At the evening of November 17, 2017, management rules on “large-amount asset”, which has been long-expected by the market, was finally put into implementation. The People’s Bank of China, CBRC (China Banking Regulatory Commission), CSRC (China Securities Regulatory Commission), China Insurance Regulatory Commission and Exchange Office jointly issued the Instructions on Asset Management in Financial Institution (exposure draft) (hereafter referred to as Instructions).

The Instructions provides solutions for problems encountered by the asset management work, like the non-standardized development, supervision arbitrage, nested product, rigid payment and avoiding financial supervision etc. The Instructions targets to unify supervision standards used for similar asset management products, get asset management developed healthily, efficiently control financial risks, and better serve the real economy.

What is “one bank and three commissions”? Actually, it is short for four financial supervision institutions, including the People’s Bank of China, CBRC (China Banking Regulatory Commission), CSRC (China Securities Regulatory Commission) and China Insurance Regulatory Commission. “One bank and three commissions” firstly appeared in 2003. In fact, “one bank and three commissions” forms the pattern for separated supervision in the field of China financial industry. By the mode of vertical management, “one bank and three commissions” maintains the separated supervision, that is the People’s Bank of China, CBRC, CSRC and China Insurance Regulatory Commission separately have their own management scope (the three commissions are mainly responsible for the business, while the People’s Bank of China is not only responsible for some business but also the macro control and financial stabilization). Under this background, two tough situations will be caused:

(1)  Supervision overlapping: Such as, the bank has security businesses (including the fund custody, consigned bond and asset securitization), which makes it under the supervision of two departments, therefore, the full coordination is required.

(2) Supervision vacuum: Some new financial businesses (like “Wealth Company”) are under zero supervision. For some crossing businesses along with mixed operations, the supervision shall be coordinated by two supervision subjects, however, the improper is often seen which causes a dead zone.

The availability of Instructions will strengthen the supervision from:

(1) Delete the multiple-layer nested products, only one-layer product can be invested

As stipulated in the Instructions, it is clearly regulated that asset management product can invest one-layer product, that is the newly invested asset management product cannot be used to invest other products (excluding the public security invests funds). And it is regulated that the financial institution is not allowed to provide channel service for the asset management products owned by other financial institutions, like avoiding investment scope and leverage constraint. Under the Instructions, the multiple-layer business (like SOT, the bank financing - trust - asset management plan) will be shrunk a lot.

(2) Rigid payment will be broken and net worth management shall be executed

   In Instructions, breaking the rigid payment is specially specified. That is financial institutions are required to perform net worth management for their asset management products. The net worth formation shall be consistent with the principle of “fair value”, which shall promptly reflect the income and risk of the underlying assets.

The person in charge of the People’s Bank of China also said that “if rigid payment shall be essentially broken, it is mandatory for investors to undertake the risks by themselves under the condition that investors clearly know about the risks and fully get the incomes. However, net worth management plays an important role in clearly knowing about the risks.” 

(3) Leverage level shall be strictly controlled, debt of public placement shall be no more than 140%

In Instructions, it is clearly described that in order to keep the financial market (bond and share market) running stably, the asset price bubble shall be strictly controlled and it is mandatory to control the leverage level of the asset management products.

For liability leverage, it is a kind of investment leverage added by asset liability behaviors, like borrowing funds and pledged purchasing after the raising. In Instructions, it is clearly regulated that public placement and private placement (total asset / net asset) shall be no more than 140% and 200% respectively. The liability of level-to-level private placement shall be no more than 140%.

For level-to-level leverage, that is the share grading (which shall be in priority), it is regulated in Instructions that public placement and private placement which is in the mode of open operation, or which is only used to invest on one target, or whose standardized asset is more than 50% are not allowed by share grading; for private placement which is able to be graded, the grading ratio (shares in priority / shares in inferior) for fixed income products shall be no more than 3:1; the grading ratio of equity products shall be no more than 1:1, the grading ration of commodities, financial derivatives and mixed products shall be no more than 2:1.

(4) Lower liquidity risk and prohibit capital pooling

In order to solve the problem that asset management product is only valid for a short term, to lower and get rid of the term mismatch and liquidity risk suffered by the fund source and asset source, Instructions clearly prohibits capital pooling and requires the management of “three independence” (independent management, independent account-making and independent accounting). Meanwhile, financial institutions are required to strengthen the long-term management, stipulating that the shortest term for enclosed asset management product shall be no less than 90 days.

(5) Disconnect the new and old, and set up a transitional period (due in June 2019)

What is worth mentioning is that Instructions is applicable for all the asset management institutions and products existed in the market, including the asset management business performed by the banks, trust companies, funds, futures company and insurance company, as well as non-guaranteed financial products, fund-trust plans issued by the bank and asset management products issued by subsidiaries of security company, fund management company, subsidiaries of fund management, futures company, subsidiary of futures company and insurance institutions etc.

Additionally, in order to get the asset management stably transitioned, Instructions, under the principle of “the old separates from the new”, allows the inventory can be existed until the invested asset is due. That is “asset maturity” shall be executed. The Instructions also sets the transitional period starting from the day when Instructions is implemented to Jun. 30, 2019. During the transitional period, financial institutions are not allowed to enlarge the net subscription scale of asset management products which are not consistent with the Instructions (excluding the scope extension for ensuring the liquidity and market stability of asset management product, and the extension is not beyond the inventory)