Caixin
Dec 05, 2016 07:37 PM
FINANCE

CSRC Tightens Rules Governing Subsidiaries of Fund Management Firms

(Beijing) — Chinese securities regulators have laid out new regulations that govern subsidiaries of fund management firms — an attempt to further rein in the growth of "shadow banking."

After seven months of public review, the China Securities Regulatory Commission (CSRC) has unveiled regulations that introduce capital controls to limit the expansion of high-risk businesses. The new regulations take effect on Dec. 15, and an 18-month grace period has been granted to allow fund management firms' subsidiaries to adjust their businesses and conform to the new rules.

Shadow banking — a term for unregulated bank-like services — burgeoned in China from 2010 in response to greater demand for financing. By shifting loans off balance sheets through businesses with other financial institutions, including asset management subsidiaries of fund firms, smaller banks in China were able to circumvent capital adequacy controls devised to curb the risks of non-performing loans.

Assets under management of fund company subsidiaries have surged since 2012, when the regulator allowed them to be established. The practice gained popularity because of the lack of capital requirements and the fund management firms' having a wider investment scope than other institutions.

As of the end of July, assets under management of 79 subsidiaries of fund management firms targeting high-profile clients rose to 11 trillion yuan ($1.6 trillion), CSRC said in a statement released in August.

Under the new regulations, a subsidiary's net capital should not be lower than its total provisions set aside against assets at risk, and net assets must not be lower than 20% of its liabilities.

The new regulations also categorize the calculation of provisions into different groups. A benchmark coefficient will be applied to subsidiaries that have been suspended from operation in the past year, or been punished for violations in the past three years. If there are no such breaches, only 80% of the coefficient will be adopted.

Minsheng Royal Asset Management Co. Ltd., a subsidiary of a fund management firm that was jointly established by China Minsheng Banking Corp. Ltd, Royal Bank of Canada and Three Gorges Finance Co. Ltd., has been punished twice by regulators this year for violations that include illegally pooling cash of more than 161 billion yuan.

Some subsidiaries have been advised by regulators that new asset management plans should not be launched as their existing assets under management are already excessive, sources at several fund managers told Caixin.

Contact reporter Dong Tongjian (tongjiandong@caixin.com); editor (kerry@caixin.com)

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