Further to a consultation paper in November 2023 (the “2023 Consultation Paper”), on July 26, 2024, PBOC and SAFE finally issued the amended Provisions on the Administration of Funds of Foreign Institutional Investors for Domestic Securities and Futures Investment (the “New Rules”), which will take effect from August 26, 2024, replacing the current rules issued by PBOC and SAFE in 2020.
Below are some highlights of the New Rules and its impact on QFII and RQFII (collectively, hereinafter referred to as “QFI”).
1.Simplified Registration with SAFE
To streamline registration with SAFE after obtaining QFI license from CSRC, the Registration Form for QFI will be removed from the current list of registration materials.
2.Improved Account Administration
For investments in both securities and futures/derivatives, QFI will no longer be required to open two types of RMB special deposit accounts separately. With both accounts merged, it will help reduce costs.
3.Allowed Transfer of Funds Clarified
Consistent with applicable rules on CIBM investments, it is clarified by the New Rules that the two-way transfer of funds is allowed between the QFI special accounts and the CIBM investment special accounts under the same name of the same foreign institutional investor. Please note that after such transfer of funds between two schemes, the investment and operation shall be subject to applicable rules on the latter scheme.
It is clarified by the News Rules that transfer of funds is allowed between different QFI special accounts under the same name. However, please note that transfer of funds is still not allowed between (a) RMB special deposit account corresponding to relevant FX account and (b) RMB special deposit account for remitted overseas RMB funds. As explained by PBOC and SAFE, in practice they will guide QFIs to name the aforesaid two types of RMB special deposit accounts differently.
4.Simplified Undertaking Letter for Repatriation
A one-time undertaking letter submitted when QFI initially registering with SAFE will replace the undertaking letters to QFI custodians required when QFI repatriating funds. Namely, QFI will do it once for all.
As for existing QFIs, as separately explained by PBOC and SAFE, although not provided in the New Rules, in practice, they will be allowed to submit such one-time undertaking letter to SAFE as well, so as to level the playground for both existing and new QFIs.
Please note that the content of the undertaking letter is simplified compared with that provided in the 2023 Consultation Paper, from complying with PRC laws (including but not limited to laws on AML, anti-terrorist financing and tax) to complying with PRC tax laws only.
With such one-time undertaking letter submitted, when a QFI intends to repatriate funds (except for the scenario of liquidation of QFI investment in China), the QFI custodian will only need to reply on the QFI’s written application or order.
5.“Foreign Currency in and RMB out” Allowed
In addition to “RMB in and RMB out” and “Foreign Currency in and Foreign Currency out” model, a QFI remitting funds in foreign currencies for investment in China is allowed to repatriate in either foreign currency or RMB.
Please note that transfer of funds is still not allowed between (a) RMB special deposit account corresponding to the relevant FX account and (b) RMB special deposit account for remitted overseas RMB funds.
6.More Ways to Manage FX Risks
With the two principles (i.e., real need and for hedging purpose only) still in place, the New Rules diversified the ways for QFIs to engage in spot FX purchase and sale or FX derivatives transactions, in order to manage FX risk exposure.
* Route 3 is not applicable to QFIs that are not overseas banks.
It is provided by the New Rules that where a QFI engage in spot FX purchase and sale or futures/derivatives transactions, the QFI may open special cash accounts, and funds may be transferred between such special cash accounts and the RMB special deposit accounts or the FX special accounts of the QFI. In addition, where trading futures/derivatives with domestic securities as underlying assets, QFI shall comply with applicable regulatory rules of PBOC and CSRC as well.
It is also provided by the New Rules that a QFI trading under Route 1 shall file related financial institutions with CFETS either by itself or through QFI custodians, which is consistent with the practice under CIBM Direct.
7.Others
It is confirmed that custodian fees are allowed to be paid from FX special accounts of QFI.
Currently, when identifying FX risk exposure, RMB assets in the RMB special deposit accounts shall not be taken into account. The New Rules removed such exclusion. In addition, as explained by PBOC and SAFE, the transition arrangement on adjusting FX risk exposure will be clarified in practice separately, although not provide in the New Rules.
In addition to QFIs, both QFI custodians and other financial institutions involved according to the New Rules may be subject to punishment if not appropriately fulfilling their duties. For example, where registration with SAFE has not been done in accordance with applicable rules, pursuant to current rules, QFI will be punished by SAFE; while according to the New Rules, both QFI and QFI custodian may be punished (as the case may be).
According to PBOC and SAFE, they will issue Q&A in due course to elaborate on some operational details. Therefore, QFIs and custodians need to closely follow up with it.
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