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Outsourcing customized funds see strictest regulation

Xinhua Financein
2017-03-20 15:41

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New regulations on outsourcing customized funds were introduced last Friday. The China Securities Regulatory Commission (CSRC) issued regulations on institutional investors to managers and custodians of public funds, prohibiting “channelizing” of public funds and requiring treating all investors fairly. Meanwhile, it provides that outsourcing customized funds shall adopt closed operation (or regularly open operation), initiated funds and other models. For non-outsourcing customized funds, a single holder shall not hold more than 50 percent. The funds approved by not established are also covered by the new regulation. All outsourcing customized funds established will be treated fairly.

Insiders indicated that the new regulation marks a new stage for the outsourcing customized business under market demands and new regulations.

Rules on outsourcing customized funds set

Old and new funds are treated fairly

Statistics show that the size of public outsourcing customized funds may exceed 1 trillion of the highlights of the new regulation is the provision on the operation model of outsourcing customized funds. It stipulates that for new funds (including those approved but yet established) proposing to allow a single investor to hold 50 percent or more of market shares, they shall conduct closed operation or regularly open operation (and the regular opening cycle shall be no less than three months) and shall adopt the model of initiated funds. They shall make full disclosure and marks in the fund contract, prospectus and other information disclosure documents. Such products shall not be sold to individual investors publicly. The manager shall commit in the application materials for the registration of the fund that it has full and independent decision-making rights in investment and will not be affected by particular investors.

Meanwhile, the new regulations require that for non-outsourcing customized funds, a single holder shall not hold 50 percent or higher proportions of the shares. They shall commit in the application materials for the registration of the fund that they will not seek evading the requirement on the 50 percent concentration.

What is more important is that new and old funds will be treated fairly. Based on the regulation, for existing fund products with a single investor holding 50 percent or higher proportions of the shares, the manager shall not accept further applications from the single investor. For other existing fund products, the manager shall guarantee that the fund shares held by a single investor shall be less than 50 percent of the total shares of funds and ensure that their products will not seek evading the requirement on the 50 percent concentration.

In addition, the regulation also requires that if a single investor holds 20 percent or more of a fund product (except those allowing a single investor to hold 50 percent of more), it shall disclose the category of the investor, the proportion of shares held at the end of the reporting period, the changes in the shares held during the reporting period and unique risks of the product under the “Other important information affecting the decision-making by investors” in the regular reports of funds.

It is learnt that the outsourcing customized business refers to the outsourcing of proprietary funds or wealth management funds of banks, insurance companies and other institutes to funds to conduct investment (or other operations as an investment advisory). Outsourcing funds began to flow into public funds in 2015 and the outsourcing business boomed in 2016. It has maintained the booming trend since 2017. Based on the regulation, certain public fund managers accepted the subscription of institutional investors last year and it resulted in highly concentrated shareholding proportion by a single investor. The risks on the independence of the manager and the liquidity of the product as well as fair treatment of investors shall not be ignored. Public funds shall treat investors fairly and the “channeling” of public funds shall be strictly prohibited.

Outsourcing funds with 1 trillion to change 

Outsourcing customized business may enter new development stage 

Several persons from fund companies, who were interviewed by the journalist, indicated that the new regulations are very strict, which will greatly impact outsourcing business. Particularly, new funds and old funds will be treated equally without discrimination, which can be said that the regulations impose restriction on funds of outsourcing customized products. 

Statistics show that 1,151 funds were established in 2016. Among these funds, more than 580 funds were customized products of institutions, which collected 493.1 billion yuan when they were issued first time. By the end of 2016, the total size of customized products set up in the year reached 903.8 billion yuan. The amount of outsourcing funds exceeds 1 trillion yuan if including the “suspected” funds of outsourcing customized products with worth of 155 billion yuan which were established since 2017. 

New regulations set “ceiling” for outsourcing customized businesses. According to the new regulations, if investors want to use capitals of corporate shareholders, corporate funds, capitals of corporate senior managers and fund managers to subscribe funds of outsourcing customized products, they should buy the funds worth more than 10 million yuan and hold them for at least 3 years. This requirement will greatly influence the issuance quantity of this kind of product. Industry insiders remarked that as resources of funds companies are limited and the new regulations bring costs to funds of outsourcing customized, it is expected that administrative fees will be raised. Large- and medium-sized funds companies or the funds companies with powerful shareholders will be relatively advantageous. 

In addition, as the new regulations require that one holder of ordinary public funds is not allowed to hold more than 50 percent of the funds, some wonder whether 3 or 4 institutions can buy one fund to avoid this. “There are few institutions willing to do this as it is very difficult to do this.” said a person. 

Wang Qunhang, vice general manager of Jian Financial Corporation, said that the new regulations aim to maintain sustainable and steady development of public fund market, which may pave way for the upcoming fund of funds (FOF) in the long run. 

Translated by Star Zhang
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