Summary of Key Points
The Shanghai and Shenzhen Stock Exchanges have recently released draft regulations for the delisting of LOF (Listed Open-End) funds, addressing two types of LOFs that have long been problematic in the market: QDII LOFs (investing in overseas markets) and commodity futures LOFs (such as silver futures), which are prone to speculation, as well as "mini-LOFs" with too small a scale and depleted liquidity. The new regulations aim to eliminate the phenomenon of high premiums caused by speculation, protect investors, and improve the fund exit mechanism. The affected funds total approximately 25 billion yuan, and the draft is currently in the feedback collection phase; the final implementation date is yet to be determined.
I. Which Types of LOFs Are the New Regulations Targeting?
The new regulations differentiate between two criteria for delisting: "type" and "scale," with different approaches:
1. Type: QDII/Commodity Futures LOFs – A transition period until the end of 2027
These types of LOFs, which invest in overseas markets (such as U.S. stocks or crude oil) or commodity futures (such as silver), often face issues with insufficient foreign exchange quotas or trading restrictions on futures positions, leading to the closure of over-the-counter (OTC) subscription channels. When the market heats up and the number of shares available for trading becomes limited, funds can only be purchased from existing holders, driving prices far above their net asset value (resulting in high premiums). The new regulations require these LOFs to be delisted by December 31, 2027 at the latest. During this period, a "*" symbol will be added before the fund's name to warn of potential risks, and fund companies must inform investors in advance about how to sell their shares or transfer them to OTC markets.
(For example, the Shenzhen Stock Exchange includes the Guotou Ruibin Silver Futures LOF in this category, while the Shanghai Stock Exchange mainly targets QDII LOFs.)
2. Scale: Mini-LOFs – Delisted immediately if the scale falls below 10 million shares for 60 consecutive days
LOFs with too small a scale (e.g., with a net asset value of less than 10 million shares for 60 consecutive days) will be delisted without a transition period. However, investors will receive risk warnings 40 days in advance. After delisting, the fund can choose to transform into an ordinary OTC fund or liquidate, ensuring that investors can still redeem their shares.
There are differences in the specific requirements between the two exchanges: The Shenzhen Stock Exchange requires fund companies to submit delisting documents by November 12, 2027, otherwise, the LOF will be delisted immediately; the Shanghai Stock Exchange provides a 20-day "choice period" for transformed funds, allowing investors to sell their shares or transfer them to OTC markets, while the Shenzhen Stock Exchange ensures transparency through continuous announcements over 20 days.
II. Why Are These LOFs Being Delisted?
The main reason for delisting these LOFs is speculation, which often leads to significant losses for retail investors:
- Case 1: Guotou Silver LOF: At the beginning of this year, as silver prices rose, this LOF was heavily speculated on, with premiums exceeding 30%. Retail investors bought in, only to see prices plummet later, resulting in substantial losses.
- Case 2: Crude Oil LOFs: Conflicts in the Middle East in the first quarter drove up oil prices, causing multiple crude oil LOFs to have premiums of over 40%, and some even experienced trading suspensions. Investors continued to buy despite the suspensions, only for the premiums to collapse.
- Mini-LOFs Are Even More Extreme: For example, the Caitong Furui Hybrid LOF had an on-exchange scale of less than 3 million shares, but its daily trading volume could reach over 200,000 shares, leading to extreme price fluctuations.
The root of the problem lies in the "dual pricing" mechanism of LOFs: OTC transactions are based on net asset value, while on-exchange trades are based on market prices. Under normal circumstances, arbitrage would eliminate price discrepancies, but when OTC subscriptions are closed (such as due to foreign exchange quota issues), the arbitrage mechanism fails, and on-exchange prices become inflated. Social media platforms also spread "arbitrage strategies," leading retail investors to buy in without understanding the risks.
III. Delisting Does Not Equal Liquidation! What Should Investors Do?
Many people think that delisting means losing all their investment, but this is not the case:
- Delisting Only Means Ceasing Trading on the Exchange: The fund can continue to operate normally, and investors have three options for handling their shares:
1. Sell them directly on the exchange while there are still trading opportunities.
2. Apply for a redemption to receive their money based on the net asset value of the fund.
3. Transfer the shares to an OTC account and redeem them as if purchasing a regular fund.
- Risk Warning: If the LOF you hold has a high premium (e.g., 30%), there may be a rush to sell before delisting, causing prices to drop rapidly to the net asset value. Investors who bought at a high price will lose the premium amount. It is recommended to check the announcements promptly to see if your fund is on the delisting list and take appropriate action as soon as possible.
IV. Long-Term Impact of the New Regulations:
- Reduced Speculation: The affected funds total only about 25 billion yuan, which is a small portion of the overall public fund market (over 27 trillion yuan). Moreover, delisting does not affect the OTC redemption of funds, so it has little impact on the broader markets (such as stocks or futures).
- Change in the Speculation Landscape: The arbitrage opportunities for QDII and commodity futures LOFs will be reduced, making it less attractive for speculation.
- ETFs Become More Popular: Some functions of LOFs will be replaced by ETFs, which offer more convenient trading and better liquidity. As a result, the scale of LOFs is expected to shrink, and ETFs will gain a stronger position in the market.
In summary, the new regulations aim to reduce speculation and return funds to their fundamental role as investment instruments rather than speculative tools. For retail investors, it is advisable to avoid buying into small-scale, high-premium LOFs due to the increased risks.
Conclusion
The new delisting regulations are a targeted solution to market issues, addressing both the problem of high premiums and the presence of worthless mini-LOFs. For investors, it is crucial to understand that delisting does not equate to losing all their investment. They should handle their affected funds promptly. For the market as a whole, these regulations are an important step in improving the fund exit mechanism, which will contribute to a healthier financial environment in the long run.
(The draft regulations are still being reviewed, and final details may change. It is recommended to continue monitoring the official announcements.)