Where to start

When repeated public announcements and trading halts fail to curb high-premium speculation, the rules themselves must be upgraded. Mini LOFs (Listed Open-Ended Funds) experienced price surges with just tens of millions of yuan, while premiums often exceeded 30%, and over a hundred announcements couldn't suppress capital-driven speculation. In the past, some niche LOFs frequently saw prices skyrocket, luring retail investors to buy at high levels. Now, the market is receiving a significant regulatory measure.

Recently, both the Shanghai and Shenzhen stock exchanges released draft rules for LOF delisting, identifying two types of mandatory delisting scenarios. These address long-standing issues of high-premium trading and liquidity droughts in mini funds. Estimates suggest these changes will affect approximately 250 billion yuan in existing products. Industry insiders believe the new rules will eliminate speculative LOFs that rely on low liquidity to manipulate prices and trade at premiums detached from fundamentals. This move marks a major institutional reform for the LOF market, aiming to improve the fund market's exit mechanism, mitigate risks from high-premium speculation, and better protect investor rights. The draft rules are currently open for feedback until August 22, with the final implementation date yet to be determined.

A structured delisting process

The delisting process under the new rules is a phased, step-by-step procedure. Recognizing differences in product attributes and investment operations across LOF types, the rules do not adopt a uniform exit method. Instead, they set differentiated arrangements for various products, dividing termination of listing into two dimensions to ensure orderly risk resolution.

From a product perspective, QDII LOFs are included in the mandatory delisting scope by both the Shanghai and Shenzhen exchanges. The Shenzhen exchange also includes commodity futures LOFs, such as the UBS SDIC Silver Futures LOF, due to its market. These products, tied to overseas markets or commodity futures trading, are often constrained by foreign exchange quotas or position limits, leading to abnormally high premiums when subscriptions are suspended. To manage existing risks smoothly and avoid market shocks from concentrated delistings, these products must terminate listing by December 31, 2027, at the latest. From the effective date of the rules until formal delisting, the fund's on-exchange abbreviation will be prefixed with "*" to signal risk to investors. Additionally, fund managers must issue announcements before the market opens on the effective date, reminding investors of options like redemption, sale, or cross-system transfer to off-exchange accounts to manage risks.

From a scale perspective, the rules target mini LOFs lacking long-term viability, establishing quantitative delisting and warning standards. Both exchanges agree that LOFs with daily on-exchange net asset value below 10 million yuan for 60 consecutive trading days must terminate listing, with the period starting from the notice's effective date. Unlike the first two categories, these mini funds will not have a transition period, proceeding directly with delisting under the standard process. To prevent investor surprises, a "40-day warning line" is set: if net asset value stays below 10 million yuan for 40 consecutive days, the fund manager must issue daily risk warnings from the next trading day until the condition resolves or delisting begins. Once triggered, fund managers can either convert the fund to a regular off-exchange fund or liquidate it, both ensuring investor exit rights.

While core standards are consistent, the Shenzhen and Shanghai exchanges differ slightly in execution. The Shenzhen exchange imposes stricter delisting timelines, requiring fund managers to submit termination documents by November 12, 2027, or face automatic delisting. The Shanghai exchange has no such deadline. For investor exit arrangements, the Shanghai version introduces a "investor choice period." If a fund manager applies to convert a LOF to an off-exchange fund, a 20-trading-day choice period is set, during which subscriptions are suspended but trading, redemptions, and cross-system transfers are allowed, providing ample time for investors. The Shenzhen exchange, while not specifying a "choice period," requires daily disclosure of termination announcements for 20 consecutive trading days after the delisting decision, with the LOF terminating on the next trading day after the period ends, extending information disclosure for investor benefit. Regarding the "trigger point," the Shanghai exchange uses the fund manager's announcement of conversion or liquidation as the benchmark, while the Shenzhen exchange uses the date of filing termination documents.

Why are they being pushed out?

The core goal of this rule revision is to address long-standing high-premium speculation in the LOF market and fill regulatory gaps in on-exchange funds. As a market department official from a Shanghai-based fund company told Yicai, "commodity futures LOFs, QDII LOFs, and small-scale LOFs are targeted for delisting because they are most prone to high-premium speculation." LOFs, as open-ended funds with both off-exchange subscriptions and on-exchange trading, have two pricing systems: off-exchange, based on net asset value per share, and on-exchange, based on market prices. In the early days before ETFs became widespread, LOFs filled the gap for on-exchange trading of open-ended funds. However, as the market evolved, especially with the rapid rise of ETFs, LOFs' structural weaknesses became apparent. Factors like market supply and demand, investor sentiment, and trading mechanisms can lead to discounts or premiums.

"The pricing logic of LOFs should rely on arbitrage between the primary and secondary markets to eliminate premiums, but this mechanism fails when products face subscription restrictions," the official explained. Commodity futures LOFs and QDII LOFs, constrained by futures position limits and insufficient foreign exchange quotas, often see their off-exchange subscription channels closed. "When market sentiment heats up, and on-exchange share supply cannot increase promptly, capital chases limited existing shares, driving up prices and creating premiums detached from net asset value." He noted that social media sharing of arbitrage strategies and retail investors' lack of risk awareness further amplify speculative trading, leading to a pattern of "buying at high levels and facing premium crashes."

Historical cases illustrate these risks. For example, early this year, the UBS SDIC Silver Futures LOF saw a sharp rise in silver prices, drawing heavy capital and retail investors, but premiums quickly collapsed, causing significant losses for those buying at high levels. Similarly, in the first quarter of this year, Middle East conflicts boosted oil and gas assets, with multiple crude oil-themed LOFs seeing premiums exceed 40%, triggering repeated trading halts. Yet, speculative sentiment remained strong, with "the more halts, the more buying" behavior, accumulating risks. Small-scale mini LOFs also face prominent speculation risks. Social media buzz about "LOF arbitrage harvesting" continues to lure retail investors, generating short-term trades. When sentiment is high, small amounts of capital can trigger consecutive price limits and soaring premiums, but when enthusiasm fades, prices revert sharply. In June this year, several mini LOFs experienced roller-coaster price movements. For instance, Caitong Furui Mixed LOF, with on-exchange assets under 3 million yuan, saw daily trading volumes of just over 200,000 yuan on June 17 and 18, yet hit consecutive price limits, followed by two consecutive limit-down days. Another fund, Caitong Jingxuan Mixed LOF, with assets under 7 million yuan, had a similar pattern, with trading volumes of only over 700,000 yuan on limit-up days.

Currently, high premiums persist. Wind data shows that as of August 7, 12 LOFs had premiums exceeding 5%, with the highest at 31.13% for Invesco Great Wall Global Chip LOF, while others like Caitong Fuxin Fixed Maturity Mixed, UBS SDIC Silver LOF, Southern Crude Oil LOF, and E Fund Crude Oil LOF had premiums over 17%.

Delisting is not liquidation

In terms of market impact, the new rules have a clear scope and defined boundaries. Wind data shows that as of August 7, there were 402 listed LOFs (counting different share classes separately), with a total on-exchange scale of about 549.7 billion yuan. Among them, 34 QDII and commodity futures LOFs are subject to mandatory delisting, with a total on-exchange scale of about 246.38 billion yuan. This includes well-known products like the UBS SDIC Silver LOF (62.82 billion yuan), E Fund S&P Information Technology LOF (32.47 billion yuan), and others like ICBC India Fund LOF, HFT USD Bond LOF, Harvest Crude Oil LOF, Southern Crude Oil LOF, Hua Bao Overseas Technology LOF, and Hua Bao Oil & Gas LOF, all with on-exchange scales over 10 billion yuan. Among the remaining 368 LOFs, 109 have on-exchange net asset values below 10 million yuan, totaling 4.43 billion yuan, with 15 products, including BOCOM Income LOF and Cinda澳 Xin'an LOF, having less than 1 million yuan. Notably, the new rule requires the 60-day average, not a single day's value. In terms of liquidity, these small funds had average daily trading volumes below 520,000 yuan in the past month, with over 77% of them under 80,000 yuan, indicating significant price volatility risk from small capital inflows.

Industry insiders stress that LOF delisting only means the product will no longer be listed on the exchange, not that the fund is liquidated or investors lose their principal. Regardless of the exit path, investors can redeem or liquidate to recover the net asset value. Additionally, delisting does not involve selling the fund's assets, so its impact on the underlying market is limited. For investors holding these products, the new rules offer three options: sell on-exchange shares, submit redemption requests, or transfer to off-exchange accounts via cross-system transfer, maintaining the fund as a regular open-ended fund for later redemption. This ensures full investor choice.

Industry insiders believe the direct impact of the new rules can be summarized as "limited scope, manageable market shock, and a shift in arbitrage dynamics." The 250 billion yuan in delisting-targeted LOFs is tiny relative to the overall public fund market. Delisting does not equate to liquidation, so fund operations and off-exchange subscriptions remain unaffected. For arbitrage, there will be structural impacts, with narrowing arbitrage opportunities for QDII and commodity futures LOFs. Some interviewees suggest that the expectation of delisting for high-premium QDII or commodity futures LOFs could directly suppress speculative sentiment. If many investors sell before delisting, high-premium LOF prices may quickly revert to net asset value, causing direct losses for those who bought at high levels. "The core risk for investors is premium retracement," the fund market department official stated. High premiums mean investors buy at prices significantly above net asset value. When premiums fall, even if net asset value remains unchanged, investors can suffer losses. He advises investors to monitor announcements to understand if their holdings are affected and the timeline, and to handle shares through sale, redemption, or transfer to off-exchange accounts. He also reiterates avoiding "speculation on delisting."

"This rule change is not just about pushing some LOFs out of the market; it's about structurally reducing space for high-premium speculation and irrational trading," a fund industry analyst said. The practice of LOF delisting rules could serve as a reference for improving exit mechanisms for other on-exchange funds. The analyst believes that as commodity futures LOFs, QDII LOFs, and some small-scale LOFs gradually exit, the residual LOF market will shrink further. Meanwhile, ETFs, with their rich product offerings and trading convenience, are likely to strengthen their dominant position in the on-exchange fund market.