The AB side of the "explosion" of bond funds

In the past three years of stock market shock adjustment, the new fund market has also been in an ice age.

In 2021, there will be occasional tens of billions of explosive funds led by star fund managers, and in 2022, the market is in the optimistic expectation of post-epidemic recovery, during which there are also many public offering bigwigs such as Dong Chengfei and Zhou Yingbo who have attracted countless amounts of money after "running for smuggling".

But in the past 2023, similar release myths have almost all disappeared. Under the pressure of fundraising, fund companies and distribution agencies have taken turns to operate fancy operations, and "ensuring the establishment" has become the first goal of fund companies.

For example, the initiation fund that the fund company pays out of its own pocket, or with the friendly support of the "circle of friends" funds, quietly withdraws the capital after "guaranteeing the establishment", or uses the fund transaction commission in exchange for the sales scale of the brokerage, sales rebates and other "gray" methods.

It is also in this context that the transaction settlement model of securities companies (hereinafter referred to as the bond settlement model) has flourished in the past two years. As of January 22, 2024, there are more than 900 bond funds in the market, with a combined scale of more than 700 billion yuan. Since the beginning of the year, 6 bond funds have been established, with a total scale of nearly 2.5 billion yuan.

The so-called bond settlement fund simply means that "the fund company entrusts the brokerage firm to open a capital account to complete the transaction and clearing of the fund products, and the brokerage company participates in the whole process of fund trading, custody and settlement as the settlement and settlement entity." ”

The cost of the brokerage trading system is relatively low, which reduces the operating costs of the public offering, and the in-depth participation of the brokerage can ensure the issuance scale of the fund to a certain extent, which can be described as a win-win situation.

If in the first two years of the advent of the bond fund, its scale growth mainly came from the test of public funds and the promotion of supervision, then now, under the general trend of brokerage commission reduction, the bond fund is ushering in the "second spring" of development.

Because the bond settlement model can bypass the 15% position restriction on a single brokerage, the brokerage company responsible for settlement can monopolize all the transaction commissions, and the fund company can also leverage sales resources, which undoubtedly provides a new way out for small and medium-sized public offerings hovering on the life and death line of scale.

However, the B side that cannot be ignored is that when the interests of public offerings and brokerages are highly bound, under the commercial demands of "scale first", fund companies may return to the old road of "exchanging commissions for sales", and brokerages that should have worked hard to turn to the "buy-side investment advisory" model may also "go backwards".

Funds and brokerages "huddle together for warmth"

Since the pilot transition to regularity in 2019, the proportion of bond funds in newly issued funds has increased year by year. In 2023, the development of bond funds will be further accelerated. Last year, a total of 1,270 funds were established in the public offering industry, including 307 bond funds.

Intuitively, the popularity of the bond settlement product lies in the fact that it meets the needs of both brokerages and funds: fund companies need the sales resources of brokerages to ensure the scale of issuance, and brokerages intend to bring considerable commissions from fund transactions, and the two sides hit it off.

From the perspective of the number and distribution of bond products of fund companies, small and medium-sized public offering managers and securities companies prefer this settlement model, among which Tibet Dongcai Fund, Guotai Junan Asset Management, Zhongtai Asset Management, and Huisheng Fund have the highest number of bond products.

制图：光述Lightell，数据来源：wind

The reason behind this is not difficult to understand, for a long time, commercial banks or head Internet distribution channels have a high "hard" threshold for access, such as company rankings, historical performance, investment and research foundation, etc., and it is often difficult for small and medium-sized public offerings to meet the standards.

Even if they win "access", fund companies often need to invest a lot of manpower and material resources to cooperate with the joint operation of distribution channels, and there is even no shortage of operations such as buying exposure and traffic.

In contrast, the threshold for cooperation in the bond settlement model is low, and the full support of brokerage resources can be exchanged for "exclusive" cooperation.

In particular, for some securities companies with public offering licenses, they can also cooperate with the parent company of the brokerage, which can not only ensure the issuance of funds, but also contribute commissions to the parent company, which can be described as killing multiple birds with one stone.

In fact, in recent years, under the background of the involution of the brokerage business, the continuous decline of commissions, and the acceleration of the transformation of the wealth management business, brokerages also urgently need to seek new business increments, and the bond fund is a ready-made choice.

It is foreseeable that in the future, in the fund sales channel, brokerages will compete with banks and third-party sales agencies to eat the cake, and the development of bond settlement products can allow them to deeply participate in the public offering industry chain and strive for more benefits and opportunities.

For example, Industrial Securities mentioned in its 2022 semi-annual report that "with the layout of fund ToB business as a new starting point, we will establish a bond settlement business ecosystem, and upgrade the bond settlement model from 1.0 to 2.0 by doing in-depth research services, expanding cooperation coverage, and doing a good job in product pools, so as to obtain high-quality product resources." ”

At present, the head pattern of the securities settlement market has emerged, and the securities companies with strong comprehensive strength have occupied the first-mover advantage. In the first half of 2021, the commission contribution rate of bond funds to CITIC Securities and GF Securities has reached 12% and 10% (data source: Industrial Securities Research Report).

In the past two years, more and more leading public offerings have also begun to test the water coupon settlement model, such as E Fund, China Merchants, Bosera, etc. In the second half of 2022, E Fund's quality momentum of raising 10 billion yuan will be held for three years, and the bond settlement model will be adopted.

From the perspective of products, compared with active equity funds, index funds with "blowout" growth last year prefer the bond settlement model.

Since the beginning of this year, E Fund CSI Hong Kong Stock Connect Internet ETF and CSI 300 ETF have successively issued announcements on convening shareholders' meetings to consider the conversion from the original bank transaction settlement model to the securities settlement model

Because index funds focus on on-exchange transactions, the bond settlement model is conducive to the improvement of the fund's transaction settlement security and capital efficiency, and the product characteristics of ETFs and index funds also match the customers of brokers, and the commission is bound to brokers, which is also conducive to brokerages to play the role of market makers.

At the same time, regulation has also added fuel to the development of bond funds.

In September 2023, the China Securities Regulatory Commission (CSRC) issued a plan to optimize the securities trading model of public fund managers. In terms of the selection of securities trading models, qualified public fund managers are allowed to independently choose securities trading models based on their own needs.

At present, under the joint promotion of regulators, public offerings and securities firms, the popularity of bond funds is continuing to heat up.

The past and present of the bond fund

As early as the end of 2017, the China Securities Regulatory Commission (CSRC) issued a document to start a pilot brokerage settlement model, requiring newly established fund companies to adopt the brokerage settlement model.

At the beginning of 2019, the bond settlement fund was transferred from a pilot to a regular one, and the regulator encouraged the new products of old fund companies to also adopt the brokerage settlement model.

From the perspective of the development of the public offering industry, the bond settlement fund is an innovation in product design, which breaks the long-standing monopoly settlement and settlement model of banks, allows brokerages to have a place in fund settlement, and makes market competition more active.

Generally speaking, the operation of a fund includes several core links such as trading, custody, and settlement.

As the manager, the fund company rents the trading seat of the brokerage and issues trading instructions to carry out transactions. Each fund has an institution that manages the assets of the fund (mainly banks, some brokers), and the funds after the people buy the fund are deposited in the custody account opened by the fund company in the custodian bank, and the custodian keeps the funds to avoid misappropriation by the fund company.

Previously, commercial banks almost monopolized the custody and settlement of public funds. Although the public fund rents the trading unit of the brokerage, all the trading instructions are sent directly to the exchange, and the custody and settlement are undertaken by the bank, and the role of the brokerage is only a simple "channel".

In this mode, the fund company's trading orders directly reach the exchange, and there may be overbought/oversold. Because the settlement of the custodian is T+1, that is, the number of shares bought and studied, the cost and income are calculated, and it takes one trading day to obtain the net value of the fund after the settlement, and it is impossible to achieve real-time capital verification and securities verification.

As a result, it is not possible to verify the funds in the account in real time when trading, which means that even if there is no money in the account, you can buy stocks first. But if a trader places the wrong order by mistake, trouble arises.

In 2013, Everbright Securities' "oolong finger" incident occurred partly because of the flaws of this model.

Due to the fact that the transaction was not settled in real time under the bank settlement mode, coupled with the error of the judgment of the trading system, the strategic investment department of Everbright Securities repeatedly placed orders when conducting ETF arbitrage operations, and the wrong buying order of 23.4 billion yuan once caused the Shanghai Composite Index to rise by 5.96%, causing sharp market turmoil.

This incident led to a loss of 194 million yuan on the same day, and was finally fined 520 million yuan, the strategic investment department was dissolved, relevant personnel were banned from the market, and the approval of Everbright Securities' new business was suspended.

The same situation may be avoided if it is in the brokerage settlement mode.

In fact, the exchange was aware of the loopholes in the bank settlement model early on, and organized a panel discussion in November 2017 to plan to convert the trading model of mutual funds, that is, from the bank settlement model to the brokerage settlement model.

In the same year, ChinaClear launched a pilot draft of the securities company settlement model for public funds, proposing to promote the separation of custody qualifications and settlement qualifications, and gradually change the bank settlement model to the settlement model of securities companies, while continuing to cooperate with relevant institutions to promote the implementation of the settlement responsibilities of custodian banks.

Comparison of the two settlement models, source: CICC Research Department

Under the brokerage settlement model, the trading instructions of the public fund are first transmitted by the fund company to the central trading room of the brokerage, and then distributed to the exchange by the brokerage, and the brokerage no longer plays the role of "channel", but takes over the functions of fund trading, custody and settlement, which to a certain extent improves the security and risk controllability of the transaction settlement of fund assets.

A new pattern under the tide of commission reduction

If the promotion of supervision has brought the bond fund into the public eye, then under the general trend of brokerage commission reduction, the advantage of the commission ceiling exemption of the bond fund has accelerated its popularity and explosion.

For a long time, fund companies need to rent multiple trading seats of brokers to execute the daily trading of fund products, and as a result, brokers will receive corresponding trading commissions, also known as split commissions.

However, an unreasonable phenomenon is that the stock trading commission of public funds has been higher than that of individual investors for a long time.

At present, the trading commission of retail investors in the whole market is about 2.5 thousand, but the commission of public funds remains at a high level of 80,000 all year round. As a result, there is a spread of about 6/10,000 between the fund commission rate and the retail brokerage commission rate.

Misshapen high rates breed a lot of gray space. Just as the unspoken rule punctured by Gao Feng, the former chairman of Rongtong Fund last year: the fund company will divide the fund into commissions in exchange for the fund distribution resources of the brokerage, and use it to exchange the relevant expenses that should be borne by the fund company's own funds to the brokerage.

It stands to reason that the commissions paid by fund companies to securities firms can only be used for research support, and the China Securities Regulatory Commission also clearly stipulates that fund companies are not allowed to link the opening of seats to fund sales, and they are not allowed to commit trading volume to securities companies in any form.

However, in practice, there are many ways to circumvent regulatory requirements, for example, the general split position is divided into two parts, one part is linked to research, and the other part is linked to sales. The sales of many new funds will give X times the trading volume of the channel back.

For example, if the negotiated is 40 times the return, the commission is 10,000 eight, and 40 times is 3.2%, which means that for every 1 million yuan of funds sold, it is equivalent to 32,000 yuan of agency fees, but this agency fee is given to the brokerage through the sub-position commission.

In fact, gray position splitting is almost a tacit secret in the industry, which is essentially the kindness of the fund company to the people, and in the end, it is the people who bear a lot of hidden costs. In the final analysis, it is the rent-seeking of interests bred by high commissions.

This is why in recent years, regulators have frequently raised the stick of fee reduction and waved it at all parties in the market.

For example, in July last year, the China Securities Regulatory Commission (CSRC) issued a document requiring the industry to reduce management fees and custody fees, and five months later, it introduced further regulations that in principle, the commission rate for stock trading should not exceed twice the market average.

Currently, the market stock commission rate is about 2.5 per 10,000, which means that the fund's commission rate drops to around 5 per 10,000. Based on the rough calculation of the public fund commission of 18.83 billion yuan in 2022, if the institutional commission rate is reduced from 8 to 5 thousand, the corresponding transaction commission will be reduced by 7.06 billion yuan.

The introduction of the new regulations not only compresses the cake of the industry, but also invisibly reconstructs the distribution of the cake. Under the new rules, the maximum proportion of the total commission for fund managers to trade through a brokerage firm has been reduced from 30% to 15%.

Previously, it was a common phenomenon that the fund subsidiary of a brokerage company usually contributed 30% of the commission to the parent company. After the new rules, the parent company of the fund's brokerage will receive half the commission on its subsidiaries, and the income that large sell-side institutions can earn in a single fund will also be limited.

However, the 15% cap is not applicable to funds that adopt the bond settlement model. Many people in the industry believe that this will become the starting point for in-depth cooperation between small and medium-sized funds and brokers.

A person from the product department of a public fund judged: "In the future, bond funds may become the mainstream, because now that commissions are declining, it is difficult to leverage sales resources, and bond funds with unconstrained commission ratios are more attractive to channels." ”

It stands to reason that the bond fund is a way for brokerages and fund resources to synergize and achieve a win-win situation, but what worries the market is that driven by scale, both sides are often more based on their own interests - brokerages are staring at commissions, and funds are staring at sales. In the end, it may be back to the old way.

In this way, the bond fund may become the hardest hit area of rebates.

Especially in practice, the bargaining power of small and medium-sized funds that issue bond settlement products to the channel is weak, and the rebate ratio is often set high, some can reach 40 times or 60 times, after all, only a high proportion of rebates can better mobilize the enthusiasm of the channel.

In this way, due to the deep binding of interests, it is difficult for brokerages to really play their "role" - to objectively select products from the customer's standpoint and give full play to the value of the wealth management platform. Obviously, this is contrary to the idea of encouraging wealth managers to transform into buyers.

In fact, at the moment of transformation and transformation of China's wealth management market, bond funds are a favorable starting point for securities companies to develop wealth management business, and they are also expected to become a new growth highlight.

From the perspective of industry development, the bond settlement model focuses on assessing the scale of fund holdings rather than the scale of transactions, which is conducive to brokerages paying more attention to the interests of buyers.

At the same time, brokerages can also rely on their perception of customers and market insight to customize products that meet the needs of investors with fund companies, so that securities products can become "the best choice for brokers".

Similarly, for small and medium-sized public offerings, in the case of continued sluggish market sentiment and no short-term hope for the new fund recovery, the bond settlement model has opened a new way for it, but is it to pursue short-term interests and give priority to large-scale, or to focus on the long-term and pave the way for turning to buy-side investment advisory?

This is a key proposition in front of fund companies.

Resources:

1. Bond fund, something you don't know, base community

2. Wealth management from the perspective of securities settlement, securities industry talk

3. CICC Public Offering Insight Series: Brokerage settlement funds may usher in a period of rapid development, CICC Quantitative and ESG

4. The former chairman of Rongtong Fund exclusively broke the news for the first time to deeply expose the unspoken rules of "fund separation", daily economic news

5. Replace the sales scale with trading volume ETF products into a public offering "aristocratic game"?