24 September, 2019
On September 6, 2019, China Securities Depository and Clearing Corporation Limited (CSDC) issued the Detailed Implementation Rules on the Registration and Settlement Business for Domestic Securities Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (Consultation Paper) (“Detailed Implementation Rules”) and the Explanation on the Detailed Implementing Rules on the Registration and Settlement Businesses for Domestic Securities Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (Consultation Paper) (“Explanation”).
These documents constitute the ancillary documents to the Administrative Measures for Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (Consultation Paper) and the Provisions on Issues Concerning the Implementation of the Administrative Measures for Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (Consultation Paper) (hereinafter collectively referred to as “QFII/RQFII New Rules”) promulgated on January 31, 2019. Once officially enacted, the Detailed Implementation Rules will replace the Detailed Implementation Rules on the Registration and Settlement Businesses for Domestic Securities Investment by Qualified Foreign Institutional Investors (“Original Rules”) promulgated by the CSDC in December 2002 and the Circular on Matters Concerning the Registration and Settlement Businesses for Domestic Securities Investment by Fund Management Company or Securities Company Type RMB Qualified Foreign Institutional Investors(“Original Circular”).
I.Intentions of the Proposed Revisions
According to the Explanation, the Detailed Implementation Rules has amended and combined the Original Rules and the Original Circular. Generally speaking, the Detailed Implementation Rules has provided principles for securities settlement business in four respects: securities account, registration, fund settlement, and risk management. In terms of business particulars and operating procedures, either current CSDC rules apply, or the relevant applicable rules and guidelines will be subsequently promulgated by the CSDC.
II.Introduction of Settlements Brokered through Securities Companies
The Detailed Implementation Rules has specified for the first time that securities companies may handle the settlement business for QFII/RQFIIs as their settlement participants.
According to the Explanation, the reason why settlement through securities companies is permitted is that the QFII/RQFII New Rules propose including trading of options, margin trading and securities lending in the scope of investment by QFII/RQFII, and the aforementioned businesses require the securities companies to conduct intraday real-time monitoring, take front-end control over the volume of positions opened by investors, make margin calls as well as force the liquidation of positions held by default investors, in which case a mode for settlement conducted through a securities company would be more appropriate. The Detailed Implementation Rules also keep it open for QFII/RQFIIs to entrust futures companies or other institutions to handle the settlement business in the future.
We note that the mode of settlements through securities companies is not a complete substitute for the mode of settlement through banks. In other words, QFII/RQFIIs may still engage banks for settlement of trades, except for trading of options, margin trading and securities lending.
Article 12 specifies that commercial banks, securities companies or other institutions, as settlement participants, shall assume the delivery and settlement responsibilities to the CSDC. When interpreted literally, Article 12 of the Detailed Implementation Rules allows a QFII/RQFII investing in stocks, bonds or securities investment funds to entrust a commercial bank or a securities company as its settlement participant, while for a QFII/RQFII investing in stock options or margin trading and securities lending, it may only entrust a securities company as its settlement participant. Therefore, upon the enactment of the Detailed Implementation Rules, the existing QFII/RQFIIs must either reestablish their settlement participants or add new settlement participants if they propose to invest in margin trading and securities lending, or options.
III.Emphasis on the Delivery and Settlement Responsibilities Assumed by the Settlement Participants to the CSDC
The Detailed Implementing Rules emphasizes the settlement participants' delivery and settlement responsibilities to the CSDC by specifying that a settlement participant shall not refuse to assume its delivery and settlement responsibilities to the CSDC on the grounds that a QFII/RQFII is unable to or fails to fulfill its delivery and settlement responsibilities in a timely manner, and that any dispute between the settlement participant, the QFII/RQFII or its custodian shall not affect the settlement and delivery of securities and funds that CSDC is conducting or has completed in accordance with its business rules, or the disposal of default in delivery.
Our Observations
We believe that allowing securities companies to engage in settlement business is a preparation for expanding the permissible scope of investment by QFII/RQFIIs, which is consistent with the regulatory principle for strengthened trading monitoring. However, as the CSDC has not yet formulated any detailed rules on the mode of settlement through securities companies, we believe that the relevant business rules and particulars on the mode of settlement through securities companies await further clarification. Moreover, it remains to be addressed how to prevent the decreased efficiency in fund transfer and usage caused by settlement through securities companies, an issue which generally concerns foreign investors. In addition, it is also unclear as to whether a QFII/RQFII may entrust a custodian bank and a securities company as its settlement participants for different securities accounts.
We also notice that, on September 11, 2019, the State Administration of Foreign Exchange (SAFE) announced the removal of the QFII/RQFII quota restrictions and proposed to immediately amend the relevant regulations to eliminate the filling and approval requirements for the investment quota of each qualified foreign investor. Meanwhile, the SAFE also announced the removal of the national and regional restrictions on RQFII pilot programs, which means eligible foreign institutions around the world are now able to use offshore RMB to invest in domestic securities.
We are of the opinion that the issuance of the Detailed Implementation Rules, the removal of the QFII/RQFII quota restrictions as well as the national and regional restrictions on RQFII pilot programs all pave the way for the official implementation of the QFII/RQFII New Rules, which we believe is likely to happen very soon.
For further information, please contact:
Natasha Xie, Partner, Jun He
xieq@junhe.com
