The market saw a sharp downturn for several high-premium LOF products on August 10, with some funds hitting their daily limit down. 景顺长城全球芯片LOF (501225.OF) opened with a flood of sell orders and hit its 10% limit down, while 南方原油LOF (501018.OF) , 易方达原油LOF (161129.OF) , and 嘉实原油LOF (160723.OF) fell between 6% and 9%. The only commodity futures LOF, 国投瑞银白银LOF (161226.OF) , also dropped 6.77%.

The turmoil stems from a new regulatory proposal aimed at curbing speculation and illiquidity in exchange-traded funds. On August 7, the Shanghai and Shenzhen stock exchanges jointly released a consultation paper proposing to classify and delist commodity futures LOFs, QDII LOFs, and small-scale LOFs under specific procedures. The proposal targets a structural issue that has plagued the LOF market for 20 years, where high premiums and liquidity traps have become common.

Under the proposed rules, commodity futures LOFs and QDII LOFs must cease trading on exchanges by December 31, 2027, at the latest. A transition period of over one year is provided, allowing for a gradual market adjustment. Small-scale LOFs with a daily net asset value below 10 million yuan for 60 consecutive trading days would face immediate delisting without a transition period, after a 40-day warning period.

Industry insiders explain that the high premiums for these products stem from supply constraints. When QDII foreign exchange quotas are exhausted or commodity futures positions hit limits, off-exchange subscriptions are blocked, making cross-system arbitrage impossible. This creates a bubble in on-exchange trading. Small-scale LOFs, with minimal liquidity, are easily manipulated by a small number of traders.

The regulatory approach is not a blanket ban, but a "delisting without liquidation" mechanism. This preserves the off-exchange subscription and redemption functions, protecting investors while eliminating the vehicles for high-premium speculation.

Data from Wind shows 402 LOF products with valid scale data, with 125 products (over a quarter of all LOFs) affected by the proposed delisting rules. These include 33 QDII LOFs (about 18.7 billion yuan in on-exchange scale), one commodity futures LOF (6.58 billion yuan), and 113 small-scale LOFs (under 10 million yuan in on-exchange scale).

Market reaction over the three days following the announcement showed a pattern of panic selling on the first day, sharp divergence on the second, and gradual stabilization on the third. On August 10, the first trading day after the announcement, the list of declining funds was dominated by QDII and commodity futures LOFs. 景顺长城全球芯片LOF , which had seen a premium of over 30% earlier in the year, hit its 10% limit down. 南方原油LOF fell 9.26%, 易方达原油LOF dropped 7.10%, and 嘉实原油LOF declined 6.89%. The single-day drop for 国投瑞银白银LOF was 6.77%, significantly compressing its premium. The average LOF gain for the day was just 0.22%.

On August 11, the market showed complex divergence. 国投瑞银白银LOF continued to fall another 5.94%, and small-scale products like 财通科创LOF (501085.OF) dropped 9.08%. However, some funds like 华宝油气LOF (162411.OF) and 广发道琼斯石油LOF (162719.OF) rose 5.25% and 4.61%, respectively, driven by a rebound in international oil prices. 中金科创主题LOF and other small-scale LOFs, with scarce on-exchange chips, were pushed to their daily limit up.

By August 12, the market had stabilized with an average LOF gain of 0.43%. The declines for 全球芯片LOF and 国投瑞银白银LOF narrowed to 1.21% and 0.10%, respectively, as the divergence between price and net asset value for previously high-premium products decreased significantly.

As of August 12, among the 33 QDII LOFs, 16 had suspended subscriptions, 7 had suspended large subscriptions, and 10 were open for subscriptions. On August 7, the average premium over net asset value for the 16 suspended products was 5.74%, while the 10 open-to-subscription products were trading at an average discount of 0.73%. By August 12, the average premium for suspended products had fallen to 1.28%, while open-to-subscription products remained at a slight discount of about 0.48%.

Fund companies are responding proactively, setting up task forces to review their LOF products and prepare for delisting or transformation. Most plan to use the transition period to 2027 for commodity and QDII LOFs, avoiding hasty delisting during high premiums. For products that will be converted to ordinary off-exchange open-end funds, a 20-day holder selection period will be set, during which on-exchange subscriptions are suspended but redemptions and cross-system transfers remain open. For small-scale products, daily monitoring systems are being implemented, with risk alerts issued after 40 consecutive days of net asset value below 10 million yuan, and delisting procedures initiated after 60 days.

Looking ahead, analysts expect that LOF arbitrage opportunities will significantly decrease but not disappear entirely. Existing LOFs with good scale and liquidity can still support cross-system arbitrage, but the frequency and returns of such opportunities will decline.