Futures-Trading Firms May be Barred From Offering Asset Management Services

(Beijing) — Chinese regulators are considering a plan to stop futures-trading companies from providing asset management services, sources close to regulatory authorities told Caixin.

The move mainly targets a rapidly growing and complex financial engineering process that acts a conduit for banks to circumvent regulatory risk-control requirements.

Futures-trading companies will return to their core business of trading in futures for stocks, bonds and commodities, and will no longer sell asset-management products (AMPs), sources with knowledge of the matter told Caixin. They did not provide further details, such as when the new rule will go into effect, or how outstanding funds under management will be dealt with.

Li Chao, vice chairman of the China Securities Regulatory Commission (CSRC), said AMPs in China totaled about 60 trillion yuan ($8.7 trillion) as of June 30, equal to 80% of China’s gross domestic product in 2016.

“Asset management products” is a broad category in China. It includes bank wealth management products, trust plans, mutual funds, funds sold in private placements, and all the other products issued by securities firms, fund companies and futures trading firms as well as insurance asset management companies.

Though the size of the AMPs issued by futures firms or their subsidiaries has only a small market share, about 279 billion yuan by the end of last year, it has witnessed exponential growth from merely 12.4 billion yuan by the end of 2014, according to data released by Asset Management Association of China.

But the majority of futures companies or their asset management subsidiaries merely act as a conduit for banks to make investments without their being classified as loans. This helps commercial lenders avoid regulations devised to control financial risks, such as higher provisions or reserves. Most of the funds channeled to AMPs have been invested in stocks, bonds and other riskier assets such as debt products because banks are allowed to set lower provisions against investment holdings under China’s capital adequacy rules.

An asset manager from a futures company told Caixin that about 80% of the AMPs sold by futures companies are used as channels of this kind. In this case, banks still retain control over investment decisions, and futures companies serve as passive managers and charge commission fees.

Because of insufficient capital and the lack of experienced assets management professionals, futures companies or their subsidiaries are generally incapable of playing an active role in managing clients’ funds, said the asset manager of a futures company. The job includes providing competent investment strategies, as required by the regulation of asset managers by futures companies rolled out by the China Securities Regulatory Commission in 2013.

Since the summer stock-market crash in 2015, when investors suffered a 40% slump in the benchmark Shanghai Composite Index over a two-month period, the China Futures Association (CFA) has suspended the registration of new asset management subsidiaries by futures companies.

Rough statistics compiled by Caixin show that at least eight futures companies, including Citic Futures, Everbright Futures, and Zhongzhou Futures, are running asset management business through their subsidiaries.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)