CBIRC Solicits Comments on M88 login Business Regulations

On December 29, 2022, M88 login China Banking and Insurance Regulatory Commission (CBIRC) issuedthe Measures for the Supervision and Administration of M88 login Business of Commercial Banks (Draft for Comments)(the “Measures”) for public consultation. The Measures establish for the first time a unified rule on commercial banks’ offerings of M88 login and ancillary services, collectively defined as “M88 login business”, for a variety of financial products as well as investment portfolios derived from a variety of dedicated funding sources (dedicated funds) at the departmental rule level.

I. Higher-Level Legal Basis of M88 login Measures

M88 login higher-level legal basis referenced by M88 login Measures include M88 loginCivil Code of M88 login People's Republic of China, M88 loginLaw of M88 login People's Republic of China on Banking Supervision and Administration,M88 loginCommercial Bank Law of M88 login People's Republic of China,M88 login Guiding Opinions on Regulating Asset Management Business of Financial Institutions,and oM88 loginr laws and administrative regulations without explicitly referring to M88 loginTrust Law of M88 login People's Republic of China. This may indicate that the Measures intend not to recognize trust relationships as the basic legal relationship of M88 login business. Notably, theSecurities Investment Fund Law of M88 login People's Republic of Chinais also not referenced as a legal basis of the Measures. Since the relevant laws, regulations, and departmental rules have detailed and comprehensive provisions for the M88 login of public funds, it remains to be seen how the overlapping or conflicting rules in the Measures and these existing provisions will be addressed.

II. Definition of M88 login Business and the Scope of M88 login Products

M88 login Business under the Measures refers to the activities whereby a commercial bank, as an independent third party, accepts the entrustment of a property owner or its authorized agent to offer M88 login and relevant services for the products under its M88 login pursuant to the laws and regulations, as well as the M88 login agreement. It can be seen that M88 login Business covers a wide range of activities and the M88 login of portfolio assets and ancillary services may fall under the regulation of these Measures.

M88 login Products may include a variety of financial products as well as investment portfolios derived from a variety of dedicated funds, in which (1) financial products include various asset management products and other financial products stipulated by the financial administrative departments of the State Council. The foregoing definition indicates that financial products may include asset management products that invest funds in the form of portfolios and other financial products that are not asset management products but may be held in M88 login as explicitly stipulated by the financial administrative departments of the State Council; (2) dedicated funds include national social security funds, basic pension funds, enterprise annuities, occupational pension funds, money from insurance companies, and other funds held in the M88 login of commercial banks according to law. In other words, the products to which a commercial bank can provide M88 login service cover all types of financial products and investment portfolios derived from dedicated funds.

By a literal reading of the above definition, proprietary funds or funds managed by a qualified foreign investor (QFI) may be regarded as “other funds held in the M88 login of commercial banks according to law” as mentioned in the above item (2).

III. Separation of M88 login Property

Examples of M88 login Property include bank deposits and other funds, stocks, bonds, equities of non-listed enterprises, other debts, commodities, and financial derivatives. The Measures are in line with theMeasures on Supervision and Administration M88 login Wealth Management Business M88 login Commercial Banksin respect to the separation of property of wealth management products. It stipulates that M88 login Property shall be separate from the proprietary property of the commercial bank and the property of other products held in M88 login. When a commercial bank enters into liquidation procedures due to dissolution, deregistration, or bankruptcy pursuant to the law, the M88 login Property shall not be deemed as its liquidated property. In addition, the Measures provide that a commercial bank shall create a separate accounting book and conduct separate accounting for each product under its M88 login, which ensures an effective separation of the M88 login Property.

IV. Principles for Custody Business and Ongoing Requirements

Differing slightly from M88 login principles provided by M88 loginGuidelines for Asset M88 login Business of Commercial Banksissued by the China Banking Association in March 2019, the Measures set out the principle of “being in good faith, diligent, independent and prudent and ensuring risk isolation” for commercial banks engaged in M88 login business. They require that commercial banks ensure their management capacity matches the size of the assets under their M88 login, its business complexity, and the M88 login responsibilities they take, and to effectively prevent conflicts of interest and interest tunneling.

The Measures provide ongoing requirements that commercial banks need to comply with while carrying out M88 login business, such as risk indicators, internal governance, staffing, premises and systems.

V. Scope of M88 login Business and M88 login Responsibility

Compared with the current rules for M88 login business, the most notable stipulation of the Measures is that commercial banks shall, based on whether they havede facM88 logincontrols, divide M88 login property into two categories, i.e., (i) the assets of which commercial banks may have M88 login, and (ii) other assets. The term “de facM88 logincontrol” cover the following circumstances: (1) commercial banks open capital accounts for M88 login products and hold deposits and other funds of the M88 login products for safekeeping; (2) commercial banks participate in the control of securities accounts opened with the securities depository and clearing institutions for M88 login products and have access to the account information on any change of type and quantity of the securities assets such as stocks and bonds; (3) commercial banks may, pursuant to market rules and the M88 login agreement, control the trading process, fund transfer, and asset flow of the M88 login assets; or (4) other circumstances of “de facM88 logincontrol” stipulated by M88 login CBIRC. For oM88 loginr assets that do not fall under any of M88 login foregoing circumstances of “de facM88 logincontrol”, commercial banks shall not take on responsibilities such as property M88 login, asset valuation, and investment supervision, while commercial banks may offer so-called “administrative management services” through contractual arrangements, such as fund transfers, asset ownership verification, maintaining investment-related documents, and recording relevant information. We understand the foregoing definition of “de facM88 logincontrol” excludes custodian banks having M88 login of the equities of non-listed enterprises and certain types of non-standardized debts. This would mean that custodian banks do not need to take investment supervisory responsibility over these underlying assets when they are unable to obtain sufficient information.

The Measures reiterate and enhance the requirement to “open a separate account for each asset management product” provided by the Guiding Opinions on Regulating Asset Management Business of Financial Institutions. Specifically, the Measures require commercial banks to clearly identify the capital accounts of each M88 login product in their business systems so that the account name corresponds to the name of the M88 login products. Commercial banks shall be prohibited from opening any securities accounts in their own name with the securities depository and clearing institution for the M88 login products or opening commingled accounts for different M88 login products.

Article 21 of the Measures lists the responsibilities that commercial banks shall not undertake when offering M88 login services. This is a “negative list” that puts boundaries around the responsibilities of custodians and managers. In particular, it explicitly prohibits custodians from taking on management responsibilities following circumstances whereby a product fails to pay its investors. It prohibits custodians from taking on responsibilities relating to the loss of M88 login assets caused by force majeure events or losses not caused by the custodian’s error or fault, which narrows down the liabilities of custodians. Notwithstanding such provisions, it remains to be tested by judicial practice how commercial banks achieve a balance between performing their M88 login duties and reasonably discharging their liabilities.

VI. Requirements on the Management of M88 login Business

The Measures provide requirements on commercial banks for the management of M88 login business. Commercial banks shall establish and improve their internal governance structure for M88 login business, establish risk management systems suitable to the size and complexity of their M88 login business, have sound internal management policies for M88 login business, have the M88 login business authorization under a unified authorization management mechanism, and establish a position balance mechanism and a process constraint mechanism. Notably, the Measures highlight the requirements on the independence of M88 login business and the enhancement of data protection. The Measures require commercial banks to strengthen the due diligence and management of M88 login products and external institutions, establish a list of the M88 login products and the relevant clients to manage and prevent risks arising from partners of M88 login business, and take effective measures to prevent improper related-party transactions and interest tunneling to enhance risk isolation.

M88 login Measures specify marketing management requirements. Commercial banks shall prohibit M88 loginir business partners, such as managers or distributors, from taking advantage of M88 login brand or reputation of commercial banks to conduct marketing activities. If a business partner uses M88 login name of a custodian bank to carry out improper marketing activities and fails to make rectifications, M88 login custodian bank has M88 login right to suspend M88 login business partnership with M88 loginm according to M88 login Measures.

VII. Regulatory Principles of M88 login Business

The Measures enhance the supervision and administration of commercial banks’ M88 login business from both a regulatory and law enforcement perspective. Firstly, the Measures take the compliance and prudence of M88 login business as an important basis for the regulatory rating of commercial banks and highlight the CBIRC’s and its branch offices’ ongoing supervision of M88 login businesses. The CBIRC and its branch offices may, in accordance with the laws and regulations, order commercial banks that violate the Measures while offering M88 login services to rectify their behavior within a specified time and may impose corresponding regulatory measures. If a commercial bank fails to satisfy the qualifications for M88 login business, is incompetent in its M88 login business, or fails to carry out its M88 login business in a prudent manner, the CBIRC and its branch offices may, according to the laws, regulations and principles of prudent regulation, suspend the relevant business of the commercial bank. Furthermore, the Measures authorize the banking self-disciplinary organization to implement self-disciplinary management pursuant to the law. With the authorization, the banking self-disciplinary organization may take measures such as issuing a warning or suspending or canceling the membership of the relevant member.

Outlook

The Measures respond to pressing issues in the M88 login practices of commercial banks and add boundaries to the responsibilities of custodian banks. Considering that the Measures also apply to certain products regulated by the China Securities Regulatory Commission (CSRC), the CBIRC may need to further coordinate with the CSRC to address issues regarding the application of laws and potentially conflicting rules on M88 login business. We will continue to monitor the situation and keep our clients apprised of the latest developments.