Hong Kong's Securities and Futures Commission announced on May 24 a regulation change allowing issuers to adjust leverage ratios daily for single-stock leveraged and inverse exchange-traded funds, within a maximum 2x multiplier cap. The regulatory shift responds to extreme volatility in products tracking South Korean semiconductor stocks, including a CSOP SK Hynix 2x leveraged ETF that collapsed approximately 75% from its peak after reaching $168 billion in assets. South Korea cannot adopt Hong Kong's approach without amending its Capital Markets Act, as Article 188(2) is interpreted by regulators and industry experts to require beneficiary meetings for leverage ratio changes — a process Financial Services Commission Capital Markets Bureau Director Byun Je-ho described as "more difficult than shareholder meetings."
Hong Kong SFC Implements Daily Leverage Ratio Adjustment Framework
The Hong Kong Securities and Futures Commission's May 24 regulation permits issuers to set different leverage ratios daily within the existing 2x cap for leveraged products and -2x cap for inverse products. Issuers must disclose the next trading day's applicable ratio after market close each day. The flexible leverage structure aims to help fund managers preserve operational capacity during high-volume trading periods by lowering target ratios when necessary.
CSOP Asset Management's SK Hynix 2x leveraged product became Hong Kong's largest ETF after assets expanded to $168 billion (approximately 24.65 trillion won). The product subsequently dropped approximately 75% from its all-time high within one month as semiconductor stocks entered a correction phase. Reuters reported that Asian investors used single-stock leveraged products to maximize bets on Samsung Electronics and SK Hynix, creating massive capital inflows that "changed the market landscape and increased volatility," prompting regulatory concern.
South Korea Capital Markets Act Blocks Issuer Discretion on Ratio Changes
South Korea's Capital Markets Act Article 188(2) requires beneficiary meetings for changes to "important matters related to beneficiaries' interests as prescribed by Presidential Decree." Related enforcement decrees list fee increases, asset manager changes, trust period modifications, and other items requiring meetings with majority consent from attending beneficiaries and at least one-quarter of issued fund units. Leverage ratio changes are not explicitly listed but are interpreted as requiring meetings because changing the ratio would necessitate amending the fund prospectus investment objective stating "2x the daily return of the underlying index."
Kwon Min-kyung, researcher at Korea Capital Market Institute, stated: "Single-stock leveraged ETFs specify '2x the daily return of the underlying index' in the collective investment agreement investment objective. Changing the ratio ultimately requires amending this agreement. Even if not specified in law or enforcement decrees, it would likely be interpreted as a significant change with high probability of requiring a beneficiary meeting."
Financial Services Commission Capital Markets Bureau Director Byun Je-ho stated on the 16th: "Realistically, to lower a product launched at 2x to 1.5x requires a beneficiary meeting, and beneficiary meetings are more difficult procedures than shareholder meetings. That [ratio adjustment] was not considered a viable alternative." Industry representatives noted that regulatory changes would be necessary for South Korea to implement Hong Kong-style ratio adjustments, similar to how Hong Kong's SFC amended its regulations to enable the new framework.
Democratic Party K-Capital Markets Special Committee Chairman Oh Ki-hyung held a meeting with industry CEOs at the Korea Financial Investment Association in Seoul on the 27th, stating: "There was consensus on reducing the volatility and product characteristics of 2x leverage. Target ratios for underlying assets are not technically impossible, so additional discussion is needed."
Hong Kong Mandates D-A-I-L-Y Investor Checklist for Leveraged Products
The Hong Kong Securities and Futures Commission introduced a five-point investor checklist using the acronym "D-A-I-L-Y" to highlight key considerations for leveraged and inverse products:
D (Daily rebalancing): Leveraged or inverse products are designed to track one day's returns. Holding for multiple consecutive days creates negative compounding effects where investors lose more principal as markets fluctuate, making these products unsuitable for holding longer than one day.
A (All fees deducted daily): Various fees including financial derivative contract costs and option expenses are deducted daily from net asset value. Accumulated costs reduce investor returns the longer the position is held.
I (Indicative real-time value monitoring): ETF net asset value is calculated after market close, but real-time trading requires continuous value indicators. The indicative net asset value (iNAV) shows real-time estimated value. Regular iNAV monitoring helps investors avoid buying at excessive premiums or selling at steep discounts.
L (Leverage ratio variability): Depending on the product, the multiplier applied to underlying asset movements may change based on market conditions. Investors must verify the specific rules governing their product's leverage mechanism.
Y (Your investment environment): Before entering complex, high-volatility investment products, investors must assess whether their objective is short-term capital gains and whether they have financial capacity to absorb risks. These products can generate large losses as quickly as large gains.
FAQ
What did Hong Kong's Securities and Futures Commission announce on May 24 regarding leveraged ETFs?
Hong Kong's Securities and Futures Commission announced on May 24 a regulation change allowing issuers to adjust leverage ratios daily for single-stock leveraged and inverse ETFs within a maximum 2x multiplier cap. Issuers must disclose the next trading day's applicable ratio after market close each day.
Why can't South Korea adopt Hong Kong's leverage ratio adjustment approach?
South Korea's Capital Markets Act Article 188(2) is interpreted by regulators and industry experts to require beneficiary meetings for leverage ratio changes. Financial Services Commission Capital Markets Bureau Director Byun Je-ho stated that beneficiary meetings are "more difficult procedures than shareholder meetings," making ratio adjustments not viable under current law. Legal or enforcement decree amendments would be necessary to enable issuer discretion on ratio changes similar to Hong Kong's framework.
