China proposes trading cost cuts for mutual funds, to regulate commissions

China's securities regulator has published draft rules aimed at cutting trading commissions for mutual funds and addressing the conflict of interest between the securities trading and fund sales businesses of brokerages, the latest reform to the $3.8 trillion mutual fund industry.
 

The China Securities Regulatory Commission (CSRC) said the proposals were designed to protect investors and better regulate the way fund managers allocate trading commissions.
 

The rules, published by the CSRC for public consultation on Friday, are the latest attempt by authorities to revive confidence in the sluggish stock market and comes five months after the regulator urged mutual funds to cut management fees and reduce costs for investors.

Analysts say the new rules would help brokerages with strong trading and research capabilities to win commissions.

According to the draft rules, trading commissions would be reduced for both passive and active fund products. SWS Research estimates that overall commissions would be cut by a third.

In addition, fund managers are banned from paying trading commissions to buy third-party services such as external expert consultancy, financial terminals or databases.

Market participants say it is common for mutual funds to pay brokers additional commissions for dispensable services, pushing up trading costs for fund investors.

The draft rules require the sales team of mutual funds not to participate in choosing a broker and allocating trading commissions.

The proposed rules also require that a mutual fund company must not pay more than 15% of its total trading commissions to a single brokerage, the CSRC said, adding that fund managers should choose brokerages that are "financially sound, well-behaved and have strong capabilities in trading and research".

The rules "will guide the brokerage business back to its root, back to research", Founder Securities said.

Kaiyuan Securities expects the CSRC to tighten regulation over fund distribution fees in the next stage of the reform.

Separately, the CSRC published draft rules to tighten scrutiny of China's $2.9 trillion private funds, in an effort to reduce risk in a sector key to innovation and economic growth.

A qualified investor in a private equity or venture capital fund must put up at least 3 million yuan ($418,731), tripling the current threshold, according to the proposed rules.

($1 = 7.1645 Chinese yuan renminbi)

(Reporting by Shanghai Newsroom; editing by Miral Fahmy and David Goodman)