Policy Development on QFII, QDII and CIBM Direct (Q1 2023)

Q1 2023 saw many hot events and policy development in the area of cross-border securities and futures investment such as QFII and QDII. 

For example, Citadel Securities was granted QFII license; the JV of Morgan Stanley was granted QDII license one month before it was approved to become wholly foreign-owned; the first QDII product of CR Trust was launched, which was distributed by HSBC China and invested primarily in a retail fund with BlackRock Investment Management (UK) Limited as the investment manager under a feeder-master structure; risks and fluctuations encountered by Silicon Valley Bank and some other foreign financial institutions have prompted financial institutions and custodians in China to seriously reconsider such matters as the risk disclosure, information disclosure, valuation adjustment of QDII products, and prudent selection of overseas custodians under the mode of global custody and multilevel custody.

Set forth below is a brief introduction and comment on relevant policy development.

(1) Registration-based Reform on IPO

With the implementation of registration-based reform on IPO in 2023, QFII for the first time has been included in the preferential offline placement targets in accordance with regulatory rules issued by China Securities Regulatory Commission (“CSRC”). Taking Shanghai and Shenzhen Stock Exchanges as an example, not less than 70% of shares offered offline shall be first placed with retail funds, social security funds, pensions, annuity funds, insurance funds and QFII.

Merits & Tree’s Comment:

It indicates that CSRC is willing to see overseas institutions taking an active part in IPO in China’s stock market.

(2) Derivatives Investment

To implement the Futures and Derivatives Law of the People’s Republic of China which took effect on August 1, 2022, CSRC issued a consultation paper on derivatives trading (the “Consultation Paper”) on March 17, 2023 to solicit public comments.

According to the Consultation Paper, for disclosure of interests (DOI) with respect to stocks of list companies, it is required to aggregate shareholdings through exchange trading and various derivatives trading. That is, relevant derivatives shall be looked through to identify the underlying stocks for the purpose of DOI. Given the complex situations on whether and how to aggregate them in practice, detailed implementing rules are yet to be formulated by competent self-regulatory organizations.

In addition, the Consultation Paper prohibits illegal activities conducted through derivatives trading such as fraud, insider trading, market manipulation, short-swing trading, trading by use of undisclosed information, interest tunneling and circumvention of regulations, and stipulates a reporting obligation on trading data under specific circumstances.

Merits & Tree’s Comment:

In principle, QFII shall comply with the above rules when investing in derivatives, but subject to further implementing rules or clarification by CSRC. With the reform of QFII regime in 2020, QFIIs have shown great enthusiasm for investment in China’s derivatives market. It is necessary for QFII license holders to have some understanding on regulatory rules of China’s securities and futures market, making proper pre-investment preparation and post-investment management.