Trust companies should manage risks to benefit from SIFs trading
September 03, 2011 | BY
clpstaff &clp articles &New rules set qualification requirements
Trust companies can optimise their investment structures through the trading of stock index futures (SIFs), but corporate governance and risk control are the keys to success, say counsel.
The China Banking Regulatory Commission (CBRC) has announced new rules that allow trust companies to trade index futures on the China Financial Futures Exchange (CFFEX). The Guidelines on the Participation in Stock Index Futures Trading by Trust Companies (中国银行业监督管理委员会信托公司参与股指期货交易业务指引) (the Guidelines), which took effect on June 28, permits trading activities for hedge, arbitrage and speculative purposes by trust companies. These companies must satisfy qualification requirements before they are allowed to trade.
Wilson Huo, a Beijing-based partner of Zhong Lun Law Firm said trust companies required “sufficient preparation” before they can gain any advantage in the SIFs market.
“Trust companies need to improve their corporate governance and internal control systems, as well as strengthening risk management,” he said. “In this way would they be able to expand their services and product scope to include SIFs trading.”
Article 7 of the Guidelines provides general requirements on the risk control system, which includes the establishment of internal procedures for company board approval and restrictions on the level of risk exposure.
“Considering the complicity and specialty of SIFs trading, it is highly suggested that trust companies design reasonable and workable risk management procedures and a risk prevention plan,” said Huo.
More importantly, trust companies have to fulfill strict qualification requirements set out under the Guidelines. These include receipt of a good regulatory rating, having experienced traders and risk analysis and management personnel, as well as an efficient IT system for valuation and risk control functions. Articles 18,19 and 21 also provide requirements on third parties including custodian banks and future companies.
Huo emphasised the importance of employee training and the recruitment of experienced SIFs trading talent, as this is a relatively new area where domestic trust companies may have limited experience. “It is essential for trust companies to develop and establish their own elite SIFs trading staff,” said Huo.
Although the Guidelines expressly permit hedge transactions, commentators also noted that only existing trusts with securities investments are able to conduct hedge trading because the China Securities Regulatory Commission (CSRC) has yet to lift the ban on trust companies from opening new securities trading accounts. Moreover, relevant rules on trading for speculative purposes have not yet been put in place.
At the moment, trust companies have to comply with strict rules governing real estate-related trust financing and bank-trustee cooperation businesses. With the gradual opening of SIFs trading activities, market observers see “huge potential in the trust financial market”.
“By investing in SIFs, trust companies may efficiently control their portfolio risk and seek arbitrage opportunities, as well as optimise their investment structures.” said Huo. JQ
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