Circular on listed structured funds

On July 24, 2026, the Securities and Futures Commission ("SFC") issued a circular supplementing structured fund requirements under section 8.8 of the Code on Unit Trusts and Mutual Funds (UT Code). This circular establishes additional authorization criteria for listed structured funds offered to the public under sections 104 and 105 of the Securities and Futures Ordinance ("SFO"), specifically targeting Leveraged and Inverse ("L&I") Products and Defined Outcome Listed Structured Funds. It incorporates and supersedes the SFC’s Circular on Leveraged and Inverse Products and related supplemental circulars dated 22 May 2020.

Regulatory Background and Market Context

Listed structured funds are collective investment schemes listed on a stock exchange, typically embedding derivatives, leverage, or structured payouts based on pre-determined conditions. Current SFC authorizations cover L&I Products tracking broad-based equity or commodities indices, including Single Stock L&I Products. Overseas markets have seen growth in Defined Outcome Listed Structured Funds utilizing options strategies for capped upside with downside protection. To meet local demand and facilitate market development, the SFC will consider authorizing these funds under a new framework comprising general requirements and specific safeguards.

General Authorization Requirements

Listed structured funds must comply with the Overarching Principles Section and UT Code in the SFC Handbook, particularly ETF requirements in section 8.6. Due to technical complexity, additional safeguards in this circular apply to protect the public and market integrity. Product naming must distinguish these funds from conventional ETFs and reflect features. Structures may utilize financial derivatives, including futures-based, swap-based, or options-based strategies. The SFC may reference Chapter 15A of the Listing Rules regarding underlying asset eligibility.

Offering documents must include upfront disclosure of key risks and features in the Product Key Facts Statement (Product KFS). This includes time horizon risks, return correlation issues for futures-based strategies, heightened volatility, and internalized costs like roll costs. For swap-based synthetic structures, the Product KFS must disclose swap entry costs not captured in the ongoing charges figure, as well as the maximum redemption fee.

Market makers must be present at trading commencement and ongoing. Providers must make a performance simulator available to investors, allowing historical performance simulation. The simulator interface must be user-friendly, and the fund website should include narratives explaining the results and assumptions. Providers must conduct extensive investor education prior to launch. Intermediaries must adhere to the Code of Conduct regarding derivative products, ensuring staff training on risks and acting in the best interests of customers.

Specific Regime for Leveraged and Inverse Products

The Appendix details requirements for Leveraged and Inverse Products (L&I Products), extending previous 2020 circulars to include Single Stock L&I Products referencing a single stock. The SFC will accept applications only for liquid broad-based equity indices, specific non-equity indices, Mainland equity indices via swaps, or highly liquid mega-cap stocks. Maximum leverage is generally 2x to -2x, with exceptions for Mainland Inverse Products (-1x) and Single Stock Products based on volatility. Flexible leverage structures require daily publication of targeted leverage factors.

Naming conventions for L&I Products must exclude "ETFs" and instead use "Leveraged Product" or "Inverse Product" with the factor and "daily" included (e.g., "[Issuer] [Index] Daily (2x) Leveraged Product"). Standalone product categories with distinctive stock short names beginning with "L" or "I" will be designated on SFC and HKEX websites. Disclosure must warn against holding beyond the rebalancing interval, clarify suitability for sophisticated investors, and highlight maximum costs deducted from NAV daily.

Market making arrangements require at least one market maker; if all resign, the product must terminate with advance notice. HKEX will monitor market maker performance, with revocation possible for non-compliance. Margin financing for trading L&I Products is advised against. Providers must continuously monitor product capacities, communicate with counterparties, and notify the SFC of potential adverse capacity issues affecting daily rebalancing.

Safeguards for Single Stock L&I Products

Single Stock L&I Products face heightened volatility and operational risk, requiring additional safeguards. Provider acceptability is assessed holistically based on prior L&I experience, group reputation, and diversified counterparty arrangements. A robust Business Continuity Plan ("BCP") is mandatory, covering triggers for reporting to the SFC, contingency measures like deleveraging, and investor notifications.

Providers must implement defensive measures against extreme price volatility, such as stop-loss mechanisms. Trading suspension is required for products referencing Hong Kong-listed shares if the underlying is halted. For non-Hong Kong shares, providers must assess the appropriateness of suspending trading based on investor interests and liquidity implications.

Overseas Products and Definitions

Applications for L&I Products domiciled outside Hong Kong will be assessed case-by-case, potentially subject to modified requirements to ensure comparable investor safeguards. Clarification requests should be directed to the Investment Products Division ("IPD") supervisors or case officers. Early consultation is encouraged for structured payout or defined outcome proposals.

Defined Outcome Listed Structured Funds are known as defined outcome ETFs in the United States. Roll costs refer to expenses from replacing near-term futures contracts with long-dated ones. Leveraged Products aim for a daily return equivalent to a multiple of the underlying asset return. Inverse Products aim for the opposite of the daily return. L&I Products' capacities refer to the size of exposure supported, considering swap exposures, position limits, and liquidity needs.