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.

Hong Kong updates

10 July 2009 SFC to further study proposal to allow remote participants to access futures market On 27th February 2009, the SFC issued a consultation paper inviting comments on whether the definition in futures contracts should be changed to allow overseas participants to participate in that market without an SFC license provided certain preconditions were met. The SFC received 16 written submissions with mixed response and is hence going to further the study before a decision can be made.

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HK and Taiwan sign pact on ETF's

From sfc.hk: The Securities and Futures Commission (SFC) and the Taiwan Financial Supervisory Commission (FSC) have on 22 May signed and exchanged a Side Letter to a bilateral Memorandum of Understanding (MOU) which will facilitate cross listing of exchange-traded funds (ETF) in the two markets (Notes 1 and 2). Under the terms of the Side Letter, ETFs listed on the Hong Kong or Taiwan stock exchange and managed by asset managers licensed respectively by the SFC or the FSC will be mutually recognised in each other’s jurisdiction for the purpose of cross listings and offerings (Note 3). The MOU was entered into by the two financial regulators in 1996.

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