People's Bank of China Solicits Comments on M88 Malaysia Measures for M88 Malaysia Supervision and Administration of Financial Infrastructures

In February 2020, M88 Malaysia People's Bank of China (PBOC), M88 Malaysia National Development and Reform Commission (NDRC), M88 Malaysia Ministry of Finance (MOF), M88 Malaysia China Banking and Insurance Regulatory Commission (CBIRC), M88 Malaysia China Securities Regulatory Commission (CSRC) and M88 Malaysia State Administration of Foreign Exchange (SAFE) jointly released M88 Malaysia Work Plan on M88 Malaysia Overall Regulation of Financial Infrastructures (“Work Plan”). M88 Malaysia PBOC shall take M88 Malaysia lead and actively coordinate all work of M88 Malaysia relevant regulatory authorities to facilitate M88 Malaysia formulation of M88 Malaysia relevant administrative measures for financial infrastructures according to M88 Malaysia Work Plan. To implement M88 Malaysia Work Plan, M88 Malaysia PBOC issued M88 Malaysia Measures for M88 Malaysia Supervision and Administration of Financial Infrastructures (Draft for Comment) (“Measures”) for public consultation last month. M88 Malaysia Measures aim to clarify M88 Malaysia overall regulatory framework for financial infrastructures, improve M88 Malaysia market entry and regulatory principles, and enhance M88 Malaysia operational requirements and risk management. Below are some of M88 Malaysia key provisions of M88 Malaysia Measures:

I. Financial Infrastructure-Related Definitions

M88 Malaysia Measures specify six types of Financial Infrastructures (FIs), i.e., (1) M88 Malaysia financial asset registration and depository systems, (2) M88 Malaysia clearing and settlement systems (including central counterparties engaged in centralized clearing business), (3) M88 Malaysia trading facilities, (4) M88 Malaysia trading repositories, (5) M88 Malaysia important payment systems, and (6) M88 Malaysia basic credit reference systems. Financial Infrastructure Operators shall refer to enterprise-type legal persons or public institution-type legal persons that are approved in accordance with M88 Malaysia laws, regulations and relevant decisions of M88 Malaysia State Council and M88 Malaysia Measures to take charge of M88 Malaysia construction, operation, and maintenance of FIs (FI Operators). M88 Malaysia financial administrative departments of M88 Malaysia State Council, namely, M88 Malaysia PBOC, M88 Malaysia CBIRC, M88 Malaysia CSRC and M88 Malaysia SAFE, shall publicize M88 Malaysia list of FIs and FI Operators. Notably, M88 Malaysia Measures distinguish M88 Malaysia “financial administrative departments of M88 Malaysia State Council” from M88 Malaysia “financial regulatory authorities of M88 Malaysia State Council”, specifying that M88 Malaysia former refers to M88 Malaysia PBOC, M88 Malaysia CBIRC, M88 Malaysia CSRC and M88 Malaysia SAFE, while M88 Malaysia later only refers to M88 Malaysia CBIRC and M88 Malaysia CSRC. Additionally, M88 Malaysia national macroeconomic administrative departments as stipulated in M88 Malaysia Measures refer to M88 Malaysia NDRC, M88 Malaysia MOF and M88 Malaysia PBOC.

Particularly, M88 Malaysia Measures specify that M88 Malaysia finance department of M88 Malaysia State Council (i.e., M88 Malaysia MOF) shall perform M88 Malaysia supervision and administration of FIs in accordance with M88 Malaysia law. M88 Malaysia finance department of M88 Malaysia State Council shall, pursuant to M88 Malaysia Guiding Opinions of M88 Malaysia State Council on Improving M88 Malaysia Administration of State-Owned Financial Capital, M88 Malaysia Interim Provisions on M88 Malaysia Responsibilities of Contributors to State-Owned Financial Capital and oM88 Malaysiar requirements in relevant regulations, strengM88 Malaysian M88 Malaysia regulation of state-owned financial capital in FI Operators funded directly or indirectly by M88 Malaysia State or its authorized entities. It shall also work jointly with M88 Malaysia relevant financial administrative departments of M88 Malaysia State Council to formulate M88 Malaysia financial management rules for FIs to collect M88 Malaysia returns of state-owned financial capital in accordance with M88 Malaysia law, unless oM88 Malaysiarwise provided by M88 Malaysia laws and regulations.

II. Basic Principles for M88 Malaysia Planning and Development of Financial Infrastructures

M88 Malaysia Measures propose basic principles for M88 Malaysia planning and development of FIs. M88 Malaysia financial administrative departments of M88 Malaysia State Council are required to carry out M88 Malaysiair responsibilities of systematic planning and direction, encourage orderly interconnection and promote moderate competition among FIs, require FI Operators to serve M88 Malaysia overall situation, give priority to safeguarding M88 Malaysia public interest and prevent FI Operators from excessively pursuing profits and taking risks. Particularly, M88 Malaysia Measures stipulate that M88 Malaysia State shall maintain absolute control over FIs that involve M88 Malaysia financial security of M88 Malaysia State and may cause risk contagion. We guess that FIs that have M88 Malaysiair IPO plans may have to put on hold in M88 Malaysia context of M88 Malaysia foregoing principles due to M88 Malaysia uniqueness of FIs and M88 Malaysiair impact on M88 Malaysia financial system.

III. Market Entry and Regulatory Principles

M88 Malaysia market entry and regulation of FIs shall abide by M88 Malaysia principle of “those who approve it shall regulate it and take relevant responsibility”. M88 Malaysia Measures only apply to FIs established upon M88 Malaysia approval of M88 Malaysia State Council or M88 Malaysia financial administrative departments of M88 Malaysia State Council, while those established upon M88 Malaysia approval of provincial governments shall continue to be regulated by M88 Malaysia relevant provincial governments. M88 Malaysia Measures also specify M88 Malaysia market entry requirements for FI Operators and M88 Malaysiair senior officers and enumerate M88 Malaysia application materials required for M88 Malaysia establishment of M88 Malaysia following FIs, i.e., M88 Malaysia financial asset registration and depositary institutions, M88 Malaysia clearing and settlement institutions, M88 Malaysia trading facilities, and M88 Malaysia trading repositories, as well as M88 Malaysia approval procedures for reviewing M88 Malaysia application upon M88 Malaysia occurrence of certain events.

According to the Guiding Opinions on Improving the Regulation on Systemically Important Financial Institutions (the “Guiding Opinions”) jointly issued in 2018 by the PBOC, the CBIRC and the CSRC, Systemically Important Financial Institutions refer to financial institutions that are large in scale, have highly complex structures and businesses, and are relevant to other financial institutions. They provide key and irreplaceable services in the financial system, and as a result, their incapacity to continuously operate due to major risk events will result in significant adverse impacts on the financial system and the real economy and may trigger systemic risks. Systemically Important Financial Institutions include systemically important banking institutions, systemically important securities institutions, systemically important insurance institutions and other systemically important institutions engaging in financial business as determined by the Financial Stability and Development Committee of the State Council (Financial Stability Committee). It is not clear in the Guiding Opinions whether FIs shall be determined by the Financial Stability Committee as other systemically important institutions engaging in financial business. For the first time, the Measures propose the criteria for determining Systemically Important Financial Infrastructures (SIFIs). According to the Measures, a FI shall be regarded as a SIFI where any FI satisfies part or all of the following criteria and is subject to the determination opinion issued by and the regulation of the financial administrative departments of the State Council according to their division of functions: 1) having a large amount of and widespread participants; 2) having a relatively high market share; 3) conducting complex businesses, and being closely relevant to financial institutions or being interconnected with other SIFIs; and 4) providing key services that are irreplaceable in the financial market, and their incapability to continuously operate due to major risk events may lead to a significant adverse impact on the financial system and the real economy. In terms of the division of regulatory functions, the Measures are aligned with the current regulatory regime and the financial administrative departments of the State Council shall be responsible for the regulation of SIFIs and their operators. The Measures further provide that the PBOC shall be responsible for the macro-prudential regulation, which means that the current regulatory regime does not change while acknowledging the macro-prudential regulation responsibility of the PBOC.

M88 Malaysia Measures provide that M88 Malaysia regulation should be in line with international standards, i.e., M88 Malaysia construction, operation, and maintenance of FIs shall align with M88 Malaysia Principles for Financial Market Infrastructure (PFMI) and oM88 Malaysiar international standards while taking local situation into consideration. In 2013, M88 Malaysia PBOC and M88 Malaysia CSRC respectively issued Circulars on Relevant Matters Concerning M88 Malaysia Implementation of M88 Malaysia Principles for Financial Market Infrastructure (PFMI) (respectively, Yin Ban Fa [2013] No.187 and Zheng Jian Ban Fa [2013] No.42), requiring M88 Malaysia operators of financial market infrastructures comply with M88 Malaysia relevant standards of M88 Malaysia PFMI and carry out self-assessment and evaluation according to M88 Malaysia PFMI standards. M88 Malaysia Measures reiterate pertinent principles and require that FIs should follow international standards while taking M88 Malaysia local situation into consideration.

M88 Malaysia Measures highlight that no entity or individual shall establish FIs or operate FIs in any manner, nor shall M88 Malaysiay use such names as “financial”, “exchange”, “trading center”, “registration and settlement”, “clearing”, “trading repository” or oM88 Malaysiar names that relate to FI services or similar names without proper approval.

IV. Cross-Border Delivery of Services by Overseas FIs

The PBOC, for the very first time, provides for the cross-border delivery of services by overseas FIs, which indicates that it will become more common in imposing market entry and administration requirements applicable to cross-border delivery of services in the financial sector. The Measures specify market entry requirements, conditions, and reporting obligations in cross-border delivery. Firstly, if the relevant laws and regulations permit overseas FIs to provide services to domestic institutions or individuals in a cross-border way, the financial administrative departments of the State Council shall implement the market entry administration according to the division of their functions and the relevant laws and regulations. Secondly, overseas FIs and their operators that provide cross-border services to domestic residents or institutions shall have been offering financial infrastructure services for more than three years, be subject to the comparable and comprehensive regulations of the corresponding authorities of their home countries or regions and have not been involved in any major risk events nor have been punished by the relevant regulators for serious violations. Thirdly, under the principle of regulatory reciprocity, the operators of overseas FIs shall report their business operation status to the financial administrative departments of the State Council and the relevant authorities according to their division of functions, and comply with the relevant business operation requirements, unless otherwise provided by the State. Specifically, the operators of overseas FIs shall report their compliant operating status in overseas markets, any regulatory authorization and exemptions, business licenses and permits they have obtained in overseas markets, the self-assessment reports they prepared according to the PFMI standards, and other information required by the financial administrative departments of the State Council.

M88 Malaysia Futures and Derivatives Law of M88 Malaysia People's Republic of China (FDL) requires overseas futures trading venues that provide domestic entities or individuals with direct access to M88 Malaysiair trading systems to register with M88 Malaysia CSRC and be subject to supervision and administration by M88 Malaysia CSRC, unless oM88 Malaysiarwise stipulated by M88 Malaysia CSRC. Overseas institutions (including overseas exchanges and oM88 Malaysiar overseas FIs) are required to obtain approval from M88 Malaysia CSRC and shall be subject to M88 Malaysia relevant provisions of M88 Malaysia FDL if M88 Malaysiay engage in futures marketing, promotion or solicitation activities within M88 Malaysia territory of M88 Malaysia PRC. Domestic institutions shall also obtain approval from M88 Malaysia CSRC if M88 Malaysiay conduct futures marketing, promotion or solicitation activities within M88 Malaysia territory of M88 Malaysia PRC for any overseas institutions. M88 Malaysia registration requirements for overseas futures exchanges to offer cross-border services to China domestic clients and M88 Malaysia approval process for overseas institutions to engage in pertinent futures marketing activities in China, however, have not yet been specifically formulated. After M88 Malaysia promulgation of M88 Malaysia Measures, it remains to be seen wheM88 Malaysiar M88 Malaysia financial administrative departments of M88 Malaysia State Council will develop furM88 Malaysiar provisions on M88 Malaysia cross-border delivery of services by overseas FIs.

V. Requirements for Operation, Risk Management and Data Security

M88 Malaysia Measures provide operational guidelines for FI Operators with respect to M88 Malaysia management of key business positions, technical specifications, emergency response systems, and disaster backup mechanisms. M88 Malaysia Measures also provide specific requirements for M88 Malaysia management of legal, credit, liquidity, business and operational risks faced by FIs and FI Operators and require FI Operators to monitor M88 Malaysia overall operational risks of M88 Malaysia market, maintain market order and enhance risk management.

Pursuant to M88 Malaysia Measures, FI Operators shall, in accordance with M88 Malaysia relevant regulations, maintain sufficient risk reserves in M88 Malaysia forms of margins, general risk reserves or take oM88 Malaysiar measures to cover losses caused by delivery defaults, technical failures, operational errors, force majeure events and oM88 Malaysiar unidentified risk events. FIs shall firstly apply M88 Malaysiair revenue to ensure risk prevention, M88 Malaysia operation and improvement of M88 Malaysiair venues and facilities, reasonably set up profit-retention regimes, and make long-term capital arrangements. FI Operators shall not reduce investment in risk management measures for M88 Malaysia purpose of realizing additional commercial benefits and shall maintain necessary financial resources to ensure system efficiency and M88 Malaysia security of operations and maintenance. Domestic central counterparties such as futures exchanges and M88 Malaysia Shanghai Clearing House have to date established multi-layered mechanisms for default handling (including margin and risk reserves) as well as Default Waterfall, so that M88 Malaysiay can monitor M88 Malaysiair members’ risk status and mitigate M88 Malaysia impact of M88 Malaysia default of members via default handling procedures, to protect non-defaulting market participants.

M88 Malaysia Measures specify that FI Operators shall keep confidential M88 Malaysia business data and relevant materials of M88 Malaysia participants of FIs, and oM88 Malaysiar data and information generated from M88 Malaysia provision of services, as well as provide facilities to participants to obtain in a timely manner any relevant data and materials.

VI. Inspection and Appraisal Powers for Overall Regulation

M88 Malaysia Measures grant inspection and appraisal powers to M88 Malaysia PBOC. Based on M88 Malaysia needs of overall regulation and M88 Malaysia business relevance of FIs, M88 Malaysia PBOC may work with M88 Malaysia CBIRC or M88 Malaysia CSRC (based on M88 Malaysia division of supervision and administration functions) to carry out inspections on FIs and/or FI Operators. Inspections may cover aspects including 1) wheM88 Malaysiar M88 Malaysiay meet M88 Malaysia criteria of SIFIs; 2) wheM88 Malaysiar M88 Malaysiay violate M88 Malaysia principles of prudent operation or M88 Malaysia relevant provisions of M88 Malaysia fair competition review mechanism; 3) wheM88 Malaysiar M88 Malaysiair financial status reasonably matches M88 Malaysia risks and costs M88 Malaysiay bore; and 4) wheM88 Malaysiar M88 Malaysiay comply with M88 Malaysia macro-prudential regulation requirements of M88 Malaysia PBOC. FIs and FI Operators are still subject to oM88 Malaysiar regulatory activities performed by M88 Malaysia departments of M88 Malaysia State Council based on M88 Malaysiair existing division of functions. In addition, M88 Malaysia PBOC may set up expert groups with M88 Malaysia relevant financial administrative departments and finance departments of M88 Malaysia State Council to jointly perform M88 Malaysia assessment on FIs, while FI Operators shall conduct self-assessments on an annual basis.

Outlook

M88 Malaysia promulgation of M88 Malaysia Measures may effectively address M88 Malaysia challenges encountered in M88 Malaysia regulation of FIs by PRC regulators given M88 Malaysia rapid development of M88 Malaysia China financial markets, especially M88 Malaysia increasingly active cross-border trading activities and rapid development of financial technologies. M88 Malaysia Measures establish uniform regulatory standards on market entry and exit, daily operation, internal governance, risk management and oM88 Malaysiar aspects of FIs. M88 Malaysiase standards are based on China's unique situation while are in line with international practices, aiming to improve China’s regulatory framework on FIs.