| China QDII Policies Announced
The People's Bank of China, the Chinese central bank, recently announced principle policies for the financial services sector on outbound investments in overseas markets by Chinese nationals and corporations. These policies are generally regarded as the Qualified Domestic Institutional Investors (QDII) program in the market. The policies are summarised as follows:
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commercial banks may conduct discretionary asset management business in overseas investments where RMB funds may be raised from corporations and individuals, which funds will be converted into foreign currencies and invested in overseas fixed income products; |
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qualified fund management companies or securities companies may raise foreign currency funds from corporations and individuals, which funds may be invested in overseas investment portfolios including equities; |
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qualified insurance companies may conduct overseas securities investment by converting RMB funds into foreign currencies and invest in fixed income products and money market instruments. |
So far three commercial banks have been issued with investment quota. The China Securities Regulatory Commission have just issued a consultation draft on the rules relating to collective asset management business by securities companies. These developments present significant opportunities to international fund managers in managing these assets or to play a sub-advisory role. In the long run, overseas foreign currency denominated fund products may be allowed to be offered directly in China.
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Update on Derivatives in China
On 1 March 2004, the Provisional Administrative Rules Governing Derivative Activities of Financial Institutions were implemented by the China Banking Regulatory Commission (the "CBRC") and constituted the first set of substantive regulations governing the derivatives business in China. These rules which apply to all banks, most non-banking financial institutions and branches of foreign banks in China, require these institutions to seek CBRC approval prior to conducting derivatives business in China. The rules define the term derivative, set out the approval requirements for qualifying financial institutions and controls that such institutions must put in place when entering into derivatives transactions.
On 2 December 2005, the CBRC implemented the Circular on the Relevant Issues of Business Scope of Derivatives Product Transactions by Chinese Owned Commercial Banks which lifted the prohibition on Chinese owned commercial banks engaging in derivatives transactions linked to equities and commodities. The CBRC now assess such products on a case by case basis but this circular does not apply to foreign banks or financial institutions.
On 1 February 2006, the CBRC introduced the Implementation Measures on Administrative Licensing Items Relating to Foreign-Invested Financial Institutions. These licensing measures provide that a foreign owned financial institution can apply to carry on derivatives business that is not explicitly provided for in existing laws and regulations. If the CBRC does not approve an application made pursuant to these licensing measures, it must provide a reason for its refusal. The effect of such licensing measures is to put foreign banks and financial institutions and Chinese branches of foreign banks on a similar footing to Chinese owned banks in terms of the development of derivatives products which are not authorised under the 2004 Interim Rules or otherwise.
Several problems remain relating to the enforceability of ISDA documentation and collateral arrangements in China. Chinese law does not currently provide for close out netting and contractual provisions for close out netting may be challenged. In response to a request from the CRBC, ISDA submitted to it a first draft of proposed netting rules in September 2005 which were based on the ISDA Model Netting Act but adapted to suit the Chinese legal system. Legislation is currently being drafted, which, it is hoped, will address this issue.
In addition, problems arise relating to the use and enforcement of collateral arrangements. The concept of title transfer (as it arises in the ISDA Credit Support Annex) is not recognised by Chinese law and perfection of security involves complicated procedures.
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Regional Shareholder Disclosure Requirements
Shareholders with a substantial interest in a listed company are required to disclose their shareholdings in order to improve market transparency, prevent insider trading, and facilitate informed investment decisions.
In most countries in Asia, initial disclosure is required once a shareholder acquires an interest in 5% of a listed company’s voting shares. In Taiwan and Sri Lanka it is 10%. For movements above the initial threshold, disclosures are required in Hong Kong when the shareholding moves through a whole percentage number. In Malaysia, by contrast, disclosures are required for every subsequent change, whereas in China, it is any 5% increase or decrease in shareholding since the last disclosure (for A Shares). In Taiwan, substantial shareholders must also file monthly reports.
The time limit for disclosure varies (from one business day in Thailand, to 10 calendar days in Indonesia), as do the types of interest that must be disclosed (such as derivatives and discretionary interests) and the rules for aggregation of interests within a group structure or by parties acting in concert.
Breaches of disclosure requirements are inevitable, given their complexity, yet can result in severe consequences, including criminal prosecution.
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Hong Kong Disclosure of Interests Regime: Implications for Investment Managers, Trustees and Custodians
Memorandum by William Mackesy now available for download
This Memorandum explains the requirements ("Disclosure Requirements") relating to the disclosure of interests in the securities of Hong Kong listed companies under the Securities and Futures Ordinance, with particular focus on the implications for investment managers, trustees and custodians.
The Disclosure Requirements apply to interests in companies whose securities are listed in Hong Kong; interests in shares and debentures of warrant and bond issuers, as well as share issuers, will accordingly be potentially disclosable. This Memorandum focuses mainly on disclosure of interests in companies whose shares are Hong Kong listed.
Please click here to view or download this publication.
The Disclosure Requirements are very complicated and this Memorandum gives a general outline of them only. The information contained in this Memorandum is not intended to be comprehensive and is not a substitute for specific legal advice, which should always be sought when considering specific issues. This Memorandum is up to date as at April 2006.
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Sue in Hong Kong: Enforce in China
On 14 July 2006, the Hong Kong and Mainland China Governments signed a ground-breaking agreement under which they agreed to recognise and enforce judgments made in each others courts. Legislative changes will be made to implement the arrangement, which is aimed to help businesses on both sides of the border to resolve legal disputes. A legal update on reciprocal enforcement, setting out the current position, the terms of the new arrangement and its practical implications, is available on our website please click here.
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Deacons acted for the first China A-share fund authorised in Hong Kong
Having established a reputation for advising on new and innovative investment fund products in the market, Deacons’ Financial Services Group recently adds yet another "First" to its list of innovative products. The FSPG advised on the first authorised open-ended fund in Hong Kong that provides the retail market with direct access to China A-shares through the qualified foreign institutional investors (QFII) scheme of China. This open-ended fund was made possible due to the changes to the QFII rules that have evolved to address concerns raised by fund managers. There has been notable demand in A-Shares products where FSPG have been advising in a number of cases, as well as QFII licence applications from fund managers.
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Deacons Sponsors the RICE Fund
Launched at the Masters of Hedge dinner at the Ritz Carlton Millennia in Singapore on 26 May 2006, RICE, which is an acronym for Returns Invested in Children and Education, raises money from participants in the alternative investment industry to help children across Asia. It aims to improve the quality of life of the children it reaches, to give them access to the fundamentals for living: shelter, healthcare, education and hope. By working with rigorously selected charities and charitable projects across the region, RICE is committed to ensuring that 100% of all donations it receives are spent on those who are in need of them. RICE is being registered in Hong Kong, Singapore and Tokyo.
Deacons, HSBC Holdings, PricewaterhouseCoopers and Artradis Fund Management are the initial sponsors of RICE in Asia and have been involved in supporting the logistics of the launch.
As the earnings of hedge funds in Asia continue to grow, there are more opportunities for funds to make contributions help the underprivileged. To find out more about the RICE fund, how to get involved and make donations email info@thericefund.org or refer to the RICE website at www.thericefund.org
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