China Securities Regulatory Commission, Guidelines for the Side Pocket Mechanism of Publicly Offered Securities Investment Funds (Draft for Comments)

中国证券监督管理委员会公开募集证券投资基金侧袋机制指引 (征求意见稿)

October 31, 2019 | BY

Susan Mok

CSRC introduces a side pocket mechanism to prevent unfair fund redemption

Promulgated: 2019-08-16
|

Issued: August 16, 2019

Applicability: For the purposes of these Guidelines, the term "side pocket mechanism" means a mechanism whereby specific assets in the investment portfolio of a fund are removed from the original account and placed in a dedicated account where they are independently managed.  The original account is known as the main pocket account and the independent account as the side pocket account.

For the purposes of the preceding paragraph, "specific assets" include: (1) assets for which no active market price exists for reference and where the use of valuation techniques would still result in material uncertainty as to their fair value; (2) assets the value of which would still remain materially uncertain if calculated based on their amortized cost and allocation to an asset impairment reserve were also made therefor; and (3) other assets the value of which is materially uncertain (Article 2).

Main contents: In the event that a fund holds specific assets and a large amount of redemption applications exist or threaten, the fund manager may, in accordance with laws, regulations and the fund contract, apply the side pocket mechanism to an open-ended fund other than a money market fund or a trading type open-ended index fund after consultations with the fund custodian and seeking the professional opinion of an accounting firm.

Where specific assets account for at least 50% of the net value of a fund's assets on the preceding valuation date, the fund manager shall take relevant measures such as suspending valuation of the fund in accordance with relevant requirements of Article 24 of the Regulations for the Administration of the Liquidity Risks of Publicly Offered Open-Ended Securities Investment Funds and may not apply a side pocket mechanism (Article 5).

| Issued: 2019-08-16

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