Is there any legislation or proposed legislation in your jurisdiction under which financial institutions are prohibited from dealing in investments as a principal?

China has implemented the “separate operation” principle to administer the Chinese financial market since the promulgation of Commercial Bank Law of the People’s Republic of China (the Commercial Bank Law) in 1995 (amended in 2003). According to the Commercial Bank Law, unless otherwise permitted, a commercial bank must not engage in trust investment business or securities business, or make investments in non-self-use real estate properties, or invest in non-bank financial institutions or other enterprises.

However, a commercial bank may engage in wealth management business on behalf of its clients, under which the commercial bank will act as the agent of its clients to conduct various  investments which may not be conducted by the bank as a principal. Regulatory approval or reporting requirements as well as various restrictions imposed by the China Banking Regulatory Commission (CBRC) will apply when a commercial bank carries out such wealth management business.

To which financial institutions do the prohibitions relate?

All commercial banks that are regulated by CBRC, whether as a purely domestic bank, a foreign-invested bank or a Sino-foreign equity joint venture bank, are subject to the related prohibitions.

What exceptions to the ban on proprietary trading are contemplated by the legislation?

Commercial banks have been expressly permitted, by legislation following the Commercial Bank Law, to make domestic equity investments, as principals, in fund management companies and insurance companies. They may also make overseas equity investments as principals subject to regulatory approvals. A commercial bank may also enter into derivative transactions as a principal subject to CBRC approval.

Can any other entity within the relevant financial institution’s group of companies carry on the prohibited activity?

The parent company of a financial institution’s group normally makes equity investments in different types of financial institutions, which is permissible as long as the “separate operation” principle is strictly complied with by each particular financial institution. Consequently, a banking affiliate within the group only conducts banking business, a securities affiliate engages in securities business and a trust affiliate undertakes trust business.

When will the proposed legislation come into effect?

Not applicable as there is no legislation or prohibition on proprietary trading. Please see our response in question 1 for Australia regarding the FIs to which different restrictions apply.