The new proposed measure by the domestic exchange and the regulator has promoted the discussion on enhancing the flexibility to list products on the first day of listing, as well as the assessment of product types besides leveraged products.

The Securities and Futures Commission of Hong Kong (SFC) and the Stock Exchange of Hong Kong (HKEX) are considering new guidelines to enhance listing requirements and arrangements for structured products, with the aim of boosting market efficiency.

The proposal was included in the Hong Kong government’s 2024-2025 Budget, which was released earlier this year. The new measure includes lowering the listing costs of these structured products, which primarily consist of derivative warrants (DWs) and callable bull/bear contracts (CBBCs).

I wouldn't imagine Hong Kong will have everything like we do in Europe, but I think it is very good timing for us to consider other than just the leveraged products

The proposal came as a “positive surprise” to Cedric Cheung (pictured), head of listed structured products sales, Asia at J.P. Morgan, as if passed, the new proposal would improve the product’s listing efficiency.

“In our current listing rule, when we [as the issuer] list a certain product, we have to anticipate what the market demand will be two or three months ahead of time. Then there could be no demand for some of the products in the early days after listing,” Cheung told SRP. “It would be waiting for a couple of weeks or months [for the market to adjust to what the product was aimed to design].”

“[What we hoped to see more via the new measure] was the flexibility to list products which the maturity, strike level and pricing could better suit what the investor needs on day one of listing.. to meet the market's demand effectively,” he said.

According to Cheung, the proposal also promotes a second stage of discussion to determine what concrete product types within Hong Kong’s listed structured product market would be incorporated.

Compared to Europe where the listed structured product market includes various categories, such as leveraged products, yield enhancement products, capital-protection-focused products and participation-focused products, the Hong Kong market listing ruiles are not as comprehensive.

“I wouldn't imagine Hong Kong will have everything like we do in Europe, but I think it is very good timing for us to consider other than just the leveraged products,” he said, adding that yield enhancement products may have the most potential to be introduced in the city's listed structured product market if the regulator and the HKEX allow it.

The process, however, cannot proceed without ongoing investor education to ensure that investors understand "the value and the risk and reward profile of the product,” added Cheung. “A continuous and liquid secondary market provided by the designated market-makers to accurately reflect the product value during the lifetime of the investment… serve as a good illustration of risk and reward product profile, which is an important part of investor education [as comparing to only realizing the true value of an investment couple of months or years later at maturity].”

Underlyings activity

Although the equity market attempted to rebound from the January low, Hong Kong’s listed structured products market has been flat YTD.  

According to HKEX’s March statistics report, the average daily turnover (ADT) for derivative warrants fell by 8.5% month-over-month (MoM) last month to HK$4.2 billion (US$536m), while ADT for CBBCs was down by 0.4% to HK$4.8 billion.

Since February, three Hong Kong underlying giants – the HSI, the Hang Seng China Enterprises Index, and the Hang Seng Tech Index – have actually outperformed the US and Japanese markets 

While many investors have flocked to US indices-focused and Japan index-focused underlying for derivative warrants and CBBCs, Cheung observed a rebound in some Hong Kong and Chinese stocks as well. Hang Seng Index (HSI), the benchmark of the Hong Kong stock market, has risen more than 10% year-to-date to over 18,500 as of Monday’s closing.

“Since February, three Hong Kong underlying giants – the HSI, the Hang Seng China Enterprises Index, and the Hang Seng Tech Index – have actually outperformed the US and Japanese markets,” Cheung said. “We do see some of the DW and CBBC investors have benefited from this trend, pocketing profits from the tech, oil, and banking sectors.”

Gold is also capturing the market participants' attention as its notable rally. The contraction of US ISM Services PMI data in April suggested a ‘potential stagflation environment akin to the 1970s when the Fed had its hands tied to prevent it from enacting an accommodating monetary policy which in turn may support the ongoing major bullish trend in Gold (XAU/USD) in place since September 2022,’ Kelvin Wong, senior market analyst at foreign exchange market maker Oanda, wrote in a Monday analysis note.

The increased demand for gold has also been present in the listed structured products space in Hong Kong where derivative warrants linked to gold-focused ETFs also gained attraction among investors, Cheung said.

Despite the short-term lukewarm market, Cheung remains confident in the listed structured products market's potential for growth in the long-term.

“I want the stakeholders in the Hong Kong financial market to start being aware of the importance of the listed structured products and how these products can enhance Hong Kong as a wealth and risk management center,” he said.

If more product types, such as capital protection and yield enhancement, were allowed to be introduced, it would mean there would be “one more channel for people to conduct their wealth management exercise, especially for a simpler product, to make the market more efficient,” he added.

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