The once-popular strategy of "buying money market funds on Thursdays to earn weekend yields"—considered a "wealth management hack" by some investors—has been exposed as a gray arbitrage scheme exploiting settlement time gaps. This practice, known as the "four-in, three-out" loophole, is now being eradicated by new regulatory measures.
The latest regulatory circular targets irregularities in money market fund operations, particularly the "yield enhancement" arbitrage model, by tightening rules across subscriptions, redemptions, and marketing. Key provisions include: 1. Mandating same-day fund transfers upon subscription confirmation, eliminating the T+2 settlement window used for yield boosting. 2. Standardizing redemption processes, prohibiting excessive focus on speed or channel-based differential treatment. 3. Banning misleading marketing claims like "instant access" to redemption proceeds.
Effective November 24, non-compliant products must rectify operations within six months. The reforms aim to safeguard investor interests in China's 14 trillion yuan ($1.96 trillion) off-exchange money fund market while refocusing institutions on their fiduciary role.
**Closing the Arbitrage Loophole** The circular requires fund managers and distributors to upgrade systems for faster subscription settlements. Crucially, distributors must transfer confirmed subscription funds (minus fees) to registry accounts by 4:00 PM on the confirmation date (T+1), with subsequent transfers to custodial accounts.
"This regulation structurally eliminates yield enhancement arbitrage," explained a fund distribution executive. Previously, some distributors exploited the T+2 settlement gap—where funds earn returns from T+1 despite reaching custodians at T+2—by pooling delayed transfers to offer "enhanced" yields through interest subsidies.
A bank-affiliated fund manager detailed the mechanics: Thursday subscriptions would only settle the following Monday due to weekends, allowing investors to collect three days' returns before funds reached the portfolio. Distributors meanwhile earned deposit interest on idle funds, which they partially rebated as "bonus yields." This practice diluted returns for existing holders.
Preemptively, many funds had implemented Thursday purchase limits. A northern China-based fund capped Thursday subscriptions at 50,000 yuan ($7,000), while others blocked large orders entirely. "These guardrails mainly target institutional arbitrage without affecting retail investors," noted a fund company representative.
Similar protections apply pre-holidays, when funds often suspend subscriptions to prevent yield dilution from late-arriving capital.
**Curbing Competitive Excesses** The rules also address redemption efficiency and marketing practices: - Redemptions: Prohibits channel-based differential treatment and premature fund releases (before T+1 for non-money market funds) to prevent disruptive asset liquidations. - Marketing: Bans "instant access" claims except for permitted internet money fund sales, curbing liquidity risk from distributor-funded T+0 redemption promises.
"Past T+0 offerings created dangerous maturity mismatches under the guise of convenience," commented a Shenzhen-based fund executive.
With 350 off-exchange money funds holding 14 trillion yuan as of Q3 2023, the changes will significantly reshape business models. The reforms follow earlier signals, including September's proposal to cut money fund sales fee caps from 0.25% to 0.15% annually.