Regulation

China leads 2012 Asian market structure reforms

A further move to open up Chinese markets to foreign investors highlights a series of changes across Asia that will dictate the continuing evolution of market structure in the region during 2012.

China – the rise of the renminbi 

Foreign investors seeking access to China have received a boost, with Hong Kong regulator the Securities and Futures Commission granting renminbi qualified foreign institutional investor (RQFII) status to a further four fund managers.

The four newly approved firms comprise: CSOP Asset Management; Da Cheng International Asset Management; China Universal Asset Management (Hong Kong); and Guotai Junan Assets (Asia).   

The latest move followed the approval of RQFII status for 21 companies on 22 December 2011 – of which nine were for fund management firms – and marks an expansion of both the country’s ambitions for the renminbi, as well as a milestone for foreign investors, who have traditionally found it difficult to obtain QFII licences, with few issued in recent years.

The RQFII program builds on the original QFII program, which is denominated in US dollars. The RQFII initiative will allow foreign firms to bring investments of offshore renminbi deposits back into China. It will also allow domestic Chinese brokerages and fund companies to raise money offshore for investment in the domestic markets. 

The RQFII scheme is also expected to be particularly attractive to Hong Kong-based firms, since China’s interest rate is higher than that in Hong Kong, potentially easing the cost of investment in mainland China for Hong Kong-based firms. Banks in Hong Kong offer a range of RMB-denominated retail banking services, such as deposit-taking, currency exchange, remittance, debit and credit cards, cheques, and the subscription and trading of yuan bonds, as well as yuan trade settlement. 

China’s State Administration of Foreign Exchange stated on 30 December 2011 that it had granted RMB 10.7 billion (US$0.159 billion) in RQFII quotas so far, out of a planned RMB 20 (US$3.17 billion) in total.

Korea gets tough 

Meanwhile in Korea, the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) have taken a tough stance to shore up confidence in the country’s securities markets, following an incident in which rumours of an explosion at the Yongbyon nuclear facility in North Korea caused local stocks and the Korean won to fall dramatically.

Korean regulators stated that they will not allow market participants to use groundless rumours to manipulate the market, and announced their intention to do whatever is necessary to limit the potential for irrational financial market movements based on such rumours.

The FSS confirmed that it would set up a special team to examine unfair trading of stocks, bonds and derivatives based on rumours about North Korea and domestic political events.

“If any detect unfair transactions that take advantage of bad rumours, we’ll instantly report related suspects to the prosecution for investigation,” stated the FSC and FSS in a joint release. “If urgent, we can drop the usual internal reviews of such cases and directly report them to prosecutors.”

Japan plans OTC reform 

In Japan, OTC derivatives took the spotlight, as the Japanese Financial Services Agency (FSA) held a discussion last Friday to discuss the creation of specialised electronic trading platforms for OTC derivatives, including yen-denominated interest rate swaps.

The FSA proposes that exchange-traded product (ETP) market operators will be required to register as Type 1 Financial Instruments Business Operators (FIBOs). ETP market operators will be required to record and disclose trade data publicly and to regulators, and will also need to implement rules that ensure fair trading.

Foreign ETP operators may operate in Japan without registration as a Type I FIBO, as long as they are regulated by their own home country and a framework for cooperative oversight exists.

The FSA confirmed that it expected the new framework to be in place within three years.

Australia - A new transaction tax 

In Australia, the federal government has introduced an A$22.8 million (US$23.28) tax aimed at recovering the supervisory costs incurred by regulator the Australian Securities and Investments Commission (ASIC).

The tax would be paid by market participants and operators, and will be used to help ASIC pay for its assumption of supervisory powers from the Australian Securities Exchange (ASX) in August 2010. Some observers have already pointed to the similarity between the Australian tax and the financial transaction tax that is currently at the centre of fierce debate in Europe. France recently announced that it would take the lead in that initiative, which is intended to cut back on speculative trading and restore confidence in financial markets.

However, in Australia critics have countered that the ASIC tax may push some brokers into the OTC markets, which is less regulated and therefore more exposed to dangerous financial disasters. In December, ASIC sent market operators and brokers invoices, estimating the amount payable from each firm in 2012 for the service of market supervision. Smaller firms’ contributions were estimated at A$40,000 (US$40,836) to A$60,000 (US$61,254), while larger brokers may have to pay more than A$1.5 million (US$1.53 million) each.

The tax charges partly based on message traffic – meaning that high-frequency trading firms, which send out a high proportion of messages to orders, will be particularly affected.

Elliott Holley +44 (0)20 7397 3820 elliott.holley@information-partners.com