Hong Kong’s securities regulator is preparing new rules to facilitate the launch of new high-risk exchange-traded funds (ETFs) that US regulators are trying to restrict, sources with direct knowledge of the matter told Reuters.

Exchange Square
Exchange Square

The Securities & Futures Commission (SFC) is expected to soon release guidance on how ETF providers can launch inverse and leveraged funds, said two sources briefed on the matter. “There are a whole load of firms lining up to launch these products,” one of the sources told Reuters.  The sources declined to be identified because the discussions are not public.

Leveraged ETFs use derivatives to try to deliver two or three times the daily return of a specific index. Inverse ETFs try to deliver a negative daily return of the reference index.

These products have been big hits in the US and some Asian markets including Korea, Taiwan and Japan, but are not yet permitted in Hong Kong. Because they are recalibrated on a daily basis, they are considered trading instruments and not for buy-and-hold investors.

However, many individual investors have posted large losses because they don’t fully understand how they work or their large risks. This has led the US Securities and Exchange Commission to try to clamp down on the products.

The SFC has historically taken a conservative approach to approving new funds, but the industry has been pressuring the watchdog to allow more sophisticated products amid fears Hong Kong’s ETF market is falling behind regional rivals.

A spokesman for the SFC declined to comment.

The total global assets under management of short and leveraged exchange-traded products at the end of June 2015 was $62.8 billion, according to ETF provider Boost.

The SFC is expected to approve the new ETFs in phases, with non-Hong Kong and non-China focused products to get the green light first, followed by Hong Kong-focused products, the sources said. Products based on mainland China may be approved in the longer-term, they added.

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