On 8 December 2023, the China Securities Regulatory Commission (CSRC) promulgated the Provisions on Strengthening the Administration of Securities Trading in Publicly Offered Securities Investment Funds (Consultation Paper) (the "New Regulations"). At present, the draft is still widely soliciting comments.
The views obtained from exchanges with many market participants are also relatively consistent: the starting point of the draft of the new regulations is very good, it directly addresses the problems that have always existed in the A-share market, and the reform efforts are also very large, and the purpose of guiding the high-quality development of public funds and securities companies is obvious, which will play a very important role in the long-term healthy development of the A-share market.
2023 is also the 25th year of vigorous development of the mutual fund industry. Looking back on the first three quarters of this year, on the one hand, public funds continued to grow, with a total scale of more than 28 trillion yuan, especially the development of ETFs.
In 2023, in the process of continuing to grow in the number and scale of public funds, according to incomplete statistics, the number of liquidations this year will exceed 30% year-on-year, which shows that the pace of "survival of the fittest" in the industry is also accelerating.
In addition, this year is a year of heavy reform of public funds.
The reform of the interest rate, the innovation of floating rate products, and the recent introduction of blockbuster new regulations (referred to as the "Consultation Paper") have a profound impact on the future development of public funds.
Under the premise that the general direction is worthy of affirmation, focusing on the changes before and after the new regulations, and referring to the cases and experiences of overseas markets, the author also puts forward the following thoughts and discussions, hoping to play a role in throwing bricks and stones.
01
What is the impact of the change of investment research suppliers on public offerings?
Before and after the new regulations, the relationship between funds, securities firms, and third-party services (expert consulting, data services, etc.) may change significantly.
Under the traditional cooperation model before the new regulations, fund companies pay commissions to brokerages (including trading commissions, soft commissions for paying experts and data services), and there are two ways for brokerages to make profits:
The first is similar to selling your own products. That is, securities firms provide securities trading and research services to fund companies.
The second is similar to the "middleman model". That is, brokerages purchase third-party expert consultation, data services, etc. for their own research, and at the same time sell them to fund companies through the "soft commission" model, similar to agency sales.
In this traditional trading model, funds, brokers, and third-party services perform their own duties, and the division of labor is professional and efficient.
After the new regulations, fund companies are prohibited from purchasing third-party expert services and data services from securities firms through "soft commissions", and at the same time, fund companies are allowed to purchase investment research services from securities firms through commissions.
This means that the aforementioned model of "the second middleman makes the difference" does not exist. Brokerages are likely to no longer purchase third-party services, but choose to build their own expert services and data services.
On the one hand, the new regulations prohibit the use of commission payments to purchase third-party services from brokers, and on the other hand, because the intermediary model is prohibited, brokerages and third-party services will directly change from a cooperative relationship to a competitive relationship in the procurement of research services by fund companies, let alone purchase third-party services.
As a result of the closer business contacts between fund companies and brokers, especially in terms of agency transactions, as of the end of 2022, the securities trading volume of brokerage agency customers was 733.25 trillion yuan, of which the securities trading volume of agency customers accounted for 31.81%, which has continued to increase in recent years.
As a result, brokerages have a natural advantage in the competition with third-party service providers, and the original third-party service providers may be weakened or even eventually squeezed out of the market. The result is that in the end, the data, experts, research, and sales will all come from the same party, for example, I do the data myself, I can selectively say the expert opinion, the research report is also written by me, and the sales are still me.
This may have several significant impacts on mutual funds:
First, it breaks the original pattern of each party performing its own duties, specialization in the division of labor, and high efficiency, weakens the market transparency and the neutrality and fairness of investment research services, and hinders the comprehensiveness and in-depth research of the public fund industry.
Second, it increases the operating costs of public funds. In terms of the quality of the services provided by brokerages for fund companies, such as experts and data, they are not necessarily what fund companies really need, and at the same time, for cost considerations, brokerages will also control the number of services used by fund companies, which cannot really meet the needs of fund companies. In order to improve their investment and research capabilities, fund companies can only purchase the required services through management fees, which undoubtedly worsens the already stretched operating costs of fund companies.
Third, it increases the compliance risk of securities companies, and at the same time, it poses a huge challenge to regulators. If a securities company builds its own experts and data services, it must achieve strict risk control, establish a firewall with its own investment banking business, stock recommendation business, etc., and avoid conflicts of interest with its own asset management, proprietary business, direct investment and other businesses.
Therefore, if a brokerage wants to build its own team from scratch and provide professional services on these services provided by a professional third party, it is bound to invest a lot of systems and manpower, or face large capital expenditures, which may also lead to unclear main business, thereby increasing compliance and operational risks.
There is a precedent for this in foreign brokers. A typical example is UBS, which is involved in securities trading while providing advisory services, and the development of this integrated business is inseparable from the investment and construction of the complex operation and management system behind UBS. If domestic brokerages are to transform, they need to consider the required costs, corresponding benefits and challenges. In terms of supervision, it is also necessary to comprehensively assess the potential risks that may arise in the risk management system and business operations of securities companies.
02
What is the impact of changes in the brokerage landscape on public offerings?
Before and after the new regulations, the market structure of large and small and medium-sized securities firms may also change significantly.
The focus of the reform of fee reduction for public funds is to standardize the use of commissions. It is worth noting that the "Regulations" also restrict the use of commissions, and strictly prohibit the use of transaction commissions to transfer payment fees to third parties, including but not limited to fees arising from the use of external expert consultation, financial terminals, research platforms, databases, etc.
Some brokerage personnel said that in the actual process of business development, the scale advantage and comprehensive strength advantage of the head brokerage will be magnified, and the impact will be relatively small; the profit margin of small and medium-sized brokerage companies will be squeezed, the difficulty of survival will increase, and the polarization of the industry is expected to be further intensified. A medium-sized brokerage executive expressed concern: "(Fund fee reform) for some small brokerage research institutes, it may be directly related to life and death. "There are also executives of fund companies who believe that the reduction of commission income is inevitable, and there is a high probability that some securities companies with weak research strength will withdraw from the sell-side service competition.
Listed brokers, especially the head brokers, have outstanding competitive advantages in terms of capital strength, risk pricing capabilities, institutional customer layout, investment and research capabilities, etc., and more small and medium-sized brokerages may be merged by large brokerages in the future.
This may also have a greater impact on mutual funds. In a certain period of time, it is possible to weaken the efficiency improvement brought about by competition, and as a result, the scope of investment research service procurement options of public funds is narrowed, or they can only passively purchase investment research services of large brokerages.
However, the increase in concentration may force small and medium-sized brokerages to find differentiated development paths, actively carry out model innovation, and enhance their competitiveness.
In the seventies and eighties of the 20th century, Wall Street investment banks experienced a round of decline in commission rates and the restructuring of institutional business caused by changes in customer structure. Faced with this situation, Goldman Sachs has used the model of innovation and restructuring of institutional business to quickly leap from a second-rate investment bank to a world-class investment bank.
At that time, the NASDAQ national trading system was operational, innovative small and medium-sized enterprises were blowing out, and at the same time, the wave of mergers and acquisitions of small and medium-sized enterprises by large American enterprises was emerging. While peers pride themselves on serving large enterprises, Goldman Sachs has gone the opposite way, positioning small and medium-sized enterprises outside the top 500 and taking the lead in launching the "takeover defense" business, providing consulting services for small and medium-sized enterprises to resist hostile takeovers, and avoiding direct competition with other investment banks for large corporate clients. During this period, Goldman Sachs gained a large amount of business by virtue of its good image among small and medium-sized enterprises, laying the foundation for the company's M&A advisory ace business.
The case of Goldman Sachs may be applicable to the current domestic small and medium-sized brokerages, how to avoid direct competition with large brokerages, tap the new needs of new public offering customers, and innovate to provide differentiated services, or their best way out, and at the same time, it can also enable public funds to have more and better investment research service options.
03
Which model is worth referring to in mainland China?
Overseas models are mainly the United States and the European Union.
The trading model in the United States is simple, that is, to liberalize commissions, allowing the use of commissions to pay for third-party services, but the commissions are used to improve the fund's investment and research capabilities.
The EU's model is one-size-fits-all, prohibiting brokerages from using "soft commissions" to purchase third-party services, and fund companies from using the commission model to purchase brokerage research services.
The author believes that the original intention of the current domestic regulatory design is good, but in terms of specific implementation, it is difficult to prevent the possible "exploitation" behavior of some investment and research service providers - taking the opportunity to seek benefits and transfer the risk to the public fund.
How to reduce the risks faced by mutual funds?
To a certain extent, we can refer to the US model, as long as it is conducive to improving the investment and research capabilities of the fund, the commission can be used to pay for the research and third-party services of the brokerage;
On December 22, the National Press and Publication Administration issued the Measures for the Administration of Online Games (Draft for Solicitation of Comments), and the capital market reacted greatly. Subsequently, the Publication Administration issued a response that tended to "correct deviations", saying that it would further revise and improve on the basis of continuing to listen to the opinions of relevant departments, enterprises, users and other parties.
In fact, whether it is a game operator, an investor, or a user, they all hope that before the issuance of this important document and regulations, all parties can fully communicate and do a good job in expectation management.
This may also apply to mutual funds.
The above three points of reflection and discussion may be inappropriate, but they are purely the words of one family, throwing bricks and stones, and forming a synergy for the high-quality development of the mainland public fund industry. (End of full text)