Ferheen Mahomed: Challenges continue for banks, but talking can help
December 08, 2009 | BY
clpstaff &clp articles &In September, Société Générale won CLP's international in-house team of the year award. Phil Taylor recently spoke with the bank's regional general counsel for Asia, Ferheen Mahomed
Ferheen, one reason that your team won CLP's award was your innovative work on establishing yourself as a wholly-owned subsidiary bank – this involved business localisation and conversion of assets and liabilities of existing branches into a new subsidiary bank. Can you tell us a bit more about this?
It has been a very extensive, very difficult process ... [T]here's a tremendous uncertainty in the law as to what works and what doesn't work; market practice varies from institution to institution and also varies across different provinces in China; and as a result of that, the way we have had to work on the documentation has been adopting a two prong approach. One is constant discussion with the regulators, to understand exactly where the areas of risk are; and two, in adopting a very risk-based approach in our advice to management and our business clients, because there aren't really any hard or fast rules in being able to do certain things. There is the law, but the area around the law remains quite grey … until they develop sufficient jurisprudence on the interpretation of the law.
So it has very much been a risk-based approach in putting together all the documentation required, and because of the infancy of it all, we also have put in place a process whereby we'll have to re-look at the documentation on a six-month basis to make sure we are up to speed with any regulatory changes, or indeed any policy changes which we know are prevalent in China – dependent on a particular period of time as to what their macro-economic concerns are.
It has been very much a challenge.
So it will be an ongoing process of reviews every six months?
Yes, I reckon it will be an ongoing process for at least the next five years, until there is a more established way of doing business, and market practices are also in a more formalised stage.
You hinted about the greyness of regulation and legislation in China. And you mentioned talking to the regulator. Is that something you found relatively easy to do?
I think that's very easy. The regulators in China are extremely accessible, they are very keen to meet and to discuss issues and to give their views. Their views are not binding in the sense that we're all searching our way around the regulation. But having the discussion with them is very important because it does help you understand the policy of a particular piece of legislation. They're also very keen on understanding international market practice as well.
It allows you a further brainstorming session which then helps you to mitigate, or manage, the risk that you nonetheless have to handle in any emerging market.
As a foreign bank operating in China, do you think you face any particular legal and regulatory issues?
I think China has done a lot in actually making all these regulations applicable in the past two years to both local and foreign banks. We do not feel in any way aggrieved or penalised being a foreign bank, and being a foreign bank allows us tremendous access to the regulators because of our international expertise and knowledge of international practices.
So it is not the regulations as such which really pose a challenge being a foreign bank; but rather it is a lot of internal policies as a foreign bank which actually creates the challenge. For example, foreign banks are very used to doing documentation governed by English law. In China if you're locally incorporated, you're considered a local entity which means that if you're dealing with another local entity all your contracts need to be in PRC law. This is very different concept-wise to English law. These are internal things that we've got to manage, and try to convince head office and management of the necessity of using local law, and how we deal with that. It's not only local laws – it's also local laws and local arbitration. There's more and more demand for China to use its own Cietac arbitration whereas five years ago they were more amenable to using international arbitration. There is a lot of internal management that needs to be done as well.
If you had a wish-list for regulatory reform in the next few years in China, what would be at the top of that wish-list?
The top would definitely be further clarification on the PRC Enterprise Bankruptcy Law (中华人民共和国企业破产法) with a particular focus on making clear that close-out netting applies. This is a very serious problem that I think a lot of institutions, especially foreign institutions, face in China because we have to operate on a derivative basis with PRC documentation and not the standard Isda documentation.
This is an excerpt from an online interview conducted on November 24 2009. To listen to the entire recording, please visit
www.chinalawandpractice.com/webseminars and look out for more web-seminars online in the coming months.
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