Taiwan’s securities regulator is reviewing applications from the island’s stock exchange and OTC bourse to set up a retail distribution platform for listed open-ended funds (LOFs).
Both the Taiwan Stock Exchange (TWSE) and Gre-Tai Securities Market have submitted LOF proposals to the Financial Supervisory Commission in a drive to simplify mutual fund investment.
Under the proposals, retail investors would be able to subscribe to LOFs issued by different securities investment trust enterprises (Sites) through a single account, with a reduced period for redemption and liquidation.
The process is designed to be more efficient and cost effective for investors. Subscription and redemption fees would amount to no more than 0.385%, including a brokerage fee of 0.1425% and a securities transaction tax of 0.1%.
That compares with up to a 1.5% front-end charge among banks for onshore mutual fund subscription.
The scheme would see securities investment trust enterprises apply to list their mutual funds, with priority given to domestic equity funds (partly on the grounds that it takes offshore managers longer to build their positions).
The LOFs would be denominated in Taiwan dollars and be available for trading between 9am and 1.30pm during week days.
For this scheme, the TWSE is seeking to replicate Deutsche Börse’s market-maker mechanism. A centralised trading method would likely be adopted, with the exchange matching bid and ask. Each Site would need to have at least one market-maker for each of its listed funds, with market-makers mostly being domestic firms with an appropriate trading licence.
Gre-Tai’s LOF platform would be a quote-driven market with trades negotiated over-the-counter and market-makers working from proprietary trading desks.
But as pointed out by Shin-Chung Chen, senior vice-president in TWSE’s corporate planning and strategy department, the LOF scheme is not such a priority for the main exchange.
“We focus first on IPO listings, as well as Taiwan Depositary Receipts and exchange-traded funds,” he stresses. “So far our only ETF cross-listing partner is Hong Kong. We are now trying to establish the relationship with Singapore and maybe Europe at a later stage.”
But he concedes that an LOF platform would be a convenient way to introduce overseas mutual funds to domestic retail investors, given that ETF cross-listing is a more complex process.
Still, he questions whether an LOF platform would be able to get a realistic foothold in Taiwan’s distribution landscape, where banking channels dominate.
Further, Sites have raised concerns that if an LOF platform was introduced they would lose customers to securities brokerages, adding to already intense competitive pressures.
Industry practitioners also point out that there is now just one closed-end fund – namely Fubon Fubon fund – that is listed on the TWSE, down from more than 20 in the early 1990s.
“Back then investors traded the limited number of funds as stocks. But as mutual funds become more readily available, the difference between a fund’s market value and its net asset value went from a high premium to deep discount,” Chen points out, resulting in closed-end funds delisting.