Hong Kong to adjust leverage ratios for Samsung, SK Hynix products

Hong Kong's financial markets are set to see a shift in how leveraged and inverse products are managed, with asset manager CSOP announcing flexible leverage ratio adjustments for popular products tracking Samsung Electronics and SK Hynix starting August 3.

The new system, introduced by the Hong Kong Securities and Futures Commission (SFC), allows asset managers to dynamically adjust the leverage ratios of single-stock leveraged and inverse products within a maximum of 2x. This flexibility is intended to be applied based on market conditions, such as asset liquidity, market volatility, and the operational capacity of the product.

CSOP's 12 single-stock leveraged and inverse products, which currently maintain a 2x leverage under normal market conditions, will be renamed to reflect the "maximum" leverage. For example, the 'CSOP SK Hynix Daily 2x Leverage Product' will become the 'CSOP SK Hynix Daily Maximum 2x Leverage Product.' While the target leverage will remain 2x, managers can lower it to as much as 1.1x in extreme market situations or when derivative trading becomes challenging.

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The operator has more room to manage the product by lowering the target leverage when necessary during periods of high trading volume.

The SFC stated that this change aims to increase investor awareness that these products are designed as daily trading instruments, not for long-term holding. The daily disclosure of the target leverage ratio on product websites and the Hong Kong Stock Exchange's website will further emphasize this point.

In South Korea, similar measures to adjust leverage ratios for single-stock leveraged products have been discussed as a way to mitigate volatility. However, implementing such a system domestically faces hurdles, as changing the leverage ratio of existing 2x products would require a shareholder meeting. The Korean Financial Services Commission is reportedly studying the specifics of Hong Kong's new system to assess its applicability.

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The fact that the leverage ratio can change daily will increase investors' perception that this product is a daily trading product that is not designed to be held overnight.