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Authored by: Taylor Hui and Faye Meng
CSRC to loosen short swing profit rule for foreign public funds
The China Securities Regulatory Commission (CSRC) is working on policies on the application of certain short swing profit rules for foreign investors, in order to facilitate foreign investors’ participation in the A-Shares market.
The so called “short swing profit rule” is specified under the current Securities Law of China, which states that where any shareholder holding 5% or more of shares of a company listed in Mainland China sells securities of that company within six months after the purchase thereof, or purchases securities within six months after sale, the profits generated from such short-term trading shall be returned to the listed company. The Securities Law also stipulates that the CSRC has the power to prescribe exemptions to the short swing profile rule. A foreign fund manager is currently required to aggregate all its funds’ holdings in a listed company.
According to a news report by Shanghai Securities News on 16 October 2022, the newly proposed policies include (i) allowing eligible foreign public funds to calculate the shareholding on each product level for the purpose of determining short-term trading, with reference to domestic public funds; and (ii) exempting Hong Kong Securities Clearing Company Limited from the application of certain short swing profit rules, in respect of transactions conducted under the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect regimes.
In practice, the CSRC has allowed domestic public fund houses and China’s National Social Security Fund to calculate the shareholding by product, instead of aggregating the shareholding at the fund manager level. The proposed policies will benefit foreign fund managers by allowing them to enjoy equal treatment.
The report states that the CSRC has already drafted the new measures and is fulfilling relevant procedures for publication. We will monitor progress and share updates in the future.
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