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China Opens Funds Custody Business to Local Branches of Foreign Banks

2020.07.15 XIE, Qing (Natasha)、QIN, Tianyu、FANG, Hao

On July 10, 2020 the China Securities Regulatory Commission (CSRC) and the China Banking and Insurance Regulatory Commission (CBIRC) jointly issued the amended Administrative Measures on Securities Investment Funds Custody Businesses (“Measures”) and the relevant drafting statement (“Drafting Statement”). Pursuant to the Drafting Statement, the proposed amendments are meant to implement the first-phase of the Economic and Trade Agreement between China and U.S. and facilitate the applications for securities investment funds custody business qualification (“funds custody qualification”) by local branches of foreign banks (“foreign bank branches”) under a centralized framework for the opening up of China’s financial industry. The Measures became effective upon release, and foreign bank branches are now able to apply for funds custody qualification in accordance with the Measures. 


We briefly summarize below the relevant provisions of the Measures and the differences between the Measures and the Administrative Measures on Securities Investment Funds Custody Businesses (Consultation Paper) (“Consultation Paper”) issued by the CSRC on May 8, 2020.


I.Requirements for Foreign Bank Branches Applying for Funds Custody Qualification and Liabilities of Parent Banks


1.Requirements 


In contrast to the Consultation Paper, the Measures lower the qualification requirements to some extent for a foreign bank branch and its parent bank. For a foreign bank branch, the Measures remove the requirement that it must have been in continuous operation for more than three years with good business performance and asset quality, and have operating capital compatible with the funds custody business. The Measures also abolish the following requirements for the parent bank of a foreign bank branch, namely, (i) relevant indicators of the parent bank in the past three years shall comply with the requirements of the laws and regulatory requirements of the country or region where it locates; (ii) the parent bank must not have been subject to any severe penalty imposed by any regulatory authority, or administrative or judicial authority in the country or region where it locates during the past three years; and (iii) the parent bank cannot be under active investigation by relevant authorities due to any suspected major violation of laws or regulations. Accordingly, when applying for the funds custody qualification, a foreign bank branch is no longer required to provide a statement issued by the relevant regulatory authorities in the country or region where its parent bank is located or a foreign institution recognized by the CSRC, as to whether the parent bank has met the aforementioned three requirements. 


Similar to the Consultation Paper, under the Measures, a foreign bank branch is allowed to refer to its parent bank’s net assets and other financial indicators when applying for the funds custody qualification. The revised qualification requirements for a parent bank are set forth below.


(1)It has a good internal control system, good international reputation and business performance, with the business scale, revenue, profits, market share and other indicators of its funds custody business ranking forefront internationally in the past three years, and maintaining a high long-term creditworthiness over the past three years. 


(2)The country or region where it is located has well-established legal and regulatory regimes for securities; relevant financial regulatory authorities in such country or region have entered into a securities memorandum of understanding with the CSRC or other regulatory authority recognized by the CSRC, and maintain effective regulatory cooperation.


2.Liabilities of overseas parent bank


Consistent with the Consultation Paper, the Measures specify that civil liabilities imposed on a foreign bank branch shall be borne by the parent bank, while simultaneously requiring the parent bank to establish a liquidity support mechanism based on the size of assets under the local branch’s custody. The Measures require a foreign bank branch, when applying for the funds custody qualification, to provide a description of the liquidity support mechanism provided by its parent bank for the local branch’s proposed funds custody business. However, the Measures do not provide the specific requirements for such liquidity support. In the press release issued by the CSRC on the same day (“Press Release”), the CSRC made it clear that it would subsequently update the guidelines for administrative approvals regarding funds custody qualification (“Guidelines for Administrative Approvals”) in accordance with the Measures. We expect that the CSRC would clarify the detailed requirements for relevant application materials in the Guidelines for Administrative Approvals.


Notably, in the Press Release, the CSRC further clarified the following: a foreign bank branch is allowed to refer to the net assets and other financial indicators of its parent bank when applying for the funds custody business qualification; the liabilities assumed by the parent bank shall be specified and the relevant risk control measures shall be strengthened; when implementing the Measures, the locally incorporated subsidiaries of foreign banks shall be subject to the same regulatory requirements as a whole. We understand the CSRC and the CBIRC have the discretion to decide how the foregoing rules would equally apply to the local subsidiaries of foreign banks (“foreign bank subsidiaries”) when implementing the Measures.


II.Refine Net Asset Requirements for Fund Custodians 


Same as the Consultation Paper, the Measures raise the minimum net assets threshold imposed on an applicant for funds custody qualification, namely, the applicant’s minimum net assets at the end of the last three fiscal years shall be RMB 20 billion instead of 2 billion. The CSRC and the CBIRC pointed out in the Drafting Statement that, the reason for raising the net assets threshold for fund custodians to RMB 20 billion rather than applying the same net assets threshold for clearing agents (i.e. RMB 40 billion) is to separate the funds custody business and clearing business while effectively increasing the risk tolerance of fund custodians. Some foreign bank branches/subsidiaries desire to obtain the clearing agent qualifications to better carry out the funds custody business, but the requirement for the net assets at the end of the last three fiscal years to not be less than RMB 40 billion undoubtedly becomes one of the obstacles for them to apply for the clearing agent qualifications. Currently, it remains unclear as to (a) whether a foreign bank branch can apply for the clearing agent qualification; and (b) whether a foreign bank branch/subsidiary can refer to the financial indicators of its parent bank when applying to the China Securities Depository and Clearing Corporation Limited for the clearing agent qualification. 


III.Unify the Entry Criteria and Regulatory Requirements for Funds Custody Qualifications


The Measures unify the entry criteria and regulatory requirements for commercial banks and other financial institutions applying for funds custody qualifications, and also incorporate the relevant provisions for non-bank financial institutions carrying out funds custody business.


We note that on the basis of the Consultation Paper, the Measures add a new article to clarify the respective responsibilities of the CSRC and the CBIRC, namely (1) if a commercial bank acts as a fund custodian, both the CSRC and the CBIRC have the power to supervise the bank’s daily operation of funds custody business according to law; (2) if a commercial bank violates relevant laws, regulations and rules in carrying out the funds custody business, both the CSRC and the CBIRC may take regulatory measures against relevant violations; and (3) both the CSRC and the CBIRC will strengthen information sharing and regulatory collaboration with respect to the funds custody businesses conducted by commercial banks.


Our Observations 


We expect that with the official release of the Measures, applications already submitted by foreign banks subsidiaries (such as HSBC, Citibank and Deutsche Bank) for funds custody qualifications will be approved soon. It would indicate that from now on, funds custody business is officially open to all foreign banks.


We will continue to monitor the situation and keep our clients apprised of any important developments.

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