Taiwan's market regulator is moving to build up its investment industry by opening up the available range of products to include hedge strategies for retail investors and leveraged/inverse exchange-traded funds, among others.
Rosemary Wang, deputy director-general in the regulator's securities and futures bureau spoke to Christina Wang about its progress and thinking behind this.
The full interview appears in the May 2016 issue of AsianInvestor magazine. We have already published extracts from it on the FSC's plans to introduce member choice of funds under the central pension scheme and Wang's comments on mutual recognition of funds, and fee models.
RW: The FSC is relaxing regulations to increase the diversity of domestic fund products and flexibility of their investments. For instance, we allowed fund houses to issue and raise capital for leveraged and inverse ETFs, widened the band of equity investment in balanced funds, and allowed fund houses to launch renminbi-dominated funds or funds comprising renminbi share classes, as well as multi-currency funds that have to include new Taiwan dollar [NT$] share classes.
Also, fund houses can now have new onshore funds registered, effectively, 12 working days after their submissions for bond, ETF, principal-guaranteed and money-market funds that invest in domestic markets; and after 30 working days for their submissions for bond, balanced, index fund, ETF, principal-guaranteed and money-market funds that invest in overseas markets.
The FSC made leveraged and inverse ETFs available to Taiwanese investors from the end of 2014. What was behind this move?
We have studied leveraged and inverse ETFs for a long time. In the US these products are mostly used by institutions, and we were concerned that retail investors would not fully understand the risks involved. But retail investors buy futures and warrants, and so they have experience of derivatives products. As you say, we started to allow them from the end of 2014, but brokers have to state clearly what the risks are, that the product just tracks the daily performance of an index but may deviate over the long run given the effect of compound interest. Investors need to sign a risk disclosure statement before buying any of these products.
Is there a need for more innovative products to be introduced in future?
Since leveraged and inverse ETFs went live there have been almost no disputes caused by investor misunderstanding. Leveraged and inverse futures ETFs will be given the go-ahead in the first half of this year. We will require the TWSE to educate investors continuously and make sure they understand the risks.
What other regulatory relaxations FSC has given in recent years?
Fund managers want more regulatory relaxation to allow them to create a more diversified fund offering. We have made many efforts in recent years, not just allowing leveraged and inverse ETFs. We permitted greater flexibility in the asset allocation of balanced funds: the investment range allowed for equities used to be between 30-70%, but since October 2013 it has been 10-90%. In February we also permitted dual-currency ETFs.
When will the FSC allow fund houses to provide alternatives exposure to retail investors?
Fund managers are advocating the approval of alternative funds or hedge fund for retail investors, which relates to the use of derivatives and involves shorting. Fund houses can issue hedge funds through private placement, which high-net-worth individuals can buy.
We are studying the landscape to try to understand demand, to see how it is done in other markets and whether it can be opened out in Taiwan. It is possible this may get the green light in the second half of this year.
The FSC is studying the feasibility of opening alternative funds to the mutual fund industry. If it gets the green light, it will initially be hedge funds that invest in public securities and with supplementary measures protecting investors and meeting fund managers’ demands. FSC will invite industry practitioners to our office to learn about demand for and actual execution of such investment.