On May 7, 2020, the People’s Bank of China and the State Administration of Foreign Exchange promulgated the Provisions on the Administration of the Domestic Securities and Futures Investment Funds of Foreign Institutional Investors (the “Provisions”), which came into effect on June 6, 2020. The Provisions stipulate matters such as the definition of foreign institutional investors and the administration of registration, accounts, foreign exchange, investment risk management, statistics and supervision, among others.
1. Definition and registration administration
Foreign institutional investors refer to the Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (the “QFIIs”) approved by the China Securities Regulatory Commission (the “CSRC”) to invest in domestic securities and futures. A QFII is required to retain a domestic custodian (the “Custodian”) to handle the relevant formalities required by the Provisions on its behalf. If a QFII retains two or more Custodians, it shall designate one as the main custodian to be generally responsible for handling business registration and other matters on behalf of the QFII. The State Administration of Foreign Exchange shall conduct registration administration of the QFII’s investment funds in domestic securities and futures.
2. Account administration
A QFII shall, based on the business registration certificate issued by the State Administration of Foreign Exchange, open one or more special QFII accounts with the Custodian(s) as needed for its investment and inbound remittances. If the QFII remits only foreign currency funds into the country, it shall open a dedicated foreign currency account and a corresponding dedicated RMB deposit account; a single dedicated RMB deposit account is all that is needed if the QFII only remits RMB into the country, while inbound remittances of both RMB and foreign currency will require a dedicated RMB deposit account, a dedicated foreign currency account and a corresponding RMB deposit account. The two types of RMB deposit accounts shall be effectively distinguished from each other by name.
3. Foreign exchange administration
A QFII may choose the currency to be remitted for investment in domestic securities and futures. The QFII shall entrust the Custodian to handle the formalities for the outbound remittance of the relevant investment principal and gains. If a QFII needs to remit outward its realized cumulative gains, the Custodian may, upon written application or instruction from the QFII, or a commitment letter from the QFII undertaking that the relevant requisite taxes will be paid in full, proceed with the formalities for the outbound remittance for the QFII. If a QFII is liquidated (including the liquidation of products), the Custodian may, based on the written application or instruction from the QFII, a special audit report on the investment gains as issued by a registered certified public accountant in China, and a tax recordation form (unless not required), proceed with the outbound remittance of relevant funds and close the account for the QFII. The currency of the QFII’s inbound and outbound remittances for its investment in domestic securities and futures should basically remain consistent, and there may not be any cross-currency arbitrage between RMB and any foreign currency.
4. Investment risk management
A QFII engaging in derivative trading in this country shall be limited to foreign exchange risk hedging products and qualified financial derivatives for hedging purposes only. The derivative exposure shall be reasonably correlated with the investment risk in the domestic securities on which the transaction is based. A QFII’s foreign exchange derivative positions shall not exceed the size of its RMB assets corresponding to its investments in domestic securities and futures (not including the RMB deposit assets in the dedicated RMB deposit accounts) to ensure compliance with the principle of conducting transactions based on actual needs.
5. Statistics and supervisory matters
A change in the QFII’s name shall be reported to the main custodian for application to the CSRC to amend the QFII’s registration within 10 working days after having renewed its securities and futures permit with the CSRC. In case of any change to important information relating to the QFII, such as a change of custodian(s), the QFII shall cause its main custodian to apply to the State Administration of Foreign Exchange for amendment registration within 10 working days after the change; the same applies if the main custodian is changed. If the business permit of the QFII is cancelled due to dissolution of its organization, entry into bankruptcy proceedings, under receivership, or its own reasons, the QFII shall timely report to the People’s Bank of China and the State Administration of Foreign Exchange through its main custodian, and in principle realize all of its assets and close the dedicated QFII accounts within 30 working days.
In handling the remittance of funds for the QFII, the Custodian shall examine the authenticity and compliance of the corresponding receipt or payment, and thoroughly perform the anti-money laundering and anti-terrorist financing obligations. The QFII shall cooperate with the Custodian in fulfilling the above obligations and provide true and complete data and information to the Custodian.