SFC Amends Collateral Requirements for Domestic Synthetic ETFs

On Aug 31, SFC announced additional amendments for domestic synthetic ETFs. This is pretty much a sequel to SFC’s earlier policy to help retail investors distinguish between traditional and synthetic ETFs in November 2010. This time round SFC is keen about eliminating counterparty risks by raising top-up collateral requirements to 100%. To further reduce risks, SFC subjects that collateral in the form of equity securities to a haircut policy of 120% of the related gross counterparty risks exposure. The deadline for compliance is scheduled for October 31 this year.

The new amendments target particularly the fact that ETFs have, in the course of their development history, increasingly evolved to become instruments which defy their original purpose – to replicate index performance. Some synthetic ETFs do not in fact represent what they are supposed to replicate and have become sophisticated leveraging tools for adventurist investors. In this light, existing funds should consider stocking up their capital and enhancing liquidity in order to meet the more stringent collateral requirement.

The Financial Times report on SFC amendment can be found here.

The SFC November Notice can be found here.

The SFC Aug 31 Notice can be found here.