On 22 May 2020, the Securities and Futures Commission (SFC) issued a supplemental circular introducing changes to the scope of leveraged and inverse products (L&I Products) which the SFC would accept for authorization for public offering in Hong Kong.

The SFC’s circular on L&I Products was first issued in February 2016 when the SFC considered that L&I Products had become increasingly popular in overseas markets, particularly in Asia, and that there may be demand for these products in Hong Kong. Due to the novelty and the technical complexity of L&I Products, at the initial stage the SFC only accepted applications for L&I Products tracking liquid and broadly based non-Hong Kong, non-Mainland foreign equity indices, although swap-based synthetic replication and futures-based replication structures were allowed. Initially, leveraged products were subject to a maximum leverage factor of two times (2x) and inverse products were subject to a maximum leverage factor of one time (-1x), meaning that inverse products could not be leveraged.

The scope of SFC-accepted L&I Products has gradually been expanded, by allowing, in different phases, Hong Kong equity indices, Hong Kong and non-Mainland non-equity indices (including commodities indices) and relaxing the leverage factor cap of inverse products to two-times (-2x).

The supplemental circular issued on 22 May 2020 further expands the scope whereby the SFC will now accept authorization applications for L&I Products tracking Mainland equity indices. A leveraged product tracking a Mainland equity index may have a leverage factor up to two-times (2x), but the leverage factor cap of a Mainland equity index inverse product is limited to negative one-time (-1x). For the time being, only a swap-based replication structure is accepted for L&I Products tracking Mainland equity indices – a futures-based replication structure is not acceptable yet.

The SFC has indicated that it will continue to review the eligible replication structures for L&I Products for public sale in Hong Kong.