17 May, 20`8
On May 4, 2018, following the promulgation of the Administrative Measures for Foreign-invested Securities Companies, the China Securities Regulatory Commission (“CSRC”) released a consultation paper on the Administrative Measures for Foreign-Invested Futures Companies (“Consultation Paper”) addressing additional measures to open up the financial industry. Below we have summarized the main points of relevance for foreign investors.
I. Scope of Application
The Consultation Paper starts by specifying that aggregate foreign ownership in a futures company shall comply with the State’s current commitment to open up of the futures industry, i.e. the percentage of equity in a futures company held by foreign investors, whether directly or indirectly, will be limited to 51% for the first three years, after which the cap will be lifted. In recognition of the differing operational characteristics of foreign-invested and domestic-invested futures companies, the CSRC has formulated separate and specific administrative measures to regulate those futures companies invested by foreign investors. The Consultation Paper defines a foreign-invested futures company as “any futures company in which 5% or more equity is directly owned or indirectly controlled by a single foreign shareholder or multiple affiliated foreign shareholders.” Those futures companies whose foreign ownership is less than 5% will continue to be governed by the Measures for Supervision and Administration of Futures Companies (“Measures for Futures Companies”).
II. Qualification Requirements for Foreign Shareholders
Currently, the establishment of a futures company is primarily governed by the Administrative Regulation for Futures Trading (“Regulation for Futures Trading”) and the Measures for Futures Companies. The Regulation for Futures Trading requires that the major shareholders and de facto controller of a futures company should “have sustained profitability and good credit and no record of material violations of laws or regulations over the past three years”, while the Measures for Futures Companies provide that a foreign shareholder shall be a “validly existing financial institution” and that “all financial and regulatory indexes of the company for the past three years shall comply with the relevant requirements.”
The Consultation Paper further specifies the qualification requirements for foreign shareholders. As well as complying with Articles 7 and 9 of the Measures for Futures Companies, any foreign shareholder directly holding 5% or more equity in a futures company, shall also be a “validly existing financial institution”, and moreover “be a financial institution having operated continuously for at least five years and have not been subject to any material punishment for violations of law or regulations for the past three years.” In addition, the Consultation Paper requires “sustained profitability”, defined as “having good international reputation and operation performance, and the business scale, incomes, profits of the company shall be ranked in the forefront of the world” and also “good credit”, meaning the company shall “have maintained its long-term credit at a high level for the past three years.” We note that the qualification requirements for foreign shareholders proposed by the Consultation Paper are basically in line with those for foreign-invested securities companies provided in the Administrative Measures for Foreign-invested Securities Companies.
As for a foreign shareholder indirectly holding equity in a futures company, the Consultation Paper requires that “for any foreign investor having actual control over 5% or more equity in a futures company through an investment relationship, agreement or another arrangement, the equity shall be directly transferred to such investor.” Given the current situation, in which some futures companies are wholly owned or controlled by securities companies, and that foreign investors may currently buy shares in onshore listed futures companies through QFII/QDFII channels and the stock connect mechanism, the Consultation Paper grants exemptions from the direct shareholding requirement for “any equity indirectly held by domestic securities companies or other circumstances provided by the CSRC.” Moreover, if the shares in a listed futures company purchased by a foreign investor, whether through a stock exchange trade, through joint ownership by a foreign investor and others, or through some other arrangements, reach 5% or more, such foreign investor shall meet the qualification requirements for foreign shareholders pursuant to the Consultation Paper as set forth above.
III. Appointment of Management
Along with the increase of the foreign ownership limit in futures companies, given foreign shareholders’ desire to appoint more foreign senior management personnel, the Consultation Paper requires that all such senior management personnel of the foreign-invested futures company shall be present in China to perform their duties, and that the number of senior management having Chinese nationality shall be not less than one third of the total number of senior management personnel.
IV. Deployment of IT System
The Consultation Paper provides that, “the main server of a foreign-invested futures company, used as the information system for trading, settlement and risk control and as the data device for recording and storing customer information shall be hosted inside China (excluding Hong Kong, Macao and Taiwan).”
V. Business Scope
The Consultation Paper does not provide any additional restrictions on the business scope of foreign-invested futures companies. As is the case for domestic futures companies, foreign-invested futures companies can apply for domestic futures brokerage, overseas futures brokerage, futures investment consulting and other futures business as stipulated by the CSRC in accordance with the Regulation for Futures Trading and other relevant regulations, but are prohibited from engaging in any futures proprietary trading business, whether directly or in a disguised form. In practice, a foreign-invested futures company may establish a risk management subsidiary to conduct futures proprietary trading business such as market making business in accordance with the Working Guidelines for the Pilot Business of Futures Companies' Establishment of Subsidiaries for Operating Businesses Focusing on Risk Management Services as stipulated by the China Futures Association. We understand that as is the case for domestic futures companies, foreign-invested futures companies may apply to set up a risk management subsidiary to conduct futures proprietary trading activities in accordance with the above provisions.
The deadline for soliciting public comments on the Consultation Paper is June 4, 2018 and we expect that the final version will be issued soon thereafter.
For further information, please contact:
Natasha (Qing) Xie, Partner, Jun He
xieq@junhe.com
