AsianInvestor's regulatory roundup, June 18

Technical issues delay SZ Connect; CSRC tightens margin lending; Japan sets out tax reforms; SFC mulls new legislation; Iosco urges less reliance on ratings agencies; and derivatives reporting changes sought.
AsianInvestor's regulatory roundup, June 18

Hong Kong/China: Shenzhen Stock Connect delayed
The launch of the much-anticipated Shenzhen-Hong Kong Stock Connect has been delayed due to technical difficulties, according to reports.

A Reuters report on June 9, which cited three sources familiar with the situation, casts doubt over whether Stock Connect would be ready this year. A report on AAStocks on June 10 said that Shenzhen Stock Connect had been delayed because the China Securities Regulatory Commission and the State Administration of Foreign Exchange were unable to agree on a quota amount.

The Shenzhen trading link would be an important step towards inclusion of China A shares in the MSCI emerging markets index, which was rejected last week as the index provider decided more progress was needed to expand the China securities universe for global investors.

China: Regulator tightens margin lending
The China Securities Regulatory Commission (CSRC) last Friday (June 12) released draft rules that would cap a brokerage’s margin trading and short-selling business.

The draft rules, which are currently undergoing public consultation, will mean that a brokerage could only carry out margin trading and short-selling business at four times its capital holdings.

Meanwhile, the CSRC said that it would also allow investors a reasonable extension to margin trade contracts with their brokerages, which would be a change to the current six-month maturity practice.

Margin lending currently stands at around Rmb2 trillion for an A-share market capitalisation of Rmb10 trillion.

Japan: FSA outlines tax reforms for 2015
Japan’s financial watchdog has outlined tax reforms for the 2015 tax year.

The reforms, announced on June 16, will include the introduction of a withholding tax exemption for interest on cash collaterals for derivative transactions.

Unlike other jurisdictions, interest on cash collateral which financial institutions receive in OTC derivative transactions from overseas counterparties is currently subject to a withholding tax in Japan.

The Financial Services Agency said that interest on specified types of collateral for OTC derivative transactions entered into by Japanese counterparties with foreign financial institutions will be exempt from withholding tax before the end of March 2018.

The Japanese financial watchdog is also looking to make further enhancements to Nisa (Nippon Individual Savings Account), the tax-exempt individual investment accounts.

The upgrades to the savings-investment accounts include the introduction of "junior Nisa", which would enable individuals under 20 years old to open a specially-designed Nisa account with an annual investment limit of ¥800,000 ($6,455).

There are also plans to raise the annual upper limit on investments into Nisa accounts to ¥1.2 million, from ¥1 million at present.

Hong Kong: SFC ends consultation on assistance to global regulators
Hong Kong’s Securities and Futures Commission (SFC) is considering legislative proposals that would allow it to work better with foreign regulators.

It comes after results of a public consultation on the subject were released on June 5, in which the public called for the purpose and scope of supervisory assistance to be limited, while also adding thresholds to the “gravity” and “materiality” of the issue before the SFC steps in.

Having considered the comments of all the respondents, the SFC has decided to propose legislative changes to enable it to provide a particular form of supervisory assistance to regulators outside Hong Kong upon request by making enquiries and obtaining certain records and documents.

These proposals will also enhance the SFC’s ability to enter into reciprocal supervisory arrangements with regulators outside Hong Kong that will include two-way exchanges of relevant supervisory information.

“The proposals will enable the SFC to adhere more closely to international regulatory standards and allow for more effective supervision of licensed corporations which operate in multiple jurisdictions,” said CEO Ashley Alder.

International: Investors urged to take more credit rating responsibility
Fund managers should reduce their reliance on external credit rating agencies and instead make more of their own efforts to determine the credit worthiness of a company, an international regulatory association said.

In the June 9 publication on “Good practices on reducing reliance on credit rating agencies in asset management”, the International Organisation of Securities Commissions (Iosco) stressed the importance of asset managers having the appropriate expertise and processes in place to assess and manage the credit risk associated with their investment decisions.

To help managers avoid over-reliance on external ratings, the report listed eight good practices that they may consider when resorting to external ratings, which include making their own judgements as to the credit quality of a financial instrument.

Fund managers should also refrain from investing in products / issuers when they do not have enough information to perform an appropriate credit risk assessment, Iosco said.

External credit ratings should be used only as one method of assessing whether an investment is suitable or not, the association added.

International: Consistent derivatives reporting sought
Financial market lobbyists have called for financial regulators to show greater consistency over derivatives reporting requirements.

A total of 11 industry associations have published a letter supporting a set of principles developed by the International Swaps and Derivatives Association (Isda), which includes calls for derivatives reporting requirements to be harmonised across borders, and for the further development and adoption of global data standards.

The principles were developed to address challenges that have emerged in the cross-border implementation of derivatives reporting rules.

Significant progress has been made in meeting a G20 requirement for all derivatives to be reported to trade repositories to increase regulatory transparency.

However, a lack of standardisation and consistency in reporting requirements within and across jurisdictions has led to concerns about the quality of the data being reported and their usefulness to regulators. For financial institutions, inconsistency leads to greater costs and complexity in reporting.

The 11 signatories included the Alternative Investment Management Association, the European Fund and Asset Management Association, the Securities Industry and the Financial Markets Association.

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