More Synthetic ETFs Get Go-Ahead In Hong Kong

Last Updated: 29 November 2022

Hong Kong’s financial regulator has approved the launch of a new range of ETF products from locally-based asset manager Enhanced Investment Products (EIP), the first Hong Kong-based firm to get the green light to list synthetic ETFs.

The new range will focus on emerging Asian country-specific funds and will allow investors to go long or short on the various countries. The products received approved from the Securities and Futures Commission on Monday and are due to list on the Hong Kong Stock Exchange on February 16.

Synthetic ETF providers have had a difficult time in Hong Kong over the past two years, as the SFC has taken an increasingly heavy-handed approach to the regulation of swap-based funds.

In August it tightened collateral requirements for domestic funds, requiring managers of domestic synthetic ETFs to ensure that collateral levels in their funds exceed 100 percent. The requirement, however, does not extend to synthetic ETFs that are cross-listings of foreign funds—European synthetic ETFs therefore continue to operate under UCITS rules, meaning they have to maintain collateral backing of at least 90 percent.

In theory, the requirement that EIP’s funds hold greater collateral than their European-based rivals may make it harder for the issuer to compete on pricing.

However, even European issuers have struggled in the Hong Kong market and Lyxor announced recently that it plans to delist all of its 12 ETFs (all synthetic) from the Hong Kong stock exchange.

Tobias Bland, EIP’s chief executive, told Financial News that he was confident the firm’s launch would not suffer the same fate as its European rival. “Our offering is different from other ETF providers including Lyxor. Synthetic replication investment strategy has received a fair amount of negative reviews and comments and we believe there is no single preferred investment strategy for all situations.”

He added: “We feel that for these target markets in emerging Asia, the use of synthetic replication strategy is the most appropriate way to achieve the investment objectives for these ETFs.”

The SFC approval comes less than two weeks after the regulator approved six new synthetic ETFs from db X-trackers. That was the first time it had approved any new swap-based products in over 18 months.


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