Guidelines for the Involvement in the Securities Lending of the Re-lending Business by Publicly Offered Securities Investment Funds (Trial Implementation)

(Promulgated by the China Securities Regulatory Commission on, and effective as of, June 14, 2019.)

CSRC Announcement [2019] No.15

Article 1:     These Guidelines have been formulated pursuant to laws and regulations such as the Securities Investment Funds Law and the Measures for the Administration of the Operation of Publicly Offered Securities Investment Funds in order to regulate the involvement of publicly offered securities investment funds (Funds) in the lending of securities for re-lending purposes (Securities Lending), guard against business risks and protect the lawful rights and interests of Fund unit holders.

Article 2:     These Guidelines shall govern the application of Fund property by Fund managers to participate in Securities Lending.

The phrase "involvement of a Fund in Securities Lending" means that a Fund lends securities to the China Securities Finance Corporation Limited (CSF) through the stock exchange's comprehensive business platform at a certain charge rate, and the CSF returns the securities borrowed and the corresponding equity compensation and pays the charge upon expiration of the term.

Article 3:     A Fund manager that applies Fund property to participate in Securities Lending shall comply with the principle of prudent operation, possess the technical system and professional personnel, formulate rational and reasonable investment strategies and risk management systems, improve its business procedures, effectively guard against and control risks, and duly safeguard the safety of the Fund property, and the lawful rights and interests of Fund unit holders.

Article 4:     The Fund custodian shall strengthen its monitoring and review of the involvement of the Fund in Securities Lending and duly safeguard the safety of the Fund property and the lawful rights and interests of Fund unit holders.

CSF shall strengthen its monitoring of the risks involved in the Fund's involvement in Securities Lending and regularly submit monitoring reports to the CSRC.

Article 5:     The following Fund products may be involved in Securities Lending in accordance with laws and regulations, and the Fund contract and/or prospectus:

(1)     equity funds and equity-oriented hybrid funds in their lock-in periods;

(2)     open-ended stock-index funds and related feeder funds;

(3)     strategic placement funds; and

(4)     other Fund products as recognized by the CSRC.

For the purposes of Item (1), the term "equity-oriented hybrid fund" means a hybrid fund of which the Fund contract expressly specifies that the percentage of its investment in stocks is at least 60%.

For the purposes of Item (3), the term "strategic placement fund" means a securities investment fund of which the main investment strategy includes investment in strategic placements of stock and is operated in a closed-end manner.

Article 6:     The securities assets lent out by a Fund in its closed-end period may not exceed 50% of the net value of its assets and the date of expiration of the loan may not exceed the expiration of the closed-end period, except in special circumstances recognized by the CSRC.

Article 7:     An open-ended stock index fund and related feeder funds involved in Securities Lending shall satisfy the following requirements:

(1)    the securities assets lent out may not exceed 30% of the net value of the Funds' assets and lent securities of which the loan term is at least 10 trading days shall be incorporated within the scope of liquidity-limited securities as described in the Provisions for the Administration of the Liquidity Risks of Publicly Offered Open-Ended Securities Investment Funds;

(2)    where an exchange traded fund is involved in Securities Lending, any one security that is involved may not exceed 30% of the total quantity of such security held by the Fund; where another open-ended stock index fund or a feeder fund of an exchange traded fund is involved in Securities Lending, any one security that is involved may not exceed 50% of the total quantity of such security held by the Fund;

(3)    the daily average net value of the Fund assets during the past six months may not be less than Rmb200 million; and

(4)    the average remaining terms of securities loans may not exceed 30 days, with such average remaining terms calculated on the basis of weighted average market capitalization.

Article 8:     If the investments of a Fund cease to comply with Article 6 or 7 hereof due to a factor other than the Fund manager, such as securities market volatility, merger of a listed company or change in the size of the Fund, the Fund manager may not engage in new Securities Lending.

Article 9:     The involvement of a Fund in Securities Lending does not terminate the confirmation of the lent securities. The calculation of the holding period for securities held by a Fund shall not be affected by the lending thereof, and the lent securities shall be incorporated within the scope of calculation of the Fund's investment operation indicators.

Article 10:    When a Fund is involved in Securities Lending, it may adopt the specified reporting method or a non-specified reporting method and shall comply with the requirements of relevant self-regulation rules.

Where a Fund is involved in Securities Lending by means of the specified reporting method, the Fund manager and the borrowing securities company shall determine through consultations the specified reported quantity, term, charge rate, etc.

Article 11:    A Fund manager shall strengthen the management of credit risks in Securities Lending and reasonably disperse the concentration of lending terms and borrowing securities companies. Where a Fund is involved in Securities Lending by means of the specified reporting method, the Fund manager shall carry out the necessary due diligence on the solvency, etc. of the borrowing securities companies and strictly manage their access, subject different borrowing securities companies to trading limit management and carry out dynamic adjustment thereof, and the classification of the borrowing securities companies during the previous year shall be grade A.

A Fund manager shall strengthen its management of affiliated transactions, abide by the principle of primacy of the interests of unit holders, handle matters in accordance with fair and reasonable market pricing and may not engage in benefit diversion or other improper trading activities.

Article 12:    A Fund manager shall duly manage the liquidity risks relating to Securities Lending, strengthen stress testing management and analyze in detail factors such as market circumstances, investor class and structure, historical purchase and redemption data, and information on the liquidity of the lent securities so as to rationally determine the scope, term and percentage of lent securities.

Article 13:    Where involvement in Securities Lending is proposed for a Fund, for which an offering application is made after the implementation hereof, the arrangements for Securities Lending shall be set forth in the Fund contract and prospectus, and information such as the Securities Lending plan shall be submitted with the product registration application materials.

Article 14:    Where the contract of a Fund that was approved or registered by the CSRC before the implementation hereof expressly provides that the Fund may engage in Securities Lending, it may engage in Securities Lending in accordance with laws, regulations and the Fund contract. If the Fund contract does not so provide, the Fund may engage in Securities Lending only after carrying out the Fund contract amendment procedure in accordance with the law, strategic placement funds recognized by the CSRC excepted.

Article 15:    A Fund manager shall disclose the details of the Fund's involvement in Securities Lending in documents such as the Fund's regular reports, and provide a detailed account of material affiliated transactions that occurred during the reporting period.

Article 16:    Where a Fund is involved in Securities Lending, valuations shall be carried out with reference to relevant provisions of the industry association so as to ensure the fairness of valuation.

Article 17:    If a Fund manager, Fund custodian or other such relevant institution violates these Guidelines, the CSRC and its relevant agency may take administrative regulatory measures against the relevant institution and personnel in accordance with the law. Where administrative penalties are called for in accordance with the law, such administrative penalties shall be assessed in accordance with relevant provisions.  If there is suspicion that a criminal offense has been committed, the case shall be transferred to the judicial authority for the pursuit of criminal liability.

Article 18:    These Guidelines shall be effective as of the date of promulgation.