each L&I Product that is listed on the Singapore Exchange will need to appoint at least one designated market maker. This allows investors to trade L&I Products any time during market hours as there will be market maker(s) appointed to provide all day competitive bid/ask prices.

Recent initiatives

The Monetary Authority of Singapore (MAS) had indicated its openness to L&I Products in Singapore last year, and had on 05 August 2016 published its revised Frequently Asked Questions on Offers of Shares, Debentures and Collective Investment Schemes (MAS FAQs) which set out an additional section on L&I Products to provide guidance to the industry on the MAS’ requirements for such products.

Perhaps as an indication of things to come, the Singapore Exchange Limited (SGX) published a dedicated web page for L&I Products in February 2017. The web page provides an informative description of L&I Products in general, including the daily reset feature and compounding effect. An Investor Guide has also been introduced to educate potential investors. The introduction of L&I Products will provide investors with greater investment options, and should energise the SGX’s efforts in promoting vibrancy in the Singapore market.

There is currently only one inverse product listed in Singapore. But we expect more L&I Products in the near future in light of the greater awareness, clarity and guidance for fund managers and potential investors. Simmons & Simmons JWS is currently involved in several such products in the pipeline.

If you have any questions or would like to find out more, please contact us.