Hong Kong to allow daily leverage ratio adjustments for single-stock ETFs — a model for Korea?

Hong Kong, widely regarded as the world's leading market for leveraged and inverse exchange-traded products, is introducing a "Flexible Leverage Structure" that allows fund managers to adjust a product's target leverage ratio daily — a move aimed at enhancing operational flexibility and reinforcing market stability.

Hong Kong's investment market is considered one of the most experienced in single-stock leveraged products, having been the first in the world to list leveraged ETFs tracking Samsung Electronics and SK hynix, ahead of South Korea. Now that the city's financial regulator has unveiled new measures backed by years of accumulated expertise, attention is turning to whether South Korea might follow suit.

According to the financial investment industry, Hong Kong's Securities and Futures Commission (SFC) announced Friday that it would overhaul its regulatory framework for leveraged and inverse products. The centerpiece of the reform is the introduction of a "Flexible Leverage Structure" that allows target leverage multiples to be adjusted daily in response to market conditions.

Under the revised rules, leveraged and inverse products whose assets under management fluctuate significantly with market conditions will be required to adopt the Flexible Leverage Structure. Fund managers will be able to adjust the next trading day's leverage multiple at their discretion, within the existing cap of 2x for leveraged products and -2x for inverse products.

The SFC said single-stock leveraged and inverse products would generally be the most likely candidates to adopt the Flexible Leverage Structure under the new requirements. Some index-tracking leveraged and inverse products could also fall within scope, depending on the liquidity of the underlying asset and prevailing market conditions.

Fund managers will be required to disclose the next trading day's target leverage multiple on their own websites and on the Hong Kong Stock Exchange website after the close of each trading session. Product names will also be required to reflect both the flexible leverage feature and the maximum leverage multiple.

"As the leverage multiple will be disclosed after market close each day, investors will be better able to understand the daily product characteristics of leveraged and inverse products," the SFC said. "It will also help investors recognize that these products are not designed to be held for more than one day."

The rapid growth of the single-stock leveraged and inverse product market is the driving force behind the regulatory overhaul. The SFC noted that "the management of single-stock leveraged and inverse products has become increasingly dependent on the market ecosystem surrounding the underlying stock — including futures and options position limits and daily rebalancing liquidity — in order to maintain target leverage exposure."

The new rules give fund managers the discretion to reduce target leverage multiples when market volatility rises.

Hong Kong became the first market in Asia to permit single-stock leveraged ETFs last year. CSOP Asset Management listed Samsung Electronics single-stock leveraged and inverse ETFs on the Hong Kong Stock Exchange in May last year, and in October of the same year launched the world's first SK hynix single-stock leveraged ETF.

The CSOP SK Hynix Daily 2X Leveraged ETF currently has assets under management of approximately $6.6 billion. On June 23, its AUM swelled to around $16.8 billion, briefly making it the largest ETF in Hong Kong.

"It appears the new regime was introduced in response to the sharp rise in volatility in Samsung Electronics and SK hynix in recent months," said one Hong Kong financial investment industry official. "From a fund manager's perspective, there is a positive side to this, as it expands the operational discretion needed to manage tracking differences."

In South Korea, discussions are also underway on adjusting the leverage multiples of single-stock leveraged ETFs. The Democratic Party of Korea's special committee on the Korea Premium K-Capital Market has previously said it is reviewing a plan to reduce the leverage multiple for single-stock leveraged and inverse ETFs from 2x to 1.5x.

The approach under discussion in South Korea differs from Hong Kong's in that it would change the target multiple of the product itself. Industry officials have noted that doing so would require procedural steps — including revisions to index calculation methodologies, updates to prospectuses, and unitholder meetings — making it a significant practical burden.

Kim Dae-jong, a professor at Sejong University's School of Business Administration, called Hong Kong's Flexible Leverage Structure "a rational regulatory direction that balances investor protection and market stability," adding that it is "a best-practice example well worth referencing in South Korea."

Kim added that "given South Korea's high proportion of retail investors, the effectiveness of any such regime will depend on pursuing three principles together: transparent disclosure, investor education, and phased implementation."

Lee Jun-seo, a professor in the Department of Business Administration at Dongguk University, said the Hong Kong model is "worth benchmarking domestically, in that it allows rebalancing volumes to be reduced in response to market conditions while still pursuing the product's target return." He added that "since it is difficult to uniformly reduce the target multiples of already-listed products, the Hong Kong-style flexible management approach is a more realistic alternative."

One official at a domestic asset management firm said the structure "is in effect a form of active management — but active management of leveraged ETFs is not permitted in South Korea, and there are many related regulations." The official added that "there will be no small number of regulatory hurdles to clear before this could be adopted in the domestic market as-is."