Singapore Exchange (SGX) is preparing the introduction of new leverage and inverse (L&I) products in the second quarter of 2017, as the exchange moves to optimise its offering alongside the regional trends after the Monetary Authority of Singapore (MAS) issued new guidelines last year.

The regulator, however, pointed that, because the base value of leveraged and inverse products is reset on a daily basis, investors are advised to divest positions within the day and do not use them as buy-and-hold investments. The only L&I product listed on SGX is the db x-trackers S&P 500 Inverse Daily (-1X).

The new products will track indices that meet a number of criteria, including liquidity, diversification (a maximum of 20% weight per constituent) and transparency. These type of products have been very successful in other markets, particularly in Taiwan, Japan and South Korea. The spectacular 45% increase in Taiwan exchange-traded fund (ETF) trading in 2015 was driven primarily by the inclusion of L&I offers to the market, according to David Tsoi of the Hong Kong ETF division at Mirae Asset Global Investments.

The success of L&I products will depend on many factors such as the type of underlying, the issuer's and distributor's commitment to education and marketing, as well as the bid-ask spreads and traded volumes, according to Luuk Strijers (pictured), head of products at SGX. "The reason why these products are popular in surrounding markets is the unique setup when compared to other collective investment schemes," said Strijers. "In general, leveraged and inverse products are designed to offer trading and hedging opportunities."

According to Strijers, the new L&I listings are expected in the second quarter of this year, and the exchange is "certainly looking forward to issuers listing new types of leveraged products in Singapore in the near future".

The introduction of L&I products is not expected to affect the country's structured warrants market, according to Strijers. "Warrants are clearly a different instrument type and, for that reason, we expect the impact of the launch of L&I products on the SGX Structured Warrants turnover to be negligible," said Strijers, noting that warrants pricing is determined by factors such as volatility and time to expiry which are not applicable to L&I products.

New L&I products will also be coming to the Hong Kong Exchange, after a recent expansion of the pool of eligible underlyings, which now includes Hong Kong equity indices and other non-equity indices. There are 12 L&I products listed in Hong Kong, but their trading volume is relatively small compared to the entire Hong Kong ETF market, according to Mirae's Tsoi. "Hong Kong-linked L&I products could be a game changer in Hong Kong's leveraged and inverse market," said Tsoi. "Even though Hong Kong has launched foreign indices L&I products, we still believe that Hong Kong investors will favour local indices due to home bias phenomena." Judging by the experience of warrants and CBBCs, which are the most popular leveraged products in Hong Kong, the most traded warrants and CBBCs are those with local indices as underlyings which bodes well for the new L&I products in HK, according to Tsoi.

The upcoming L&I products linked to the HSI and HSCEI in Hong Kong should not affect warrants and CBBCs, said Johnny Yu, managing director, head of public distribution Asia at UBS. "L&I products offer up to 2x leverage and are designed to be held for no more than a day, whereas warrants and CBBCs go up to 15x leverage and are effective long-term position building blocks, so the target audience is quite different," said Yu.

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