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The China Banking and Insurance Regulatory Commission (“CBIRC”) disclosed a consultation paper (“Consultation Paper”) on custody business of commercial banks on December 29, 2022.

 

We would like share with you some key issues rather than a full analysis of the Consultation Paper.

 

1.Custody & Safekeeping

 

The Consultation Paper is applicable to both custody (托管) and safekeeping (保管) business of commercial banks, although such business is generally named as custody business in the Consultation Paper.

 

Therefore, we should avoid literal translation as the terminology “托管” in the Consultation Paper in Chinese may refer to custody (托管) and/or safekeeping (保管), as the case may be.

 

2.Legal Relationship

 

The Consultation Paper does not intend to identify or change the legal relationship of various custody business.

 

We shall still refer to other laws and regulations for the legal relationship. For example, the custodian of public funds is one of the two co-trustees under the trust relationship, according to the PRC Fund Law; while the custody service provided by commercial banks to trust schemes is still of safekeeping nature, with no trust relationship established.

 

3.Legal Duties vs Commercial Services Only

 

(1)"custodial assets" that commercial banks can actually control

 

According to the Consultation Paper, commercial banks can provide a full set of custody services and undertake related custody responsibilities for the "custodial assets" that they can actually control.

 

The circumstances of such actual control include: (i) the commercial bank opens a cash account for the asset management product, and keeps all kinds of bank deposits and other funds held by the product; (iii) the commercial bank can control the transaction process and fund/asset transfer of assets under the asset management products in accordance with market rules and custody agreements; (iv) other actual control situations stipulated by CBIRC.

 

(2)"other assets" beyond the actual control of commercial banks

 

According to the Consultation Paper, other assets that cannot be actually controlled shall be dealt with in two dimensions:

 

Responsibilities that cannot be assumed: asset safekeeping, asset valuation, investment supervision, etc.

 

Transaction management services that can be provided: According to their own capabilities and service levels, commercial banks can provide transaction management services in accordance with the custody agreement, including: (i) checking the asset management product manager’s transfer instructions and transferring funds according to the elements stipulated in the custody agreement; (ii) providing asset ownership verification services in accordance with the methods agreed in the custody agreement; (iii) safekeeping of investment agreements, certificates of rights and other related materials and related information recording services; (iv) other services agreed in the custody agreement.

 

(3)brief analysis

 

While the Consultation Paper is helpful for the commercial banks to control business risks, there are still some other key issues to consider.

 

Custody services may be provided to various asset management products under different regulatory rules and legal relationships, so that we need to take into consideration of both the Consultation Paper and the rules on various asset management products.

 

For example, according to the PRC Fund Law, custodian of public funds and private securities investment funds etc. have a set of legal duties, which are mandatory duties.

 

QUOTE

A fund custodian shall perform the following duties:

(a)Keeping safe custody of fund assets;
(b)Maintaining a cash account and a securities account for the fund assets according to relevant provisions;
(c)Establishing separate accounts for the assets of different funds under its custody to ensure the integrity and independence of fund assets;
(d)Maintaining records, account books, statements and other materials concerning the business of fund custody;
(e)Handling settlement and delivery matters without delay in accordance with fund contracts and the investment instructions of fund managers;
(f)Handling matters of information disclosure in relation to the business of fund custody;
(g)Issuing opinions on the financial and accounting reports, and the interim and annual reports, of funds;
(h)Verifying and reviewing the net value of fund assets and the purchase and redemption prices of fund units calculated by fund managers;
(i)Convening general meetings of the holders of fund units as required;
(j)Supervising the investment operations of fund managers in accordance with relevant provisions; and
(k)Performing other duties prescribed by CSRC.

UNQUOTE

 

Prudent analysis is required on how to strike a balance between the Consultation Paper and the PRC Fund Law.

 

4.Issues to be Further Considered

 

Taking the asset management products regulated by the PRC Fund Law as an example, in practice, we often discuss with clients such issues as:

 

[Question 1] Article 36 of the PRC Fund Law on the responsibilities of the fund custodian contains many such expressions as "in accordance with relevant provisions". How shall we understand it? What provisions of which legislator(s)?

 

[Question 2] Article 145 of the PRC Fund Law stipulates that "Where in the process of performing their respective duties, the fund manager and the fund custodian violate the provisions of this law or the fund contract, and cause damage to the fund assets or fund units: if the manager or the custodian causes the damage, they shall bear the compensation liability for their respective actions according to law; if the joint behavior causes the damage to the fund assets or fund unit holders, they shall bear joint and several liability for compensation.” What acts shall be regarded as the sole acts of the manager, what acts shall be regarded as the sole acts of the custodian, and what acts shall be regarded as the joint acts of the two?

 

We believe that there are no easy answers to these questions. Will these issues become more complicated after the Consultation Paper is finally implemented in the near future? People in the industry needs to think further, and according to our experience, we believe that more discussion is required between CBIRC and other financial regulators as well.