On 17 Feb 2025, the SFC issued a circular superseding its 2020 guidance on leveraged and inverse products, introducing a unified framework for listed structured funds. The proposals establish new requirements for product naming, risk disclosure, market making, and performance simulation, while extending authorisation to Single Stock L&I Products and Defined Outcome Funds with specific safeguards. If implemented, these changes will replace prior SFC circulars and enhance investor protection for complex derivative-based funds.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
SFC Regulation of Virtual Asset Trading Platforms: The Emerging Hong Kong Framework
SFC proposes new regulation of virtual assets through licensing of operators of cryptocurrency and other digital asset trading platforms
Market Misconduct Tribunal: A Guide to Penalties and Other Consequences for Misuse of Insider Information
Market Misconduct Tribunal proceedings for mishandling of insider information can result in fines and disgorgement orders
SPOTLIGHT ON
FAMILY OFFICES
Introduction
On 17 Feb 2025, the Securities and Futures Commission (SFC) issued a circular superseding its 2020 guidance on leveraged and inverse products (L&I Products) and introducing new requirements for listed structured funds, including Single Stock L&I Products and Defined Outcome Listed Structured Funds, to address evolving market demands and enhance investor protection.
Supersession of Prior Guidance
The circular incorporates and supersedes the SFC’s Circular on Leveraged and Inverse Products and its supplemental circular dated 22 May 2020, establishing a unified framework for authorising listed structured funds under sections 104 and 105 of the Securities and Futures Ordinance (SFO).
General Requirements for Listed Structured Funds
All listed structured funds must comply with the Overarching Principles and Unit Trusts and Mutual Funds Code (UT Code), with additional safeguards for their technical complexity. Key requirements include: (1) distinct product naming differentiating them from conventional ETFs; (2) mandatory disclosure of key risks and features in the Product Key Facts Statement (Product KFS), covering time horizons, volatility, and derivative costs; (3) at least one ongoing market maker; and (4) a user-friendly performance simulator for non-delta-one products.
Specific Requirements for L&I Products
For L&I Products, the SFC mandates: (1) maximum leverage of 2x to -2x (except Mainland equity inverse products at -1x); (2) product names must include 'Leveraged Product' or 'Inverse Product,' the leverage factor, and 'daily' (e.g., '[Issuer] [Index] Daily (2x) Leveraged Product'); (3) standalone HKEX product category with 'L'/'I' stock short names; (4) explicit warnings in Product KFS against holding beyond rebalancing intervals; and (5) termination of products if all market makers resign, with advance investor notices.
New Product Categories and Safeguards
The circular extends authorisation to Defined Outcome Listed Structured Funds (using options-based strategies for capped upside/downside protection) and Single Stock L&I Products (referencing highly liquid mega-cap stocks). For Defined Outcome Funds, the Product KFS must disclose time horizons, volatility, and cost escalation risks. Intermediaries must conduct enhanced investor education and comply with derivative-specific Code of Conduct requirements, including staff training and best-interest obligations.
View the full article:Source
