Economic Observer reporter Hong Xiaotang and intern Zhang Pengrui

From August 10th to 12th, multiple high premium LOF (Listed Open End Fund) products that were highly sought after by funds suffered heavy losses in the trading of public funds on the exchange.

On August 10th, the global chip LOF (501225. OF) of Jingshun Great Wall was immediately blocked by a huge number of sell orders and hit the limit down. Southern crude oil LOF (501018. OF), E Fund crude oil LOF (161129. OF), Jia Shi crude oil LOF (160723. OF) and others fell more than 6% to 9%. The only commodity futures LOF in the entire market, Guotou UBS Silver LOF (161226. OF), also fell 6.77% in response.

Behind the huge shock in the LOF product market is a document aimed at addressing the chaos of high premium speculation and liquidity depletion in on exchange funds. On August 7th, the Shanghai and Shenzhen Stock Exchanges simultaneously released the "Notice on Soliciting Public Opinions on Improving the Relevant Arrangements for Listed Open end Funds" (hereinafter referred to as the "Notice"), which intends to classify and clarify the termination of listing situations and procedures for commodity futures LOF, QDII (Qualified Domestic Institutional Investors) LOF, and small-scale LOF.

How will the high premium arbitrage model come to an end, from its emergence as an innovative product in 2004 to the current plan to delist related products that account for over 40% of the market's LOF? How can fund companies properly handle investor demands? What is the future of tool based products in the field?

Set a delisting red line

In August 2004, the "Shenzhen Stock Exchange Listing Open end Fund (LOF) Business Rules" were officially released and implemented after being approved by the China Securities Regulatory Commission. Currently, there are over 400 LOF products on the market. LOF can be purchased and redeemed at net asset value in banks, or bought and sold at market price on exchanges. Some LOF products have chaotic phenomena such as insufficient on-site liquidity and high premium speculation. As LOF enters its 20th year of development, the exchange has developed highly targeted "prescriptions" to address the structural risks of different LOF products.

Among them, the Notice intends to require the termination of the listing of commodity futures LOF and QDII LOF no later than December 31, 2027. Considering the large stock size and relatively active market trading of these two types of products, and the high premium risk arising from institutional constraints such as limited foreign exchange quotas or futures position limits, the regulatory authorities have given a transition period of more than one year to allow sufficient time for the market to smoothly digest the stock and prevent liquidity risks caused by hasty delisting. At the same time, from the date of implementation of the rules, the abbreviations of related products in the market will be marked with "*" for management.

At the same time, for small-scale LOFs with daily net asset value below 10 million yuan for 60 consecutive trading days, the Notice proposes that there will be no transition period, and once the new regulations are implemented, a mandatory delisting procedure will be initiated; If the red line is reached for 40 consecutive trading days, the fund manager shall issue risk warning notices on a daily basis.

Several interviewed institutional personnel believe that these two types of delisting situations hit the core focus of the current LOF operation.

The head of the product department of a large and medium-sized public fund in Beijing pointed out to the Economic Observer that the high premium of commodity futures LOF and QDII LOF is rooted in the "supply side interruption". When the QDII foreign exchange quota is exhausted or the commodity futures position reaches the upper limit, the over-the-counter subscription channel is closed, the cross system arbitrage mechanism is paralyzed, and the over-the-counter chips are easily separated from the fundamentals to form a foam under the pursuit of funds; Small scale LOF, on the other hand, is a tool manipulated by market makers due to its small size and extreme lack of liquidity. A very small amount of funds can significantly boost or smash the market.

However, from the perspective of rule design, regulatory authorities are not imposing a one size fits all approach on LOF products. Instead, they plan to adopt a flexible arrangement of "delisting without liquidation", which not only eliminates the high premium carriers of on exchange trading, but also retains the off exchange redemption function of the product, maximizing the protection of investors' legal rights and interests.

Three days of horror

According to Wind data, there are currently 402 LOF products with effective scale data in the entire market, of which about 125 are key products involved in this delisting adjustment, accounting for more than a quarter of the total number of LOFs. The total on-site scale is about 26 billion yuan. Among them, there are 33 QDII LOFs with an on-site scale of approximately 18.7 billion yuan; There is one commodity futures LOF with an on exchange size of approximately 6.58 billion yuan; There are as many as 113 small and micro LOFs with an on-site scale of less than 10 million yuan.

Based on the performance of three consecutive trading days from August 10th to 12th, the market's digestion process of the new regulations showed a trend of panic and stampede on the first day, severe differentiation on the second day, and stabilization on the third day.

On the first trading day after the announcement of the "Notice", the risk aversion sentiment of public fund on exchange trading quickly spread, and the decline list was almost crowded by the high premium QDII and commodity futures LOF in the early stage.

Among them, Jingshun Great Wall's global chip LOF, with outstanding performance of over 50% within the year, had previously risen to a premium rate of over 30%. On August 10th, the fund opened with a one word limit down, and the closing discount rate quickly narrowed; Southern crude oil LOF plummeted by 9.26%, E Fund crude oil LOF fell by 7.10%, and Jia Shi crude oil LOF fell by 6.89%.

It is worth mentioning that the on-site scale of Guotou UBS Silver LOF, which reached 6.58 billion yuan, fell 6.77% in a single day, significantly compressing the premium space.

On that day, the average increase in LOF in the entire market was only 0.22%, and high premium varieties experienced concentrated liquidation.

With the release of panic selling on the first day, the next day's market showed complex differentiation characteristics, and the selling pressure of Guotou UBS silver LOF continued, falling another 5.94% in a single day; Some small and micro LOFs, such as Caitong Sci Tech Innovation LOF (501085. OF), experienced a decline of 9.08%.

However, thanks to the rebound in international crude oil prices, Huabao Oil and Gas LOF (162411. OF) and Guangfa Dow Jones Oil LOF (162719. OF) rose by 5.25% and 4.61% respectively.

In addition, small-scale LOFs such as Zhongjin Sci Tech Innovation Theme LOFs were pulled up to the limit up by funds due to a lack of chips on the market.

As of August 12th, the market as a whole has become more rational, with an average LOF increase of 0.43% across the entire market.

The decline in global chip LOF and Guotou UBS silver LOF has narrowed to 1.21% and 0.10% respectively. The deviation between the price and net value of high premium products in the early stage has significantly decreased, and funds have accelerated their exit. The market is gradually returning to trading normalcy.

From the subscription status, as of August 12th, out of 33 QDII LOFs, 16 have suspended subscriptions, 7 have suspended large subscriptions, and 10 have opened subscriptions.

On August 7th, the average relative net value premium rate of 16 QDII LOF products that were temporarily suspended from subscription was 5.74%, while the average discount rate of 10 products that were open for subscription was 0.73%. As of August 12th, the average premium rate for suspended subscription products has dropped to 1.28%, while open subscription products are still at a slight discount of approximately 0.48% overall.

Implement Delisting

Faced with policy adjustments and market fluctuations, various fund companies have shown a highly cautious and proactive attitude in response.

Several public funds interviewed by reporters have stated that they have established a special working group in the first instance to comprehensively review their LOF products related to new regulations and deploy subsequent plans for product delisting or transformation.

Fund companies have adopted differentiated response measures for different product types.

For commodity futures and QDII LOF, fund companies generally indicate that they will not hastily delist when the products show high premiums, but tend to fully utilize the transition period proposed in the Notice until the end of 2027. Submit documents and publish announcements at critical time points to guide investors towards a smooth transition. If it is decided to transform LOF into a regular over-the-counter open-end fund after evaluation, a holder selection period of 20 trading days will be strictly set according to regulations. During this period, on exchange subscriptions will be suspended, but redemption and cross system custody transfer channels will remain unobstructed.

Several fund companies have also revealed that they have established daily monitoring mechanisms for mini products that touch the red line of millions. Once the net asset value of LOF products falls below 10 million yuan for 40 consecutive trading days, a risk warning announcement will be immediately activated; If the product triggers the condition for 60 consecutive trading days, it will be suspended from trading on the next trading day and the delisting procedure will be initiated in accordance with the law.

The compliance officer of a medium-sized public fund in South China pointed out that under the guidance of the LOF new policy, the top priority of the company's current work is to do a good job in investor education and information disclosure. Among them, for high premium products on the market, the company will continuously issue premium risk warning announcements and implement temporary intraday trading suspensions if necessary to prevent investors from blindly chasing high prices.

The compliance officer further stated that by collaborating with securities firms and other sales channels, the process for holders to transfer their on exchange shares to off exchange (cross system transfer of custody) will be simplified, ensuring that investors who wish to hold long-term shares can seamlessly switch to off exchange channels to continue holding.

Looking ahead to the future, Jiang Rui, a researcher at GeShang Fund, stated that opportunities for LOF arbitrage will significantly decrease, but will not completely disappear. Inventory LOFs with good scale and liquidity can still be used for both on and off market arbitrage, but the frequency of returns and arbitrage opportunities will decrease.

(Author Hong Xiaotang)