Tim Reucroft
10-30-2009, 05:35 PM
Just back from the China Securities Forum in Shanghai. Major confusion about beneficial ownership of China A shares. A QFII has three routes to ownership:
1. Proprietary assets (Market access products)
2. Nominee holdings
3. China Funds
1 Prop assets. The broker dealer that applied for the QFII allocation is supposed to use this just for prop assets. Most broker dealers have been writing market access products (derivatives, P Notes etc) of the back of these prop assets. The end investor has an interest in the broker/dealer (try Lehmans), not in any underlying A shares. Oh dear.
The regulators (SAFE and CSCR) recently held a meeting to reinforce this. The brokers have until the end of November to disclose who owns the assets granted under this mechanism – expect problems. Some brokers have sold allocations or rented them out – the Chinese authorities regard this as grossly unfair.
2 Allocations via a custodian can be held in a nominee name, although it is not clear what legal entitlement this grants. The depository can record nominee names but often via sub-accounts which (I believe) are not the registered owner (the depository is also the central registrar). There is no distinction between legal and beneficial owner in China, so the legal status of a nominee is vague.
3 For China Funds the underlying ownership by the fund is recognised and the custodian includes the funds name in the account at the depository. This is the registered owner. This seems to be the most secure form of ownership.
Anybody owning A shares via a QFII needs to follow events more closely.
1. Proprietary assets (Market access products)
2. Nominee holdings
3. China Funds
1 Prop assets. The broker dealer that applied for the QFII allocation is supposed to use this just for prop assets. Most broker dealers have been writing market access products (derivatives, P Notes etc) of the back of these prop assets. The end investor has an interest in the broker/dealer (try Lehmans), not in any underlying A shares. Oh dear.
The regulators (SAFE and CSCR) recently held a meeting to reinforce this. The brokers have until the end of November to disclose who owns the assets granted under this mechanism – expect problems. Some brokers have sold allocations or rented them out – the Chinese authorities regard this as grossly unfair.
2 Allocations via a custodian can be held in a nominee name, although it is not clear what legal entitlement this grants. The depository can record nominee names but often via sub-accounts which (I believe) are not the registered owner (the depository is also the central registrar). There is no distinction between legal and beneficial owner in China, so the legal status of a nominee is vague.
3 For China Funds the underlying ownership by the fund is recognised and the custodian includes the funds name in the account at the depository. This is the registered owner. This seems to be the most secure form of ownership.
Anybody owning A shares via a QFII needs to follow events more closely.