Public Index Funds Meet The Standard: The Target Index Running Time And Liquidity Index Should Be Appropriately Relaxed

The standard operation of index funds is becoming regular.

On January 22, the China Securities Regulatory Commission (CSRC) officially issued the "guidelines for the operation of public offering of securities investment funds No. 3 - Guidelines for index funds" (hereinafter referred to as "guidelines for index funds"). Specifically, there are 13 guidelines on index funds, which mainly regulate the professional competence of managers, the quality of the underlying index, the investment and operation of index funds, and the special regulatory requirements of ETF and feeder funds. After that, the Shanghai and Shenzhen stock exchanges also issued the "guidelines for the application of self regulatory rules of funds No. 1 - development of index funds" (hereinafter referred to as "development of index funds").

Some employees of public funds in Beijing said that the introduction of index fund guidelines and related supporting rules documents has made detailed provisions on the operation of the fund and the indicators of the new development index, which will further standardize product development and change the thinking of index product layout.

China Securities Regulatory Commission also pointed out that in recent years, public offering index funds have developed rapidly and played an active role in giving full play to the property of asset allocation tools, promoting the entry of more medium and long-term funds into the market, serving wealth management and serving the real economy. -Photo by Gan Jun

Standardize product registration and continuous operation requirements

In recent years, the exchange fund market represented by ETF and lof has grown rapidly and its products are increasingly rich. It has become an important tool for all kinds of investors to allocate assets and an important force to participate in the capital market.

According to the statistics of China Merchants Securities, by the end of 2020, there were 1109 index funds in the whole market, with a total scale of 1476.08 billion yuan, accounting for about 14% of the total scale of public non monetary fund products. The number and scale of passive stock index funds account for about 2 / 3 of the total index funds, and the passive stock index is still the main track of index funds.

China Securities Regulatory Commission also pointed out that in recent years, public offering index funds have developed rapidly and played an active role in giving full play to the property of asset allocation tools, promoting the entry of more medium and long-term funds into the market, serving wealth management and serving the real economy. At the same time, some index funds have also exposed problems such as ignoring the quality of the underlying index, and need to improve the risk control mechanism accordingly.

Therefore, on the one hand, the index fund guidelines strengthen the professional competence of managers and index quality requirements in the product registration process. On the other hand, in the continuous operation of products, we should focus on investor protection and risk prevention and control, and strengthen the standardized operation of products.

Specifically, the guidelines for index funds specify the bottom line requirements of fund managers in terms of staffing, system and technical system, and compact the responsibilities of managers in various business links. At the same time, the new regulations also strictly control the quality of the index, with "strong market representativeness, good liquidity, high transparency and sustainability" as the target, and puts forward the principle requirements for the selection of index component securities and index compilation.

In addition, in the product operation, the SFC emphasizes adhering to the passive investment orientation of index funds and standardizing the investment in non component securities. In addition, according to the principle of priority to the interests of the holders, the emergency adjustment mechanism for major negative events of index component bonds shall be improved, and the emergency disposal arrangements under the circumstances of the index compilation institution stopping service shall be specified in the fund legal documents, so as to fully reveal the potential risks. It is worth mentioning that in order to reduce the cost of investors, the index fund guidelines also make it clear that the use fees of new products are borne by the managers.

The target index will be released within 6 months

At the same time, the Shanghai and Shenzhen stock exchanges also strengthen the self-discipline management responsibilities in the listing and trading of index funds and the specific specification of the underlying index.

Among them, "index fund development" requires index funds to complete their positions before listing, so that the fund's portfolio proportion conforms to the provisions of relevant laws and regulations, departmental rules, normative documents, fund contracts and other legal documents, reflecting the basic characteristics of index funds tracking index.

On the restrictive conditions of the newly developed index fund, the "index fund development" stipulates that if the fund manager intends to develop the index fund and trade in Shanghai and Shenzhen, the number of component securities in the underlying index shall not be less than 30, and the weight of single component securities of the underlying index shall not exceed 15%, and the total weight of the top five components shall not exceed 60%.

Zhang lining, Financial Engineering Analyst of Huaxi Securities, said that the above two restrictions are aimed at reducing the risk of index volatility. Because with the reduction of the number of stocks, the index will focus on a specific industry or sub theme, the fluctuation of the index trend may increase, and the impact of individual weighted stocks on the index will also increase. The restrictions on the weighted stocks can avoid a small number of stocks have too much impact on the index.

"At present, most of the published investability indexes have given more consideration to this issue. For an index with a small number of stocks or some stocks with high market value, the upper limit of the weight of individual stocks is generally required to be 10% or 15%, which basically meets the requirements of the guidelines. " Zhang lining pointed out.

It is worth mentioning that, compared with the draft, the index fund development also appropriately relaxed the requirements for the issuance time of the target index of the proposed index fund and appropriately reduced the liquidity of component securities.

Specifically, in the previous draft, the average daily turnover value of the constituent securities of the new development index fund in the past year should be in the top 80% of all the listed stocks on the stock exchange where it is located. In the newly released index fund development, the restriction condition of "the proportion of the total weight is more than 90% of the total" is added to the constituent securities.

Zhang lining pointed out that at present, most of the published investability indexes exclude the stocks with lower transaction ranking. Since the market value is generally positively correlated with the transaction amount, it can also be regarded as another form of liquidity screening. "If the liquidity screening criteria are added to the index compilation rules, generally speaking, it will not have much impact on the trend of the index, because the weight of stocks with low transaction value is generally low, and the impact on the index after elimination is limited."

The Shanghai Stock Exchange has previously indicated that, considering that bond index funds usually adopt the sampling replication strategy, they do not make specific requirements on the liquidity of bond index component securities, that is, they do not need to meet the above requirements for component securities.

In addition, the draft also requires the new development index fund to be released no less than one year. In the official version of the document, the release time is changed to "no less than 6 months". For index funds approved by the CSRC, the requirements for index release time can be appropriately relaxed.

"This is also the actual problem of the new development fund. If the underlying index is released one year later, the fund product will be issued again, or the fund manager's long-term product layout ability and the forward-looking prediction ability of the index design will be put forward higher requirements." According to the above-mentioned public fund practitioners, however, the supervision still retains the minimum time limit of "six months". In the future, fund companies may consider the varieties with better long-term prospects when they lay out ETF and other index products.

However, given the representativeness and importance of the broad-based stock index, the above requirements are not applicable. However, the Shanghai and Shenzhen Stock Exchange said that in order to prevent the risk in extreme cases, the equity weight of the single underlying index component of the broad-based stock index should not exceed 30% in principle.

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