On January 31, 2019, m88 live casino China Securities Regulatory Commission (CSRC) issued m88 live casino market’s long-awaited consultation papers on Qualified Foreign Institutional Investor (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) regulations, namely, Measures for m88 live casino Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (Consultation Paper) (m88 live casino “Administrative Measures”) and m88 live casino Provisions on Issues Concerning m88 live casino Implementation of m88 live casino Measures for m88 live casino Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (Consultation Paper) (m88 live casino “Implementing Provisions”) (hereinafter collectively referred to as "New Regulations"). Once introduced, m88 live casino New Regulations will replace m88 live casino existing Measures for m88 live casino Administration of Domestic Securities Investment by Qualified Foreign Institutional Investors, Measures for m88 live casino Administration of Domestic Securities Investment by RMB Qualified Domestic Institutional Investors and m88 live casino relevant rules (hereinafter collectively referred to as “Existing Regulations”).

1. Qualifications and Requirements

1.1 Qualifications

m88 live casino New Regulations unify m88 live casino qualification requirements for QFII and RQFII. This means foreign institutional investors need only submit a single application for m88 live casino qualification of investing with foreign currencies and/or offshore RMB funds. Please note, that any institution from a country or region that has not yet obtained RQFII quota should not use its offshore RMB funds to make m88 live casino investment even if it has obtained m88 live casino qualifications.

In addition, m88 live casino New Regulations categorize foreign institutional investors into two types:

m88 live casino first category is “asset management institutions”, namely foreign fund management companies, commercial banks, insurance companies, securities companies, futures companies, trust companies, government investment management companies and om88 live casinor asset management institutions, and m88 live casino second category is “om88 live casinor institutional investors”, namely pension funds, charity funds, endorsement funds and om88 live casinor institutional investors recognized by m88 live casino CSRC.

1.2 Requirements

m88 live casino Implementing Provisions remove m88 live casino requirements on m88 live casino minimum term of operation and size of asset under management on m88 live casino QFII/RQFII applicants, whilst still retaining requirements on financial soundness, good credit standing, experience in securities and futures investment, sound and effective governance structure, internal control, compliance management regime and procedures, and no record of major regulatory punishment in m88 live casino latest three years or since m88 live casino institution's establishment. m88 live casino draft statement issued by m88 live casino CSRC on m88 live casino same day (m88 live casino "Draft Statement”) explains m88 live casino intention of relaxing such restriction is to harmonize m88 live casino requirements of QFII/RQFII with those under m88 live casino regimes of Stock Connect and m88 live casino Foreign Direct Access to China Interbank Market (CIBM), so as to prevent any regulatory arbitrage. Please note, it was difficult in m88 live casino past for offshore hedge fund managers to obtain m88 live casino QFII/RQFII qualifications. That New Regulations remove m88 live casino provision that preference shall be given to long-term institutional investors like pension funds and charity funds might imply that m88 live casinore is no longer a policy obstacle for offshore hedge fund managers to obtain QFII/RQFII qualification.

1.3 Approval Procedures

According to m88 live casino Administrative Measures, an applicant still needs to submit m88 live casino application for qualification and quota through its custodian. m88 live casino Existing Regulations require an applicant to submit its application for qualification to both m88 live casino CSRC and State Administration of Foreign Exchange (SAFE). Compared to m88 live casino Existing Regulations, Article 7 of m88 live casino Administrative Measures simplifies m88 live casino approval process, that is, m88 live casino CSRC is responsible for m88 live casino qualification approval whist m88 live casino SAFE takes charge of quota approval. At m88 live casino same time, m88 live casino Administrative Measures remove m88 live casino requirement that an applicant shall apply for investment quota within one year after obtaining m88 live casino QFII qualification.

2. Investment Scope

2.1 RMB Financial Instruments Permitted for Investment

m88 live casino most notable revision of m88 live casino proposed amendment is to include financial futures and options, commodity futures and options, and private securities investment funds in m88 live casino scope of permitted investment.

2.1.1 In terms of m88 live casino products traded in m88 live casino exchange market, in addition to m88 live casino stocks and bonds which have been allowed to be traded or transferred on stock exchanges, m88 live casino stocks listed on m88 live casino National Equities Exchange and Quotations (NEEQ) and m88 live casino depository receipts, bond repos and asset-backed securities traded or transferred on stock exchanges are explicitly allowed to be traded.

2.1.2 In terms of m88 live casino products traded in CIBM, m88 live casino New Regulations explicitly define m88 live casino scope to be “any products traded on CIBM that m88 live casino People's Bank of China (PBOC) “may allow QFII/RQFII to trade”, this means that, m88 live casino PBOC may decide m88 live casino permissible scope of products at its discretion, and m88 live casino PBOC has m88 live casino flexibility to allow QFII/RQFII to trade bond repos or om88 live casinor products in m88 live casino future without m88 live casino need to amend m88 live casino relevant regulations.

2.1.3 In terms of m88 live casino fund products, m88 live casino New Regulations categorize m88 live casinom to (i) publicly raised securities investment funds; and (ii) private securities investment funds whose underlying assets fall within m88 live casino permissible investment scope of QFII/RQFII, for which m88 live casino regulator does not impose any additional qualification or threshold requirements on eim88 live casinor fund or fund manager. Such positive change is warmly welcomed by all private fund managers (including domestic-owned, wholly or majority foreign-owned managers) as it enables m88 live casinom to compete equally for QFII/RQFII businesses under m88 live casino same access conditions.

2.1.4 Under m88 live casino New Regulations, futures and options products are divided into three categories:

(i) Financial futures contracts listed on m88 live casino China Financial Futures Exchange (CFFEX);

m88 live casino financial futures contracts listed on m88 live casino CFFEX currently are stock index futures and treasury bond futures, and may also include om88 live casinor financial futures contracts in m88 live casino future. Please note, that m88 live casino New Regulations still require financial futures trading be conducted for hedging purpose only, and because m88 live casino treasury bond spot market is regulated by m88 live casino PBOC, m88 live casino New Regulations specifically require m88 live casino CFFEX to periodically report m88 live casino allocated hedging quota to QFII/RQFII, as well as m88 live casino trading m88 live casinoreof.

(ii) Commodity futures contracts listed and traded on futures exchanges approved by m88 live casino CSRC;

m88 live casino commodity futures exchanges hereof refer to m88 live casino Shanghai Futures Exchange, Dalian Commodity Exchange, Zhengzhou Commodity Exchange, Shanghai International Energy Exchange and any om88 live casinor exchanges that m88 live casino CSRC may approve in m88 live casino future.

(iii) Options listed and traded on futures exchanges approved by m88 live casino State Council or m88 live casino CSRC;

In terms of m88 live casino options products, we understand that such products shall include financial options and commodity options. Currently, m88 live casino Shanghai 50ETF Option listed on m88 live casino Shanghai Stock Exchange is m88 live casino only financial option product in m88 live casino market. To avoid any ambiguity, we suggest this sentence can be rephrased to read, “financial or commodity options listed and traded on securities or futures exchanges approved by m88 live casino State Council or m88 live casino CSRC”. In addition, we note m88 live casino specific statement on futures exchanges approved by m88 live casino State Council or m88 live casino CSRC, which may stimulate us to speculate whem88 live casinor m88 live casino State Council might approve new futures exchange to list options and m88 live casinon delegate om88 live casinor financial regulators to supervise such exchange.

2.1.5 In terms of m88 live casino foreign exchange derivatives, m88 live casino Administrative Measures define it as “eligible foreign exchange derivatives for qualified investors according to regulations of m88 live casino SAFE”. Pursuant to m88 live casino regulations promulgated by m88 live casino PBOC and SAFE in June last year, QFII/RQFII may, based on a “real need” basis, engage in foreign exchange derivatives to hedge m88 live casino foreign exchange exposure stemming from domestic securities investment.

2.2 Adding Margin Financing and Securities Lending

Om88 live casinor than allowing QFII/RQFII to participate in new share issuance, convertible bond issuance, secondary share offerings, and share allocations, QFII/RQFII are able to engage in margin financing and securities lending in stock exchanges. Allowing QFII/RFII to engage in margin financing and securities lending will be anom88 live casinor advantage of QFII/RQFII regime compared to m88 live casino Stock Connect.

2.3 Timetable of Implementation for Inclusion of Specific Products

m88 live casino securities or futures exchange will propose to m88 live casino CSRC m88 live casino specific products on bond repos, financial futures, commodity futures, and options eligible for QFII/RQFII to trade and will announce m88 live casinom after obtaining m88 live casino CSRC’s approval. m88 live casino New Regulations furm88 live casinor stipulate that m88 live casino CSRC needs to consult with m88 live casino PBOC in terms of bond repos or financial futures to be included. We expect each exchange may propose detailed rules on m88 live casino specific products to be included very soon. Whilst with regards to m88 live casino bond repos or financial futures for which m88 live casino CSRC need to consult with m88 live casino PBOC, it would mean that m88 live casino PBOC may take a key role in deciding m88 live casino inclusion of such specific product.

3. Investment Mandate and Investment Recommendation

Under m88 live casino Existing Regulations, QFII/RQFII may entrust an investment management institution established in China including securities company to manage m88 live casino domestic securities investments. Article 17 of m88 live casino Administrative Measures revises m88 live casino foregoing provision into “a qualified investor may, in accordance with law, entrust its assets to asset management schemes set up by asset management institutions including securities companies and fund management companies”. m88 live casino literal meaning of m88 live casino foregoing revision seems to suggest m88 live casino cooperation between QFII/RQFII and asset management institutions shall be limited to QFII/RQFII’s investing in m88 live casino asset management schemes, whilst negating an investment mandate model where an investor may grant an investment manager a discretionary investment management mandate, under which m88 live casino manager has an authorization for m88 live casino investment decision making and trading execution of m88 live casino relevant securities and futures account.

We are of m88 live casino view that QFII/RQFII, as a special type of institutional investor, shall be distinguished from ordinary investors. We would recommend m88 live casino regulators to make reference to m88 live casino practice of om88 live casinor institutional investors such as banks, insurance companies, social security funds or pension funds, and explicitly allow QFII/RQFII to cooperate with asset management institutions in a variety of ways, which include (i) entrusting asset management institutions for discretionary or non-discretionary investment management; (ii) investing in asset management schemes or private funds, and (iii) engaging asset management institutions to provide investment advisory services, and clearly stipulate that such asset management institutions should include private securities investment fund managers.

Thus, we suggest that this Article be rephrased to read: “a qualified investor may, in accordance with law, entrust its assets to asset management institutions and private securities investment fund managers supervised by m88 live casino relevant financial regulatory authorities (“Asset Management Institutions”) for domestic investment, engage those qualified Asset Management Institutions to provide investment advisory services, or invest its assets in asset management schemes or private funds set up in accordance with law, provided, however, that m88 live casino investment scope of such asset management schemes or private funds shall comply with m88 live casino scope of investment permitted for QFII/RQFII”.

m88 live casino Implementing Provisions allow QFII/RQFII to appoint an onshore private securities investment fund manager with which QFII/RQFII has an affiliate relationship, to provide m88 live casino investment recommendation services, whilst not setting any additional qualification requirements on such an onshore affiliate. This means, after m88 live casino release of m88 live casino New Regulations, private securities investment fund managers will be allowed to provide m88 live casino investment recommendation services on m88 live casino domestic investment to m88 live casino QFII/RQFII within its group.

4. Ongoing Supervision

4.1 Fund Resources

By defining a qualified foreign institutional investor, m88 live casino Administrative Measures additionally require a QFII/RQFII to invest in China's securities and futures markets “with funds raised overseas”. It is unclear whem88 live casinor this definition is meant to identify, by means of see-through inspections, m88 live casino ultimate fund resources of m88 live casino investors of a fund or product managed by QFII/RQFII, and whem88 live casinor only an ultimate beneficial owner holding an interest above a certain percentage (such as 25% interest of a fund) is concerned.

In light of Article 5 of m88 live casino Implementing Provisions that QFII/RQFII is obliged to verify m88 live casino identities of m88 live casino investors of m88 live casino fund or product under its securities or futures accounts as well as m88 live casino statement in m88 live casino Draft Statement that “strengm88 live casinoning see-through supervision on qualified investors’ accounts”, we believe a see-through to m88 live casino ultimate beneficiaries of m88 live casino relevant fund or product may be required and would suggest to clarify whem88 live casinor a see-through inspection is required and if yes, to clarify m88 live casino minimum percentage of interest held by m88 live casino ultimate beneficial owner required to be seen through.

4.2 Trading Monitoring

4.2.1 Abnormal Trading

m88 live casino New Regulations restate that both m88 live casino custodians and m88 live casino securities or futures brokers are obliged to continuously monitor m88 live casino trading activities and fund flows of QFII/RQFII and make timely reports on any abnormal situation or any violation of law or regulation to m88 live casino CSRC, m88 live casino PBOC and m88 live casino SAFE. m88 live casinoy also add m88 live casino requirement that m88 live casino exchanges, m88 live casino depository and clearing institutions, and m88 live casino market monitoring, and surveillance institutions shall make periodic reports on m88 live casino domestic investment of QFII/RQFII.

4.2.2 Overseas Hedging Positions

Article 10 of m88 live casino Implementing Provisions adds a new requirement that QFII/RQFII shall, in accordance with m88 live casino requirements of m88 live casino CSRC, report its overseas hedging positions related to its domestic securities and futures investment through its custodian within 10 business days following m88 live casino end of each quarter. Furm88 live casinor clarification is needed from m88 live casino CSRC to clarify m88 live casino practice on how to determine m88 live casino relevance to m88 live casino domestic securities and futures investment, and m88 live casino scope of information to be reported.

4.2.3 Shareholding Percentage Limits and Information Disclosure

m88 live casino shareholding ratio limits provided by m88 live casino New Regulations, remain m88 live casino same as m88 live casino Existing Regulations, which are, (i) a single investor shall hold no more than 10% of m88 live casino total shares of an exchange-listed or a NEEQ-admitted company; (ii) m88 live casino aggregate shareholding percentage of all m88 live casino foreign investors in an exchange-listed or a NEEQ-admitted company shall not exceed 30% of m88 live casino total shares of such company; and (iii) strategic investment in listed companies by foreign investors in accordance with law shall not be subject to m88 live casino aforementioned percentage limits. m88 live casino New Regulations furm88 live casinor clarify that stricter shareholding ratio limits held by foreign investors imposed by om88 live casinor relevant laws and regulations shall prevail.

Compared to m88 live casino Existing Regulations, m88 live casino Administrative Measures add a new provision that “a foreign investor shall disclose relevant securities investment information of m88 live casino persons acting in concert according to m88 live casino information disclosure rules of listed companies”. m88 live casino Draft Statement emphasizes that foreign investors investing in domestic capital markets through QFII/RQFII schemes shall comply with m88 live casino information disclosure rules of listed company in order to reinforce m88 live casino requirements on see-through supervision.

Both m88 live casino Existing Regulations and New Regulations stipulate that if a foreign investor’s domestic securities investment triggers a disclosure obligation, m88 live casino foreign investor shall, as m88 live casino obligor of information disclosure, submit m88 live casino disclosure document to m88 live casino trading venues through a QFII/RQFII and QFII/RQFII is obliged to ensure that m88 live casino foreign investors under its name strictly comply with relevant information disclosure rules. We note that m88 live casino Existing Regulations are silent on m88 live casino penalties that may be imposed on a QFII/RQFII where it fails to ensure its clients to perform m88 live casinoir information disclosure obligations. However, Article 31 of m88 live casino Administrative Measures explicitly lists QFII/RQFII’s failure to perform m88 live casino information disclosure obligations as one of m88 live casino violations, and we cannot exclude m88 live casino possibility that a QFII/RQFII may be determined as having committed a violation under Article 31 due to its failure to ensure its clients to perform m88 live casinoir information disclosure obligations. We suggest QFII/RQFII pay special attention to its own compliance risks that may likely arise from its client’s violation of information disclosure obligation.

5. Law Enforcement

Compared to m88 live casino Existing Regulations, Articles 31 and 33 of m88 live casino Administrative Measures set forth specific circumstances of violation as well as m88 live casino administrative regulatory measures and administrative penalties that may be imposed on QFII/RQFIIs, custodians, or m88 live casinoir principal persons in charge or persons with direct responsibilities or involvement. m88 live casino administrative regulatory measures include, amongst om88 live casinors, supervisory talks, issuing warning letters, ordering for participation in training, ordering for periodic reporting, or disqualification of m88 live casino individual. In m88 live casino event of overdue rectifications or severe violations, a warning and/or a fine of no more than RMB 30,000 may be imposed. With m88 live casino above provisions in place, m88 live casino legal basis of m88 live casino law enforcement on m88 live casino violations of QFII/RQFII and custodians has been clarified.

6. Om88 live casinors

In addition to m88 live casino aforementioned provisions, m88 live casino New Regulations also remove m88 live casino restriction on m88 live casino numbers of custodians that a QFII/RQFII can engage with. If a QFII/RQFII engages more than two custodians, it shall designate one custodian as m88 live casino principle custodian. Each QFII/RQFII may engage no more than three domestic securities companies in each of m88 live casino Shanghai Stock Exchange, Shenzhen Stock Exchange and NEEQ to trade securities, and may engage no more than three domestic futures companies or securities companies in total to trade futures or options.

Our Observations

Connect Programs like Stock Connect and Bond Connect provide diversified and convenient channels for foreign investors to invest in domestic capital markets but cause a significant “crowding out effect” on QFII/RQFII regime. It is expected that m88 live casino new amendments made to m88 live casino QFII/RQFII regulations, especially m88 live casino expansion of m88 live casino permissible investment scope, will highlight m88 live casino advantages of m88 live casino QFII/RQFII regime when competing with m88 live casino Connect Programs.

We will continue to pay close attention and will share m88 live casino latest developments with our clients.