Hong Kong's Synthetic ETF Market Challenged

Synthetic ETFs has long been scrutinized as risky, misleading, and non transparent. Proponents argue they minimize tracking errors. These products are in the news again as research consulting firm Celent says "Singapore may displace Hong Kong as Asia’s hub for synthetic exchange-traded funds due to regulatory changes."

Singapore to Beat Hong Kong as Synthetic ETF Center [Bloomberg]

On August 29th, the Hong Kong Securities and Futures Commission announced enhanced investor protection for ETFs. "The relevant synthetic ETF managers have been required to top-up the collateral level for each of the domestic synthetic ETFs to achieve at least 100% collateralization to ensure there is no uncollateralized counterparty risk exposure arising from the use of financial derivatives to replicate index performance." Full Release.

Bottom Line: More regulation and investor protection may erode the gap between Hong Kong's $8 billion market for such funds and Singapore's $1 billion market. 

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