CSRC issues offshore accounts policy to fund managers

Initially entrusted assets

Where a fund manager provides Services for a trustor, the amount of initially entrusted assets shall not be less than Rmb50 million (US$7.3 million), and the same happens on onshore segregated account services.

Administration of foreign exchange quota

According to the Reply, the State Administration of Foreign Exchange (Safe) is in charge of examining and approving foreign exchange quota, account and exchange of Services. Besides applying for foreign exchange quota to Safe, a fund manager shall file and periodically report to Safe on its implementation. As part of the contents of Safe's Circular on Issues Relevant to Foreign Exchange Control with Respect to Overseas Securities Investments of Fund Management Companies (国家外汇管理局关于基金管理公司境外证券投资外汇管理有关问题的通知) (the Safe Notice) issued in 2006 – and the annexes thereto which are just applicable to mutual QDII funds – it is still to be clarified how the Safe Notice will apply to those Services concerning foreign exchange matters mentioned herein.

Vehicles and products of offshore investment

According to the Reply, the assets under the Services could be invested in any financial vehicles and products as set out in Section 5 of the Notice of Relevant Issues on Implementing the Trial Measures for the Administration of Overseas Securities Investment by QDIIs (the QDII Notice). That is to say, the investment scope of the Services is limited to those products specified in the QDII Notice, and the Services are forbidden to invest in those products stipulated in Section 5.2 of the QDII Notice – such as real estate, noble metals and commodities in kind, etc.

Besides the above, for Services the asset manager and the asset custodian may determine whether to engage qualified offshore adviser(s) and/or offshore custodian(s) upon agreement with the trustor.

Differences

Higher assessment standards of clients' risk tolerance

In view of the wording “enhance” used in Section 14 of the Reply, different from onshore segregated account services, the asset manager of the Services is required to assess clients' risk tolerance more strictly and prudentially than the CSRC.

Exemption of investment limits

Although the Services share the same investment scope with mutual QDII funds, the Reply further allows the asset manager and the trustor to agree on the proportions of different portfolios at their own discretion. It does not need to comply with the contents of Section 5 of the QDII Notice concerning limitations on investment proportions, transaction counterparties, etc.

Exemption of disclosure of certain information

According to Section 13 of the Reply, Article 39 of the QDII Measures is not applicable to the Services. This means a public announcement by the asset manager is not necessary for a change of custodian, offshore adviser and/or offshore custodian, and involvement of an overseas lawsuit.

Specific application of segregated account measures

An issue that needs to be clarified by the CSRC and Safe is how some stipulations of the Segregated Account Measures apply to Services. For instance:

• under the daily supervision and report system of securities investment, how to understand the criteria of “abnormal transactions” in offshore investment? (see Article 20 of the Segregated Account Measures); and

• how to reasonably specify “material items”, which may affect the interests of clients in relevant agreement of the Services in order to balance interest protection for the asset trustor and the liabilities undertaken by the asset manager.

On the basis of the analysis above, there are some similarities and also differences for a fund manager (holding both licence of the segregated account services and the QDII licence) of the statutory requirements on the Services, onshore segregated account services and mutual QDII funds.

In addition, certain items regarding the application of relevant laws and regulations are still to be further clarified by the CSRC, Safe and subsequent practice.