Singapore draws a blank on L&I ETF applications

Hong Kong could see its first leveraged and inverse ETFs list next month, but sources say no applications have been filed in Singapore and that SGX is frustrated by the lack of take-up.
Singapore draws a blank on L&I ETF applications

Singapore’s bid to become an exchange-traded fund (ETF) centre seems to have hit the skids, even as rival Hong Kong looks set to launch its first leveraged and inverse (L&I) ETFs next month.

Sources say the Monetary Authority of Singapore has yet to receive any applications for L&I products, despite the products enjoying an array of incentives. Meanwhile the city-state’s stock exchange is said to be unhappy about the lack of guidance from the regulator.

Singapore's rules on L&I ETFs were announced in January and the Singapore Exchange (SGX) has said L&I products listing there would be able to offer investors 3x leverage and -3x inverse exposure. That compares to the 2x leverage and 1x inverse that will be available in Hong Kong.

Other measures were introduced to aid liquidity, including a wider scope of available indices for ETF linkage than Hong Kong, covering all markets including China and Hong Kong. The only exception was inverse ETFs for China, which are not allowed.

Furthermore, the SGX introduced a number of incentives to aid ETF liquidity and encourage new products. These include making trade reporting and clearing a free service until the end of 2017.

On top of all those incentives, all physically replicated ETFs are excluded from the MAS’s complex products regime (the so-called SIP regime). This means these products can be sold to retail investors, who are considered key to the market’s development.

Insufficient demand
However, the measures have not been sufficient to entice fund promoters to look at applying for fund approval.

Market observers say issuers are unconvinced there is sufficient demand locally to make it worthwhile launching funds in the Lion City. One fund manager told AsianInvestor: "There are no takers for these products."

No asset managers can see a business opportunity in these new products, agreed Stewart Aldcroft, Hong Kong-based senior fund industry adviser at Citi.

The MAS declined to confirm whether any fund companies had applied for approval of L&I products.

Bin Wern-Sern, Singapore-based director at law firm JWS Asia, told AsianInvestor there has been interest from fund promoters in L&I fund development. But he would not be drawn on how this might translate into applications, nor whether there was any more than one firm in the potential pipeline.

Guidance gap
Industry observers note the MAS offered very little guidance to the market about the new ETFs, leaving the SGX to explain how the new rules should be interpreted. Executives at the bourse are said to be unhappy about the situation, although they did not respond to requests for comment.

Aldcroft said: “The SGX people are tearing their hair out, because they saw this great competitive edge, but they haven’t been able to take advantage of it.”

Bin said the ETF regulations are part of a campaign by the MAS and SGX to provide broader market access that utilises a range of products, including futures and foreign exchange.

On May 3, SGX launched MSCI China index futures and options, allowing investors to trade Chinese ADRs like Baidu that are quoted on the SGX.

There are currently 81 ETFs listed in Singapore. Of these, 59 are equity-based, 10 fixed income, six focused on commodities and six on money market ETFs. Trading is dominated by a few well-known ETFs such as State Street's SPDR Gold ETF, which in April represented 24.3% of total trading. That is down from its year-to-date peak, which was 43.9% in February.

This compares with the 203 ETFs listed in Korea, where the most traded fund, Samsung Asset Management's Kodex Leverage product, represents a fairly consistent 23% of market turnover in recent months.

Other developments relating to financial advice on ETFs may also boost their trading liquidity. In April, the MAS introduced measures allowing financial advisers – on a case-by-case basis -- to facilitate the buying and selling of ETFs directly for retail investors. Previously, financial advisers could only advise clients to buy ETFs from brokers, instead of directly helping them with the transaction through a platform.

To qualify, advisers must apply to the MAS, with one condition of approval being that the adviser operates a fee-based advice model. “The rationale,” said Bin, “is that in the US, financial advisers adopting a fee-based model were very helpful in the growth of the ETF market.”

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