July 2018
Administrative Measures for Financial Asset Investment Companies (Trial Implementation) (Mainland China)
2018.6.29
Nadine Cheng
To promote the healthy and orderly development of market-based and institutionalized bank debt-to-equity swaps and how they are conducted, the China Banking and Insurance Regulatory Commission promulgated the Administrative Measures for Financial Asset Investment Companies (Trial Implementation) (the "Measures") on June 29, 2018. Consisting of 6 chapters and 67 articles, the Measures state its scope of application, the basic principles involved and the establishment, change, termination, operational scope and regulations, risks and supervisory requirements of financial asset investment companies. The Measures are highlighted below:
1. The Measures clarify that a financial asset investment company is to be considered as anon-banking financial institution. The "financial assets investment company" in the Measures therefore refers to a non-banking financial institution incorporated in China and has qualified commercial bank(s) as its main shareholders and promoters. These companies primarily engage in bank debt-to-equity swaps as well as supporting businesses customized for those swaps.
2. Banks conducting debt-to-equity swaps through financial asset management companies should do so by transferring creditor claims to those financial asset investment companies, which will then convert the claims into equity of the target enterprises.
3. The Measures stipulate the relevant requirements for the establishment, changes and termination of financial asset investment companies. The establishment procedure has two stages, namely, preparation and opening. Directors and senior management personnel are subject to a qualification approval system. The change or dissolution of a financial asset investment company shall be reported to the bank regulatory agency under the State Council for approval.
4. A financial asset investment company shall establish a systematic set of rules for its debt-to-equity swap business and a strict management system for related transactions, strengthen the appropriate management and information disclosure for investors, as well as establish a mechanism with its commercial bank shareholders and their affiliates to prevent conflicts of interest and tunneling.
5. The Measures encourage financial asset investment companies to establish and improve their equity management systems, equity exit strategies and mechanisms, and apply their own business operation and risk management strategies in making the actual transfers of their enterprise equity holdings obtained through debt-to-equity swaps to qualified investors through market-based measures.
6. The Measures put forward specific requirements for the corporate governance structure, risk management framework, capital management, and management of credit risks, liquidity risks, and operational risks of financial asset investment companies. A financial asset management company should establish effective checks-and-balances risk management mechanisms and a risk management framework, reasonably assess its capital sufficiency status, and establish a prudent and standardized mechanism to replenish and restrain its capital. A financial asset management company should also ensure that its asset-liability structure matches its liquidity management requirements, develop an effective liquidity risk contingency plan, strengthen the management of the overall debt-to-equity swap process and prevent operating risks.
7. If an enterprise invested by a financial assets investment company and its affiliates is shown to be maintaining an unreasonable leverage ratio, taking major investment risks, major operating issues and solvency issues or may be causing an adverse impact on the financial industry and the financial market, the bank regulatory agency under the State Council and any of its dispatched agencies may take regulatory measures against the financial asset investment company, such as requiring the financial asset management company to rectify within a stated period, suspending its business, or restricting shareholders' rights.
Nadine Cheng
To promote the healthy and orderly development of market-based and institutionalized bank debt-to-equity swaps and how they are conducted, the China Banking and Insurance Regulatory Commission promulgated the Administrative Measures for Financial Asset Investment Companies (Trial Implementation) (the "Measures") on June 29, 2018. Consisting of 6 chapters and 67 articles, the Measures state its scope of application, the basic principles involved and the establishment, change, termination, operational scope and regulations, risks and supervisory requirements of financial asset investment companies. The Measures are highlighted below:
1. The Measures clarify that a financial asset investment company is to be considered as anon-banking financial institution. The "financial assets investment company" in the Measures therefore refers to a non-banking financial institution incorporated in China and has qualified commercial bank(s) as its main shareholders and promoters. These companies primarily engage in bank debt-to-equity swaps as well as supporting businesses customized for those swaps.
2. Banks conducting debt-to-equity swaps through financial asset management companies should do so by transferring creditor claims to those financial asset investment companies, which will then convert the claims into equity of the target enterprises.
3. The Measures stipulate the relevant requirements for the establishment, changes and termination of financial asset investment companies. The establishment procedure has two stages, namely, preparation and opening. Directors and senior management personnel are subject to a qualification approval system. The change or dissolution of a financial asset investment company shall be reported to the bank regulatory agency under the State Council for approval.
4. A financial asset investment company shall establish a systematic set of rules for its debt-to-equity swap business and a strict management system for related transactions, strengthen the appropriate management and information disclosure for investors, as well as establish a mechanism with its commercial bank shareholders and their affiliates to prevent conflicts of interest and tunneling.
5. The Measures encourage financial asset investment companies to establish and improve their equity management systems, equity exit strategies and mechanisms, and apply their own business operation and risk management strategies in making the actual transfers of their enterprise equity holdings obtained through debt-to-equity swaps to qualified investors through market-based measures.
6. The Measures put forward specific requirements for the corporate governance structure, risk management framework, capital management, and management of credit risks, liquidity risks, and operational risks of financial asset investment companies. A financial asset management company should establish effective checks-and-balances risk management mechanisms and a risk management framework, reasonably assess its capital sufficiency status, and establish a prudent and standardized mechanism to replenish and restrain its capital. A financial asset management company should also ensure that its asset-liability structure matches its liquidity management requirements, develop an effective liquidity risk contingency plan, strengthen the management of the overall debt-to-equity swap process and prevent operating risks.
7. If an enterprise invested by a financial assets investment company and its affiliates is shown to be maintaining an unreasonable leverage ratio, taking major investment risks, major operating issues and solvency issues or may be causing an adverse impact on the financial industry and the financial market, the bank regulatory agency under the State Council and any of its dispatched agencies may take regulatory measures against the financial asset investment company, such as requiring the financial asset management company to rectify within a stated period, suspending its business, or restricting shareholders' rights.
