On 22 December 2012, the China Futures Association released the “Guidance of the Pilot Scheme on Futures Companies Establishing Subsidiaries for the Business of Risk Management Service”, marking China’s continued efforts to develop the PRC futures market and promote the provision of risk management services to small and medium enterprises. The Guidance will become effective from 1 February 2013.
- Business scope of Subsidiaries
Under the Guidance, a futures company can set up a subsidiary to provide risk management services, such as (i) warehouse receipt exchange, repurchase, sales and purchase, (ii) provision of “one to one” hedging services and risk management products, and (iii) provision of spot, forward and swap trading arrangement or bespoke pricing services and (iv) other pricing and risk management services.
- Straightforward process
A futures company planning to set up a subsidiary as contemplated by the Guidance must make a filing with the CFA. Any futures company which has already established a subsidiary carrying out similar risk management services must make a filing with the CFA on or before 1 February 2013.
A futures company which satisfies the following requirements may, after taking into account its own business strengths, availability of human resources and ability to control risks, is eligible to apply for the establishment of a subsidiary:
- its most recent regulatory rating be Class B and Level B or above;
- have minimum net capital of RMB300 million, meet certain risk control standards during the last six months and be able to continue to meet them after establishment of the subsidiary;
- have adequate internal control and risk control systems; and
- have practicable business plans.
- Ongoing obligations of the Subsidiaries
A subsidiary providing risk management services is required to establish the following systems:
- customer information management system: the subsidiary is required to carry out due diligence on the general, financial and credit condition of its customers, who are limited to business entities, financial institutions, institutional investors and high net-wealth individuals;
- internal control system: the subsidiary and its parent are required to set up internal control systems to prevent any over-concentration of risk;
- business separation system: the subsidiary, the parent and other subsidiaries controlled by the parent are required to set up a Chinese wall to ensure independence of management and operation of the subsidiary from the parent or other subsidiaries;
- information disclosure system: the parent company is required to disclose the business scope of the subsidiary and the information regarding the futures accounts opened by the subsidiary on its own websites and the website of the CFA; and
- records keeping system: the subsidiary must keep business contracts, transaction records, financial data and other related records in good order.
- The subsidiary must be established in the form of a limited liability company, and the parent futures company must hold 50% or more of the equity interest of the subsidiary. The liability of the parent futures company is limited to the capital it has contributed to the subsidiary. It cannot provide any financing or guarantees to the subsidiary.
- A subsidiary is prohibited from carrying out any business which requires any permit or licence which is specifically granted to futures companies, including futures brokerage, investment consultation of futures products and customer asset management.
Reference: Guidance of the Pilot Scheme on Futures Companies Establishing Subsidiaries for the Business of Risk Management Service (期货公司设立子公司开展以风险管理服务为主的业务试点工作指引) (the “Guidance”)
Issuing authority: The China Futures Association (the “CFA”)Any queries can be forwarded to Fang Jian, Nicola Mayo or your usual Linklaters contacts