Circulars Issued by the Securities and Futures Commission on Listed Closed-ended Alternative Asset Funds and Listed Structured Funds

55th Floor, Two International Finance Centre, 香 港 中 環 金 融 街 8 號 國 際 金 融 中 心 2 期 55 樓 8 Finance Street, Central, Hong Kong 網 址：www.hkma.gov.hk Website: www.hkma.gov.hk Our Ref: B1/15C G16/1C 17 February 2025 The Chief Executive All Registered Institutions Dear Sir / Madam, Circulars Issued by the Securities and Futures Commission on Listed Closed￾ended Alternative Asset Funds and Listed Structured Funds I am writing to draw your attention to the attached two circulars recently issued by the Securities and Futures Commission (“SFC”), relating to listed closed-ended alternative asset funds and listed structured funds respectively. SFC’s “Circular on listed closed-ended alternative asset funds” issued on 17 February 2025 This circular (at Annex I) sets out the requirements of the SFC in considering authorising closed-ended alternative funds to be listed on the Stock Exchange of Hong Kong Limited (“SEHK”), and the requirements applicable to distribution of these funds by intermediaries. As set out in the SFC’s circular, since SFC-authorised Listed Alternative Funds are complex products, except for institutional professional investors and qualified corporate professional investors, intermediaries should assess whether clients have knowledge of investing in relevant Alternative Funds or relevant alternative assets (which can be a one-off knowledge test) prior to effecting a transaction in SFC￾authorised Listed Alternative Funds on their behalf. Intermediaries should also provide clients with risk disclosure statements (which can be a one-off disclosure) specific to the relevant alternative assets and SFC-authorised Listed Alternative Fund, and ensure that their clients have sufficient net worth to be able to assume the risks and bear the potential losses of trading SFC-authorised Listed Alternative Funds. Meanwhile, where there has been no solicitation or recommendation,

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  intermediaries do not need to comply with the suitability requirement, or the minimum information and warning statements requirements referred to in paragraph 5.5(a) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC’s Code of Conduct). SFC’s “Circular on listed structured funds” issued on 23 January 2025 This circular (at Annex II) sets out the additional requirements that the SFC would consider authorising listed structured funds for public offerings in Hong Kong, particularly for specific types of listed structured funds, notably leveraged and inverse products (L&I Products) and Defined Outcome Listed Structured Funds. As set out in the section “Distribution” of the SFC’s circular, intermediaries are reminded that listed structured funds are derivative products and intermediaries are subject to the applicable requirements under the SFC’s Code of Conduct, particularly paragraphs 5.1A to 5.3 which are relevant to providing services to clients with respect to derivative products. Registered institutions (“RIs”) which distribute the relevant listed funds are reminded to have due regard to the applicable requirements set out in the respective circulars, and put in place adequate policies, procedures and controls, as well as provide sufficient staff training to ensure the compliance with all applicable requirements. Yours faithfully, Alan Au Executive Director (Banking Conduct) Encl. c.c. Securities and Futures Commission (Attn: Dr Eric Yip, Executive Director, Intermediaries)

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Circular
54/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 香港鰂魚涌華蘭路 18 號港島東中心 54 樓 +852 2231 1222 www.sfc.hk Page 1 of 6 17 February 2025 Circular on listed closed-ended alternative asset funds

1. This circular clarifies the requirements of the Securities and Futures Commission
   (SFC) when it considers authorising closed-ended collective investment schemes (Alternative Funds) which seek a listing on the Stock Exchange of Hong Kong Limited (SEHK) (Listed Alternative Funds), and the requirements applicable to the distribution of these funds by intermediaries.
2. Alternative Funds invest mainly in private, illiquid assets, which may not meet the
   liquidity and other investment requirements under Chapter 7 of the Code on Unit Trusts and Mutual Funds (UT Code) (alternative assets).
3. Listed Alternative Funds and their offering documents should be authorised by the
   SFC under sections 104 and 105 of the Securities and Futures Ordinance (SFO) and
   8.11 and relevant requirements as set out in this circular in 8.7 of the UT Code and
   listed under Chapter 20 (Investment Vehicles – Authorised Collective Investment Schemes) of the Main Board Listing Rules1 (Listing Rules) (SFC-authorised Listed Alternative Funds). Factors considered by the SFC for authorising Listed Alternative Funds Overarching considerations
4. Unless otherwise specified in this circular, SFC-authorised Listed Alternative Funds
   should meet the applicable requirements under the Overarching Principles Section (OP) and the UT Code2 in the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products.
5. The fund for which authorisation is sought should be sizeable with an expected
   market capitalisation of HK$780 million3 (US$100 million) at the time of listing.
6. The SFC may also consider:
   (a) the performance of fund(s) investing in relevant alternative assets managed by the management company; (b) the fund’s dividend policy; 1 The SFC does not, in general, expect collective investment schemes to be listed under Chapter 21 of the Listing Rules. 2 Including but not limited to (i) appointing a management company that is acceptable to the SFC and complies with Chapter 5 of UT Code on an ongoing basis, and (ii) appointing a trustee or custodian that is acceptable to the SFC and complies with
   Chapter 4 of UT Code on an ongoing basis.
   3 The SFC may consider applications for authorisation where the market capitalisation of a fund and/or the AUM of the management company invested in relevant alternative assets on a group-wide basis is lower than the respective expected minimum amounts as stated in paragraphs 5 and 8(b) on a case-by-case basis. The applicant should provide supporting information to establish that the subject alternative fund is sizeable and/or the management company is sufficiently experienced and resourced, as the case may be.

54/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 香港鰂魚涌華蘭路 18 號港島東中心 54 樓 +852 2231 1222 www.sfc.hk Page 2 of 6 Note: In general, depending on its investment strategy, a Listed Alternative Fund should preferably be able to generate regular income on a continuous basis; (c) the fund’s underlying investments, whether these are sourced or co-invested by firms with relevant experience; and (d) where the fund seeking authorisation is currently listed in another jurisdiction(s), the factors set out in paragraph 16 of this circular. Management company
7. The management company of an SFC-authorised Listed Alternative Fund must
satisfy the requirements set out in Chapter 5 of the UT Code. References to the key personnel of the management company and those of the investment delegate having the required experience and resources in 5.5 of the UT Code should be taken to mean having the required experience and resources to manage relevant alternative assets. Such experience and resources may be assessed on a group-wide basis as set out in Note 1 to 5.5(a) of the UT Code.
8. The SFC will consider, among others, the following factors when assessing the
acceptability of the management company. It should:
(a) have the requisite competence and experience on a group-wide basis in managing a public listed vehicle and complying with applicable regulatory requirements, or be able to demonstrate the ability to do so; (b) have sizeable assets under management (AUM) of at least HK$780 million (US$100 million4 ) invested in relevant alternative assets on a group-wide basis; and (c) have a good track record of regulatory compliance. Listing agent
9. The fund seeking authorisation must appoint a listing agent under Chapter 20 of the
Listing Rules5
. The SFC reserves the right to require a listing agent in relation to an SFC-authorised Listed Alternative Fund to be regarded as a sponsor where appropriate6 . 4 8.7(a) (iii) of UT Code. Please also refer to footnote 3 above. 5 20.06 of Listing Rules. 6 In such case, the listing agent must have the requisite licences and qualifications to act as a sponsor and must comply with all applicable sponsor obligations including those under Practice Note 21 and Chapter 3A of the Listing Rules and the SFC Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). In particular requirements under paragraph 17 of the Code of Conduct.

54/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 香港鰂魚涌華蘭路 18 號港島東中心 54 樓 +852 2231 1222 www.sfc.hk Page 3 of 6 Listing7 and dealing
10. An SFC-authorised Listed Alternative Fund should have procedure(s) and
mechanism(s) for it to be widely held8
. There should be an open market in the units or shares of the fund, which normally means the public holds at least 25% of the total units or shares of the fund at all times9 . Investments
11. Subject to paragraph 12, the requirements under Chapter 7 of the UT Code do not
generally apply to an SFC-authorised Listed Alternative Fund.
12. In general:
(a) we expect an SFC-authorised Listed Alternative Fund to invest in a well￾diversified portfolio of alternative assets comprising assets with varying investment life cycles where appropriate; (b) we do not expect the borrowing of an SFC-authorised Listed Alternative Fund to exceed 30% of its net asset value (NAV); (c) for an SFC-authorised Listed Alternative Fund adopting a fund-of-funds structure, we expect that:
(i) the value of the fund’s investment in units or shares of each underlying fund does not exceed 20% of the fund’s NAV; (ii) the investment objective and strategy of each underlying fund aligns with those of the SFC-authorised Listed Alternative Fund; and (iii) an underlying fund’s objective may not be investing primarily in other funds. Distribution policy
13. The distribution or dividend policy of an SFC-authorised Listed Alternative Fund must
be disclosed in its offering documents and must not result in structural decumulation of its capital. 7 SFC-authorised Listed Alternative Funds will be put under a standalone product category on the websites of the SFC and Hong Kong Exchanges and Clearing Limited (HKEX). They will have their own distinctive stock short names. Distinct stock code ranges will be designated for these funds. 8 8.11(b) of the UT Code. 9 8.08(1)(a) of Listing Rules.

54/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 香港鰂魚涌華蘭路 18 號港島東中心 54 樓 +852 2231 1222 www.sfc.hk Page 4 of 6 Publication of NAV per unit or share
14. To enable investors to appraise the premium or discount of an SFC-authorised Listed
Alternative Fund’s secondary trading price on SEHK to its NAV10, it is expected to calculate and publish the fund’s NAV on the fund’s website at least on a quarterly basis. Valuation
15. An SFC-authorised Listed Alternative Fund must comply with requirements under the
UT Code in relation to valuation11, in particular those under 8.712(o), (p) and (q), and disclose the applied key valuation assumptions and parameters in its annual reports13. Funds listed outside Hong Kong
16. The SFC may authorise for listing on SEHK a well-established Alternative Fund that is
(a) currently listed and regularly traded on internationally recognised stock exchange(s) open to the public and (b) subject to comparable regulatory requirements14. Disclosure
17. The offering documents, including the product key facts statement (KFS), of an SFC￾authorised Listed Alternative Fund should disclose the details of its investment
objectives and policy15, frequency for the publication of the fund’s NAV, valuation policies and models, as well as key risks associated with the closed-ended nature of the fund16, the nature of the alternative assets and investments in illiquid assets. Items under 8.7 (r) to (u)17 of the UT Code should also be disclosed in the offering documents where applicable, with disclosures reflecting the details of the SFC￾authorised Listed Alternative Fund as appropriate. 10 See expectation on trading discount in 8.11(c) of UT Code. 11 6.11, 6.11A, 6.11B, 6.11C and 6.12 of UT Code. 12 We expect 8.7(o), (p) and (q) to be complied with by an SFC-authorised Listed Alternative Fund regardless of whether it is a hedge fund under 8.7 of the UT Code or not. References under these provisions to “hedge fund assets” should be taken to mean underlying assets of the SFC-authorised Listed Alternative Fund. 8.7 (o), (p) and (q) generally require that (i) the investments of the fund must be independently and fairly valued on a regular basis. Where appropriate, internationally recognised accounting standards and the industry’s best practices should be applied on a consistent basis; (ii) full particulars of the valuation frequency, the valuation methods of the fund’s investments, the identity and qualifications of the valuation agent(s), the experience of the valuation agent(s) in evaluating assets of the fund and the relationship of the agent(s) with the fund’s management company or its group of companies must be disclosed in the offering document and annual reports; and (iii) the offering document of the fund must include a warning to the effect that some of the underlying investments of the fund may not be actively traded and there may be uncertainties involved in the valuation of such investments. Potential investors must be warned that the NAV of the fund may be adversely affected under such circumstances. 13 According to 11.6A of UT Code, financial reports must be prepared in compliance with the internationally recognised accounting standards which may include HKFRS or IFRS or such other accounting standards acceptable to the SFC. 14 For SFC-authorised Listed Alternative Funds established outside Hong Kong, other requirements under the UT Code (for example, the requirement under Chapter 4 of the UT Code regarding trustee/custodian) may be waived if applicants are able to demonstrate to the SFC that there are other comparable measures acceptable to the SFC. 15 C2 of Appendix C to UT Code, and 8.7(k)(vi) of UT Code for funds investing in other funds not authorised by the SFC. 16 8.11(g) of UT Code. 17 8.7 (r) to (u) generally require disclosure of key warning statements in the front cover of the offering document; relevant matters relating to investment operations and risk management with explanation of investment strategy and risks; and measures and safeguards against conflict of interest.

54/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 香港鰂魚涌華蘭路 18 號港島東中心 54 樓 +852 2231 1222 www.sfc.hk Page 5 of 6
18. In particular, risks relating to valuation must be disclosed, including:
(a) the lack of transparency on valuation of alternative assets; and (b) uncertainties involved in the valuation of alternative assets18 and that such valuation is heavily dependent on assumptions and valuation models.
19. The KFS of an SFC-authorised Listed Closed-ended Alternative Fund should contain
disclosures regarding the availability of the key valuation assumptions and parameters applied in valuing illiquid assets. These disclosures must be made available by the management company or Hong Kong representative on request and also on the fund’s website. Investor education
20. The management company of an SFC-authorised Listed Alternative Fund is expected
to carry out extensive investor education before launching the fund in Hong Kong19. Distribution by intermediaries - Client's knowledge test
21. SFC-authorised Listed Alternative Funds are complex products20. Except for
institutional professional investors and qualified corporate professional investors21, intermediaries should assess whether clients have knowledge of investing in relevant Alternative Funds or relevant alternative assets prior to effecting a transaction in SFC-authorised Listed Alternative Funds on their behalf22. A one-off knowledge test conducted by an intermediary prior to entering into a transaction in an SFC￾authorised Listed Alternative Fund is acceptable. If a client does not possess such knowledge, the intermediary may proceed only if it has provided adequate training to the client on the nature and risk of the relevant Alternative Funds or relevant alternative assets. Intermediaries should also provide clients with risk disclosure statements (which can be a one-off disclosure) specific to the relevant alternative assets and SFC-authorised Listed Alternative Fund. They should also ensure that their clients have sufficient net worth to be able to assume the risks and bear the potential losses of trading SFC-authorised Listed Alternative Funds.
22. In assessing whether a client can be regarded as having knowledge, the following
non-exhaustive criteria may be considered:
(a) whether the client has undergone training or attended courses on relevant alternative assets or Alternative Funds; 18 8.7(q) of UT Code. 19 7.3 of OP. 20 Note to 5.5 of the Code of Conduct, in particular, paragraph (vi). 21 “Institutional professional investors” is defined under paragraph 15.2 of the Code of Conduct as persons falling under paragraphs (a) to (i) of the definition of “professional investor” in section 1 of Part 1 of Schedule 1 to the SFO. “Qualified corporate professional investors” refers to corporate professional investors which have passed the assessment requirements under paragraph 15.3A and gone through the procedures under paragraph 15.3B of the Code of Conduct. 22 Where there has been no solicitation or recommendation, intermediaries do not need to comply with the suitability requirement, or the minimum information and warning statements requirements referred to in paragraphs 5.5(a) of the Code of Conduct.

54/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 香港鰂魚涌華蘭路 18 號港島東中心 54 樓 +852 2231 1222 www.sfc.hk Page 6 of 6 (b) whether the client has current or previous work experience related to relevant alternative assets or Alternative Funds; or (c) whether the client has prior trading experience in relevant alternative assets or Alternative Funds. Others
23. Due to a wide array of alternative assets available, the SFC may exercise its
discretion to impose additional conditions, modify requirements or allow flexibility from strict compliance with certain requirements under the UT Code, taking into account the fund’s nature and investment strategy, on a case-by-case basis as appropriate. Application and prior consultation
24. Prior consultation with the SFC is required before an applicant applies for
authorisation of an Alternative Fund for listing.
25. If you wish to seek clarification of any aspects of this circular, please contact the team
supervisor or case officer of the Investment Products Division who is responsible for overseeing the SFC-authorised funds of your fund group or client. Investment Products Division Securities and Futures Commission

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Circular
54/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 香港鰂魚涌華蘭路 18 號港島東中心 54 樓 +852 2231 1222 www.sfc.hk Page 1 of 7 23 January 2025 Circular on listed structured funds

1. This circular supplements the structured fund related requirements in 8.8 of the Code
   on Unit Trusts and Mutual Funds (UT Code). It sets out the additional requirements under which the Securities and Futures Commission (SFC) would consider authorising listed structured funds for public offerings in Hong Kong under sections 104 and 105 of the Securities and Futures Ordinance (SFO), particularly for specific types of listed structured funds, notably L&I Products and Defined Outcome Listed Structured Funds (as defined below).
2. It incorporates and supersedes the SFC’s Circular on Leveraged and Inverse Products
   and the related supplemental circular both dated 22 May 2020.
   Background
3. Listed structured funds are collective investment schemes (CIS) listed on a stock
   exchange which are complex investment products typically embedded with derivatives and leverage, or offer defined outcomes, protection or structured payouts when certain pre-determined conditions are met. Currently, listed structured funds authorised by the SFC in Hong Kong include leveraged and inverse products (L&I Products) that track broad-based equity indices or commodities indices.
4. In overseas markets, other types of listed structured funds have emerged and become
   increasingly popular, such as listed products using a fund structure that aim to deliver a daily return equivalent to a multiple of a single stock’s price return (Single Stock L&I Products) and those using options-based strategies to obtain long exposure to an underlying asset (such as an equity index) with capped upside potential in exchange for downside protection1 (Defined Outcome Listed Structured Funds).
5. In Hong Kong, the demand for these products is also growing. To meet such demand
   and facilitate market development, the SFC is prepared to consider the authorisation of these listed structured funds under the framework set out in this circular. The framework comprises general requirements for listed structured funds and additional safeguards applicable to specific types of listed structured funds.
6. The SFC may consider introducing additional requirements applicable to specific types
   of listed structured funds as necessary.
   General requirements
7. Listed structured funds seeking SFC authorisation for public offering in Hong Kong
   must meet the applicable requirements in the Overarching Principles Section (Overarching Principles Section) and UT Code in the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (SFC Handbook), in particular the applicable requirements related to exchange-traded funds (ETFs) in 8.6 of the UT Code given their exchange-traded nature. 1 Generally known as defined outcome ETFs in the United States.

54/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 香港鰂魚涌華蘭路 18 號港島東中心 54 樓 +852 2231 1222 www.sfc.hk Page 2 of 7
8. In view of their novelty and technical complexity, listed structured funds should also
meet the additional requirements set out in this circular (including those set out in the
Appendix) to protect the interests of the investing public and maintain the integrity of
the Hong Kong market.
Product naming
9. Listed structured funds should be named or identified differently to differentiate them
from conventional ETFs and other listed CIS products, and to reflect their product features. Product structure
10. Listed structured funds may extensively invest in and use financial derivative
instruments to achieve their investment objectives or outcomes, including the adoption of futures-based or swap-based replication structures or options-based investment strategies.
11. Where appropriate, the SFC will make reference to Chapter 15A of the Listing Rules in
considering the eligibility of underlying assets for listed structured funds (eg, market capitalisation threshold) and make necessary adjustments to reflect the features of a particular type of listed structured funds. Offering documents disclosure
12. In addition to the requirements under 8.6, 8.8, and Appendix C of the UT Code, the
offering documents of listed structured funds shall contain upfront disclosure of their key risks and features in the product key facts statement (Product KFS), so that investors will be aware of the different risk-return profile of listed structured funds from conventional ETFs and other listed CIS products. For example:
(a) the time horizon of the investment objective if the products are not intended for buy-and-hold or if there is a periodic reset to the products’ risk-return profile associated with options-based strategies; (b) the return of a futures-based investment strategy may not correlate with the spot price return of the futures’ reference asset; (c) heightened product volatility risk, where applicable; and (d) potential escalation of costs that are associated with derivatives and are internalised by the products, such as roll costs2 .
13. For listed structured funds using swap-based synthetic replication structures, we expect
clear disclosure of the costs of entering into the swap with the counterparty in the Product KFS. These should include all costs which are not captured by the ongoing charges figure under the circular to management companies of SFC-authorised Funds on “Disclosure of the ongoing charges figure and past performance information in the 2 Roll costs are costs incurred when replacing near-term futures contracts with long-dated ones (also known as rolling).

54/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 香港鰂魚涌華蘭路 18 號港島東中心 54 樓 +852 2231 1222 www.sfc.hk Page 3 of 7 Product Key Facts Statements”, as amended from time to time. We also expect clear disclosure of the maximum redemption fee. Market making arrangements
14. The provider of a listed structured fund shall ensure that there is at least one market
maker for the listed structured fund when its trading commences and on an ongoing basis. Performance simulator
15. The provider of a listed structured fund (excluding a delta-one product whose price
movements are expected to mirror those of its underlying assets on a one-to-one basis) is generally required to make available a “performance simulator”, which allows investors to select a historical time period and simulate the performance of the fund during that period based on historical data. To demonstrate the fund’s performance under different market conditions, we expect that:
(a) The historical period available in the performance simulator should cover the period since the launch of the fund. (b) The interface of the performance simulator should be user-friendly, highly intelligible and easy to navigate, using diagrams and tables where appropriate. (c) The website of the fund should include narratives to help investors understand the results of the “performance simulator” and set out the key assumptions, parameters and formulae used in the calculation. Investor education
16. Providers of listed structured funds are expected to conduct extensive investor
education before launching the funds in Hong Kong.
Distribution
17. As listed structured funds are derivative products, intermediaries are subject to the
applicable requirements under the Code of Conduct3 , particularly paragraphs 5.1A to
5.3 which are relevant to providing services to clients with respect to derivative products.
18. Intermediaries should also put in place appropriate measures, such as staff training, to
ensure that their staff are familiar with the risks and features of the investment products and comply with the applicable requirements when serving their clients. For details, please refer to the SFC’s circular on “Code of Conduct Requirements with respect to Derivative Products” dated 31 August 2010.
19. Intermediaries are also reminded to act in the best interests of their customers when
conducting their business activities. They need to be aware that gearing to invest in a product compounds the underlying risk. 3 Code of Conduct for Persons Licensed by or Registered with the SFC.

54/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 香港鰂魚涌華蘭路 18 號港島東中心 54 樓 +852 2231 1222 www.sfc.hk Page 4 of 7 Application
20. If you wish to seek clarification of any aspects of this circular, please contact the team
supervisor or case officer of the Investment Products Division (IPD) who is responsible for overseeing the SFC-authorised funds of your fund group or client.
21. You are also encouraged to consult the responsible IPD case team early on listed
structured fund proposals, particularly those that offer structured payouts or certain defined outcome or protection. Investment Products Division Securities and Futures Commission

54/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 香港鰂魚涌華蘭路 18 號港島東中心 54 樓 +852 2231 1222 www.sfc.hk Page 5 of 7
Appendix
Additional requirements for Leveraged and Inverse Products

1. This appendix sets out the additional requirements under which the SFC would
   consider authorising leveraged and inverse products, referred to as “Leveraged Products” and “Inverse Products” respectively, and “L&I Products” collectively4 .
2. These requirements are carried forward from the previous Circular on Leveraged and
   Inverse Products and the related supplemental circular both dated 20 May 2020, and have been extended to cover Single Stock L&I Products, which are a sub-set of L&I Products that reference only one single stock. Requirements Product structure
3. Given their technical complexities, the SFC will only accept applications for:
   (a) L&I Products referencing (i) liquid and broad-based equity indices, (ii) on a case￾by-case basis, non-equity indices, including commodities indices where roll costs do not have potentially outsized impact on the performance of the products2 ; (b) Swap-based L&I Products referencing Mainland equity indices, where we will keep in view the eligible replication structure of L&I Products from time to time; and (c) Single Stock L&I Products referencing a highly liquid mega-cap stock listed on a major overseas exchange5 . In considering the applications of L&I Products, we will generally assess (i) the liquidity of underlying assets, (ii) costs internalised by the products, and (iii) fairness of product design, among other factors.
4. L&I Products, including Single Stock L&I Products, should be subject to a maximum
   leverage factor of 2x to -2x in general, except that:
   (a) Inverse Products referencing Mainland equity indices should be subject to a maximum leverage factor of one time (-1x); and (b) subject to an underlying stock’s volatility, only a lower leverage factor may be allowed for Single Stock L&I Products. 4 Leveraged Products typically aim to deliver a daily return equivalent to a multiple of the underlying asset return that they track. Inverse Products typically aim to deliver the opposite of the daily return of the underlying asset that they track. To produce the specified leveraged or inverse return, these products have to rebalance their portfolios, typically on a daily basis. 5 This, however, excludes overseas listed stocks which may be dually listed in Hong Kong, as well as stocks listed on any Mainland exchange.

54/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 香港鰂魚涌華蘭路 18 號港島東中心 54 樓 +852 2231 1222 www.sfc.hk Page 6 of 7 Product naming
5. In view of the day trading nature of L&I Products as opposed to the investment nature
of conventional ETFs, SFC-authorised L&I Products should not be named “ETFs”. Instead, these products must be named “Leveraged Product” or “Inverse Product”, as the case may be. In addition, the product name should always include the leverage or inverse factor and the word “daily” to emphasise their daily rebalancing feature. To illustrate:
(a) a two-time Leveraged Product should be called “[Issuer] [Index / Stock Name] Daily (2x) Leveraged Product”6 ; and (b) a one-time Inverse Product should be called “[Issuer] [Index / Stock Name] Daily (-1x) Inverse Product”7 .
6. In addition, L&I Products will be put under a standalone product category on the
websites of the SFC and Hong Kong Exchanges and Clearing Limited (HKEX). They will have their own distinctive stock short names that begin with an “L” for Leveraged Products and an “I” for Inverse Products. Distinct stock code ranges will also be designated for L&I Products.
7. Further details regarding the stock short name and stock code arrangements can be
found on the HKEX webpage8
.
Offering documents disclosure
8. The offering documents of L&I Products shall contain upfront disclosure of the following
in the Product KFS to alert investors that L&I Products do not share the buy-and-hold characteristics of conventional ETFs:
(a) a warning against holding L&I Products for longer than the rebalancing interval, typically one day; (b) L&I Products are designed as a trading tool for short-term market timing or hedging purposes and not for long-term investment; (c) L&I Products are only suitable for sophisticated trading-oriented investors who constantly monitor the performance of their holdings on a daily basis; and (d) the performance of L&I Products, when held overnight, may deviate from the underlying indices. Market making arrangements
9. To enable an L&I Product to meet its investment objectives as a short-term trading tool,
it is important that investors are able to enter and exit their investments. As such, the 6 The Chinese name of the Leveraged Product is expected to be [發行人][指數 / 公司]每日槓桿(2x)產品. 7 The Chinese name of the Inverse Product is expected to be [發行人][指數 / 公司]每日反向(-1x)產品. 8 Please refer to HKEX website at https://www.hkex.com.hk/products/securities/exchange-traded-products/overview.

54/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 香港鰂魚涌華蘭路 18 號港島東中心 54 樓 +852 2231 1222 www.sfc.hk Page 7 of 7 presence of market makers as well as their performance is particularly important for L&I Products. In view of this, (a) we require an L&I Product to be terminated in the event of resignations of all market makers. The termination should take place at about the same time as the resignation of the last market maker becomes effective. The L&I Product provider and market maker should provide for a sufficiently long resignation notice period to allow for an orderly unwinding and termination of the product. In addition, advance notices of termination must be issued to investors pursuant to 11.5 of the UT Code; and (b) the performance of market makers will be monitored by HKEX on an ongoing basis. Those failing to meet the performance requirements set by HKEX may have their market maker permits revoked and/or be banned from applying for market maker permits for other L&I Products for a period of time. Please refer to the HKEX website for details of the relevant HKEX requirements. Margin financing
10. Please see the HKEX circular to exchange participants advising them not to provide
margin financing to investors for trading of L&I Products9 .
9 Available via http://www.hkex.com.hk/eng/market/partcir/sehk/2016/Documents/MKDCMS00116E.pdf.