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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. QDII

 

The State Administration of Foreign Exchange (“SAFE”) issued a notice on March 24, 2023, which included amendment of two provisions in the Provisions on the Foreign Exchange Administration of Overseas Securities Investment of Qualified Domestic Institutional Investors issued in 2013.

 

Article	Amendment
Article 16	Where a QDII license holder falls under any of the following circumstances, the foreign exchange authority shall punish it in accordance with the Regulation of the People's Republic of China on Foreign Exchange Administration and other relevant provisions; and, if the circumstances are serious, may reduce or even cancel its QDII quota……
Article 17	Where a QDII custodian falls under any of the following circumstances, the foreign exchange authority shall punish it in accordance with the Regulation of the People's Republic of China on Foreign Exchange Administration and other relevant provisions; and, if the circumstances are serious, may order the QDII license holder to replace its custodian……

 

Merits & Tree’s Comment:

 

There is no doubt that any QDII license holder or QDII custodian that violates applicable laws or regulations shall be punished.

 

The deletion of such provisions as “reduce or even cancel its QDII quota” and “order the QDII license holder to replace its custodian” indicates that SAFE will respect normal business operations of market players and will not intervene with administrative measures unless necessary, which is helpful to maintain stability of the QDII scheme and to better meet market expectation.

 

2. QFII

 

(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 wiling 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.

 

3. CIBM Direct

 

SAFE published a Q&A (the “Q&A”) on its official website on March 21, 2023, which clarified some implementing standards with respect to the Rules on Funds Invested by Overseas Institutional Investors in China’s Bond Market (the “Rules”) promulgated in 2022.

 

For example, in 2022, the Rules (i) cancelled the limit on outward remittance for single currency (RMB or foreign currency) investment, and (ii) relaxed the limit on outward remittance with foreign currency from 110% to 120% for investment with both RMB and foreign currency, while leaving room for relaxion on such ratio in principle for long-term foreign investors in China’s bond market.

 

In this regard, the Q&A provides that, where foreign institutional investors simultaneously remit “RMB + foreign currency” for investment, the accumulative outward foreign currency remittance amount shall not exceed 1.2 times of the accumulative inward foreign currency remittance amount, if it has been one year or less from the date when the foreign institutional investor obtains the China Interbank Bond Market (i.e., CIBM) filing notice; 1 to 3 years (inclusive), 1.3 times; 3 to 5 years (inclusive), 1.4 times; more than 5 years, 1.5 times.

 

Merits & Tree’s Comment:

 

Foreign institutional investors investing through CIBM Direct scheme shall be subject to the above rules. SAFE encourages long-term investments by foreign institutional investors in China’s bond market with such specific and quantitative measures.