[KOL Analysis]3175 Helps investors or itself?-Hu Zhongbang

After U.S. WTI crude oil futures plunged, not only did retail investors who bet on the rebound in oil prices feel “upset”, even ETF issuers were “surprised”. With regard to Samsung S&P GSCI Crude Oil ER Futures ETF (HKEX Stock code: 3175), an announcement was issued on Wednesday evening that the entirely of its holding of June 2020 contracts had been replaced by September 2020 contracts in the night market.

3175 claimed that its objective to track the “S&P GSCI Crude Oil Index Excess Return”, and the index also clearly stated that the next roll-over operation would be conducted on May 7-13, when the June 2020 contract tracked will be replaced by July 2020 contracts. 3175 suddenly changed its investment strategy with a high sounding reason that June 2020 contract may fall to zero or a negative value, “In the worst case scenario, the Net Asset Value of the Sub-Fund may drop to zero and investors may suffer a total lose of their investment in the Sub-Fund.”

In fact, as mentioned in previous articles of 3175, if the Net Asset Value of all Fund units is below 150 million Hong Kong dollars (page 36) or 40 million Hong Kong dollars (page 71), the Sub-Fund will be terminated, which means it will stop trading and go into liquidation. So even if June 2020 oil futures falls to a negative value, investors theoretically would not lose all. As long as it is clear that the market risk is borne by investors, ETF issuers dont need to take such a big risk of roll-overing in advance.

But why would Samsung roll-over？ There are two reasons; First, the company doesnt want to suffer huge losses. Second, 3175 is the most important “cash cow” for issuer, who certainly do not want to stop trading.

Once the oil price falls to a negative value, the transaction of 3175 will be terminated. So how should the issuer deal with its crude oil futures？ A few days earlier, when oil prices fell to a negative value, the decline could quickly make the oil price expand to -40 US dollars per barrel. Before the roll-over, 3175 held about 35,000 oil futures contracts, and each contract was equivalent to 1,000 barrels of crude oil. It the issuer forcibly closes the position at a price of -40 US dollars per barrel, the total loss of these futures contracts will reach about 1.4 billion US dollars (about 11 billion Hong Kong dollars). therefore, how many Galaxy mobile phones will Samsung have to sell to pay it off？

On the other hand, from the perspective of the issuer, 3175 has become the most famous speculative oil trading tool in Hong Kong stock market, with a turnover from about 300 million dollars per day in early March to 1.94 billion dollars recently. So the issuer who can make huge profits in the transaction hates the termination of 3175 transaction most.

Clients ask to buy Tencent (700), but the broker buys HSBC (005) and then makes a notice; investors want to bet on the rebound of June oil price, but 3175 roll-overs the June old futures replaced by September oil futures without timely notification. So far, the SFC and SEHK has said nothing about it. And ETF transaction continues, which seemed to be allowed. If the investment strategy written in black and white clearly can be changed without any regulatory consequences, how can the interests of investors be protected？

Author：Andeerson Wong

Profile:Hu Zhongbang, aka Xu Feng(pseudonym), is a licensee of the Securities and Futures Commission(SFC); the author of Hong Kong's best-selling financial book “Investment Knowledge”; columnist of Apple Daily, StockViva, Snowball and Futubull, with over 10,000 followers. Mr Hus column articles are usually published on Zhitong Finance, Gelonghui, and other China-Hong Kong financial news platforms. In addition, Mr Hu is also the guest of Metro Radio and Finet and an expert in trend analysis of Hong Kong and US stocks.

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