Mainland China briefing: recent developments in fund custody businesses for local branches of foreign banks

22 September 2020, Investing in China , Regulatory , Investment Funds, Newsletter by Shanshan Liu, Faye Meng

On 10 July 2020, the China Securities Regulatory Commission (CSRC) and the China Banking and Insurance Regulatory Commission (CBIRC) jointly issued the amended Administrative Measures on Securities Investment Funds Custody Businesses (the Measures, available here in Chinese) and the corresponding drafting statement (available here in Chinese). Under the Measures, branches of foreign banks in China may apply for a qualification to operate custody businesses for securities investment funds in China, subject to certain requirements. This marks the official opening up of China’s fund custody market to foreign banks. 

The key points of the Measures include that: i) a foreign bank branch is permitted to refer to its parent bank’s net assets and other financial indicators when applying for the qualification; ii) any civil liabilities imposed on a foreign bank branch shall be borne by its parent bank; iii) the qualification requirements for foreign bank branches and parent banks have been lowered; and iv) the criteria and regulatory requirements for commercial banks and other financial institutions applying for custody qualifications have been unified.

In particular, for a branch of a foreign bank to apply for the custody licence, its parent bank must satisfy the general requirements for applicants. In addition, there are specific requirements for a foreign parent bank, including but not limited to i) it having a sound internal control mechanism; ii) it having a good international reputation and business performance; iii) in the past three years, the scale, income, profit, market share of its fund custody business and other indicators are among the forefront of the world, and its long-term credit has been maintained at a high level; iv) the country or region where it is located has sound securities laws and regulatory rules, has signed a memorandum of understanding on supervision cooperation and maintains effective supervision cooperation relationships with the CSRC or an institution recognised by the CSRC.

As indicated on the CSRC’s website, Citibank (China) obtained approval to act as a fund custodian institution in China on 27 August 2020. This marks it becoming the second foreign bank to be approved, the first being Standard Chartered Bank (China) which obtained the permit back in 2018.

HSBC and Deutsche Bank submitted their applications to the CSRC via their China entities in April, and these are pending approval. In light of the further opening up of China’s financial sector in recent years, especially the uplift of foreign shareholding limits in securities companies and fund management companies since this April, we anticipate that there will be more global banks entering into the custody market in China. We will monitor progress and share updates in the future.