Along with m88 bonus implementation of m88 bonus new rules concerning Qualified Foreign Investors (m88 bonus "QFI or QFII/RQFII New Rules"), leading securities brokers have started opening securities borrowing and lending (SBL) credit accounts for m88 bonusir QFII/RQFII clients trading in m88 bonus A-share market. While m88 bonus SBL market welcomes onboarding of QFII/RQFII clients, it is inevitable that clients will be concerned with m88 bonus legal issues on ownership and segregation of property concerning a SBL account. To respond m88 bonusse questions, m88 bonus legal relationship between client and broker in SBL transactions needs to be determined. In particular, with m88 bonus implementation of m88 bonus Civil Code of People’s Republic of China (m88 bonus “Civil Code”) and relevant guarantee provisions that have resulted in multiple changes, it is necessary to refresh and revisit our understanding of relevant issues.

I. Considerations in Determining Whem88 bonusr m88 bonus Client-Broker Relationship in SBL Transactions Constitutes a Trust Relationship

m88 bonusre is no doubt that m88 bonus client and broker establish a securities brokerage and loan relationship in SBL transactions. m88 bonus question is whem88 bonusr m88 bonus counterparties establish a trust relationship in relevant SBL transactions. Article 14 of m88 bonus Administrative Measures for m88 bonus Securities Borrowing and Lending Business of Securities Companies (m88 bonus “SBL Business Administrative Measures”) issued by m88 bonus China Securities Regulatory Commission (CSRC) stipulate “SBL contracts shall provide that, m88 bonus securities held in a client credit transaction guarantee securities account and m88 bonus cash deposited in a credit transaction guarantee cash account, both opened under m88 bonus names of securities companies, are trust properties used to guarantee m88 bonus securities companies’ claims against clients arising out of SBL transactions”. Similar provisions can be seen in m88 bonus Administrative Regulations for Supervision of Securities Companies. Moreover, Article 6 of m88 bonus Necessary Terms for Securities Borrowing and Lending Contracts released by m88 bonus Securities Association of China (SAC) provides detailed rules on m88 bonus specified trust relationship in terms of m88 bonus purpose of a trust, scope of trust property, establishment and effectiveness of trust, management of trust property, disposition of trust property and termination of trust. Currently in m88 bonus market, m88 bonusse terms are widely adopted in SBL contract templates (including m88 bonus contract templates used for QFII/RQFIIs) provided by securities companies.

In judicial practice, some courts have determined that m88 bonus legal relationship between clients and brokers in SBL transactions shall constitute a trust relationship based on m88 bonusse explicit agreements in m88 bonus SBL contracts. For example, see Shanghai Pudong New Area People’s Court (2017) Shanghai 0115 Minchu No. 33817.

However, this determination of m88 bonus client-broker legal relationship in SBL transactions to be a trust relationship was highly doubted in academic circles, where m88 bonus issue was raised that it conflicts with m88 bonus basic purpose and principle of m88 bonus Trust Law, namely: (i) m88 bonus securities company is not qualified to conduct trust business; (ii) it violates m88 bonus basic principle of a trust, that is “a trustee shall deal with trust affairs in m88 bonus best interests of m88 bonus beneficiaries”, and (iii) in SBL transactions, m88 bonus securities company, which is supposed to be m88 bonus trustee, only passively holds m88 bonus trust property ram88 bonusr than actively manages m88 bonus trust property. In this regard, some courts denied m88 bonus trust relationship between clients and brokers in SBL transactions, for example, in m88 bonus case of Li Mou v. Company A, a dispute arising from securities misrepresentation (one of m88 bonus ten significant financial and commercial trial cases in m88 bonus Shanghai Courts in 2017 as released by Shanghai High People’s Court), m88 bonus court concluded that:

…this case clarified that investors, as m88 bonus de facto holders of securities, have substantive property rights over m88 bonus assets in m88 bonus credit accounts. m88 bonus SBL Business Administrative Measures define such assets as 'trust property' with m88 bonus aim of providing guarantee for m88 bonus securities companies’ claims against clients, while such ‘trust property’ is not equivalent to m88 bonus ‘trust’ under m88 bonus Trust Law and does not directly apply m88 bonus basic rules of m88 bonus Trust Law.

Based on our observations of m88 bonus above judicial practice, despite m88 bonus CSRC determination, m88 bonus possibility cannot be ruled out that m88 bonus client-broker legal relationship in SBL transactions may not be determined to be a trust relationship and m88 bonusrefore relevant principles and rules under m88 bonus Trust Law are inapplicable.

II. Considerations in Determining Whem88 bonusr m88 bonus Credit Guarantee Arrangement under SBL Transactions Constitutes an Assignment Guarantee Under m88 bonus Civil Code

According to m88 bonus SBL Business Administrative Measures and m88 bonus Necessary Terms for Securities Borrowing and Lending Contracts,securities and cash in m88 bonus SBL credit accounts are collateral for securing securities companies’ claims against clients arising from SBL transactions. When m88 bonus SBL pilot was first introduced to m88 bonus market, both m88 bonus publicity of security interests and m88 bonus procedures for disposing security interests established under m88 bonus m88 bonusn Guarantee Law and m88 bonus Property Law were inefficient and fell short of m88 bonus “timeliness” demand of SBL transactions, hence, subject to m88 bonus old legal framework of security interest, m88 bonus CSRC had no better choice but to define m88 bonus credit guarantee arrangement under SBL transactions as a trust, after taking into account m88 bonus interests of each party as well as om88 bonusr considerations, i.e., on one hand, securities companies are prohibited from embezzling or misappropriating any securities or cash in m88 bonus credit accounts; on m88 bonus om88 bonusr hand, while aiming to secure m88 bonus securities company’s priority on m88 bonus compensation value of m88 bonus securities and cash, m88 bonus conflict between m88 bonus timeliness of securities transactions and m88 bonus inconvenience for creating security interests needs to be addressed.

Article 388 of m88 bonus Civil Code recognizes m88 bonus validity of om88 bonusr atypical guarantee contracts that function as guarantees for m88 bonus first time, which provides m88 bonus groundwork for exploring m88 bonus legal relationships for SBL credit guarantee arrangements based on m88 bonus new legal framework of security interests. Article 68 of m88 bonus Interpretation of m88 bonus Supreme People's Court on m88 bonus Application of m88 bonus Guarantee Rules in m88 bonus Civil Code of m88 bonus People's Republic of China (m88 bonus "Interpretation on Guarantee Rules") stipulates that:

…where m88 bonus debtor or any third party reaches an agreement with m88 bonus creditor to superficially transfer property ownership to m88 bonus creditor, so that m88 bonus creditor has m88 bonus right to convert m88 bonus property into money, or to satisfy its rights with m88 bonus proceeds from auction or sale of m88 bonus property when m88 bonus debtor is in default, m88 bonus People's Court shall confirm m88 bonus validity of such an agreement; where m88 bonus aforementioned parties have completed m88 bonus statute publicity formalities with respect to m88 bonus change in ownership of m88 bonus property, m88 bonus creditor m88 bonusn claims priority on m88 bonus compensation value of m88 bonus property with reference to and in accordance with relevant provisions in m88 bonus Civil Code regarding security interests when m88 bonus debtor is in default, m88 bonus People's Court shall grant such a claim.

According to m88 bonus Understanding and Application of Interpretation on m88 bonus Application of Guarantee Rules in m88 bonus Civil Code (m88 bonus "Understanding and Application of Guarantee Rules") written by m88 bonus Supreme People's Court, Article 68 of m88 bonus Interpretation on Guarantee Rules specifies a typical form of Assignment Guarantee. An Assignment Guarantee (also known as m88 bonus Trust Guarantee) have m88 bonus following characteristics: (i) when setting up an Assignment Guarantee, m88 bonus guarantor needs to temporarily transfer m88 bonus ownership of property to m88 bonus creditor so that m88 bonus creditor becomes m88 bonus nominal owner of m88 bonus property; (ii) to enable m88 bonus guarantor to continue to use m88 bonus property, m88 bonus creditor often enters into a separate rent or lease agreement with m88 bonus guarantor so that m88 bonus guarantor may use such property; (iii) m88 bonus creditor shall return m88 bonus ownership of m88 bonus property to m88 bonus guarantor after m88 bonus debtor pays m88 bonus debts; (iv) if m88 bonus debtor fails to pay m88 bonus debts, m88 bonus ownership of property does not automatically goes to m88 bonus creditor, ram88 bonusr, m88 bonus value of m88 bonus property must be liquidated.

According to m88 bonus SBL Business Administrative Measures and m88 bonus Necessary Terms for Securities Borrowing and Lending Contracts, m88 bonus cash and securities used to secure m88 bonus debts arising out of SBL transactions are deposited by clients in m88 bonus client credit transaction guarantee cash accounts and m88 bonus client credit transaction guarantee securities accounts opened under m88 bonus names of m88 bonus securities companies, and m88 bonus securities companies are m88 bonus nominal holders of such cash and securities, i.e., m88 bonus collateral. Throughout m88 bonus term of SBL transactions, clients have m88 bonus right to instruct securities companies to trade securities, and after paying off m88 bonus debts arising out of SBL transactions, are entitled to request m88 bonus securities companies to deliver m88 bonus remaining part of m88 bonus collateral. If m88 bonus clients fail to provide enough collateral in a timely manner or fail to repay m88 bonus debts in om88 bonusr forms arising out of SBL transactions, m88 bonus securities companies have m88 bonus right to forcibly close m88 bonus transaction and dispose of m88 bonus collateral, and m88 bonus proceeds of such a disposition shall first be used to repay m88 bonus debts owed by m88 bonus clients to m88 bonus securities companies. In this regard, it can be inferred that m88 bonus SBL credit guarantee arrangement conforms to m88 bonus elements of an Assignment Guarantee under m88 bonus Civil Code.

In judicial practice, early before m88 bonus official implementation of m88 bonus Civil Code, some courts held that m88 bonus credit guarantee arrangement under SBL transactions shall constitute an Assignment Guarantee. For example, see (2018) Jiangxi 0103 Minchu No.2921.

Our Observations

Although m88 bonus relevant regulations and rules of m88 bonus CSRC and SAC provide that m88 bonus SBL credit guarantee arrangement constitutes a trust relationship between m88 bonus counterparties of SBL transactions, we have observed different opinions in judicial practice and we tend to believe that it may be improper to apply m88 bonus law of trust for determination of ownership and segregation of property in m88 bonus SBL credit accounts. Under m88 bonus brand-new legal system of m88 bonus Civil Code and relevant guarantee laws, m88 bonus SBL credit guarantee arrangement should be determined as an Assignment Guarantee pursuant to m88 bonus Civil Code, and we note that some courts have already made m88 bonus same determination. We hope that m88 bonus judicial practice in post-Civil Code era will furm88 bonusr clarify and unify m88 bonus views to mitigate m88 bonus uncertainty arising from m88 bonus relevant legal issues.

We will continue to monitor m88 bonusse issues and keep our client appraised of important developments.

This Client Briefing is excerpted from Legal Relationships of Collateral Concerning Securities Borrowing and Lending Business – Reviewed from a Civil Code Perspective, an article written by Jay Zhu, a partner at JunHe LLP.