There has been a notable pick up in interest in leveraged and inverse products (L&I Products) in Singapore. This comes on the back of the first batch of 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.
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.
The Monetary Authority of Singapore (MAS) had indicated its openness to L&I Products in Singapore last year, and had on 5 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. See MAS FAQs at: http://www.mas.gov.sg/Regulations-and-Financial-Stability/Regulations-Guidance-and Licensing/Securities-Futures-and-Funds-Management/FAQs/2016/FAQs-on-Offers-of-Shares-Debenturesand- CIS.aspx.
Perhaps as an indication of things to come, the Singapore Exchange Limited (SGX) published a dedicated web page for L&I Products recently in February 2017. See web page at http://www.sgx.com/wps/portal/sgxweb/home/products/securities/leveraged-inverse-products. 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 1 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.