New Rules on QFII Custodian Banks
October 31, 2003 | BY
clpstaff &clp articlesThe State Administration of Foreign Exchange (SAFE) issued the QFII Foreign Exchange Operation Circular (the Circular) on September 9 2003. The Circular…
The State Administration of Foreign Exchange (SAFE) issued the QFII Foreign Exchange Operation Circular (the Circular) on September 9 2003. The Circular provides that, while custodian banks may keep payment records for the special RMB accounts of the QFII licensees, they are not allowed to establish sub-accounts for these RMB accounts. RMB accounts for QFII investment purposes are also prohibited from being used for other purposes by QFII licensees.
Rules about custodian banks' role in the QFII scheme can be found in many regulations, including: the Administration of Securities Investments in China by Qualified Institutional Investors Tentative Procedures (the Tentative Procedures, issued November 5 2002); the Securities Transactions by Qualified Foreign Institutional Investors Implementing Rules (issued December 1 2002); the Registration and Settlement for Securities Investments in China by Qualified Foreign Institutional Investors Implementing Rules (the Settlement Regulations, issued December 1 2002); the Questions Relevant to Commercial Banks' Applications for Engaging in Custodian Services for Securities Investment in China of Qualified Foreign Institutional Investors Circular (issued December 17 2002); and the Foreign Exchange Control on Securities Investments in China by Qualified Foreign Institutional Investors Tentative Provisions (issued November 28 2002).
Duties of the Custodian Banks
According to the Tentative Procedures, the duties of the custodian banks are to: (i) maintain custody of the assets of the QFII licensees; (ii) handle the sale, purchase and remittance of foreign exchange, and the settlement of RMB funds for the QFII licensees; (iii) supervise the investment operation of the QFII licensees and inform the CSRC and SAFE of any regulatory breach; (iv) report the cash receipts and payment details of the QFII licensees' special RMB accounts to the CSRC and SAFE; (v) prepare annual financial reports for each QFII licensee and submit the same to the CSRC and SAFE; and (vi) keep all the relevant transaction records for at least 15 years.
Account Management
Each QFII licensee is required to open a special RMB account with its custodian bank. The custodian bank shall strictly separate its own assets from the assets of the QFII licensees and establish different accounts for each QFII licensee. However, as provided in the Circular, custodian banks are not allowed to establish sub-accounts of the special RMB account for the different portfolios of a single QFII licensee.
Pursuant to the Tentative Provisions, each QFII licensee shall entrust its custodian bank to establish a securities account for securities settlement and an RMB fund account for RMB fund settlement with the China Securities Depository and Clearing Company (the CSDCC).
Under the Settlement Regulations, each custodian bank is required to establish one settlement account with the CSDCC for the cash settlement business of all of its QFII clients.
Cash Settlement
Per trade practices in China and the Settlement Regulations, the QFII investment process is as follows: a QFII licensee orders a trade
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