CSRC sends message with insider-trading bans

China Asset Management is among five fund firms banned from launching products for up to six months as the securities regulator adopts a zero-tolerance approach to illegal activity.
CSRC sends message with insider-trading bans

Five Chinese fund houses have been banned from registering new fund products temporarily as the securities regulator fires a warning shot to the industry over insider trading. 

The China Securities Regulatory Commission (CSRC) slapped the ban on the firms on Friday as punishment for lack of compliance and risk controls. 

The regulator's move is seen as a bid to deter fund houses in China from engaging in illegal activities, as well as an attempt to boost foreign investor confidence in the market. 

The CSRC said five companies would be banned from new launches for three to six months, without providing additional details. 

CSRC spokesman Zhang Xiaojun named just two firms affected: China Asset Management Company, the nation's second largest fund house, and HFT Investment Management, a joint venture between BNP Paribas Investment Partners and Haitong Securities.  

Chinese media has speculated that two of the other banned firms are Harvest Fund Management and China Universal Asset Management. The companies did not respond to AsianInvestor's requests for comment.

"This is quite a heavy-handed punishment," said Ivan Shi, analyst at Shanghai-based consultancy Z-Ben Advisors. “It brings uncertainty to these fund companies as institutional investors may question their internal compliance and start to make redemptions.”  

The firms in question have not yet received official administrative instructions from the regulator, said one industry source. They have not been told when the suspensions will start or exactly how long they will last. 

A spokeswoman for China AMC said the firm would follow the CSRC's requirement to improve internal controls, but declined to confirm when its suspension would start. 

BNPP IP did not respond to a requests for comment and HFT could not be reached.

“Investigations and punishments will be the new normal," said the CSRC's Zhang. He warned that fund companies needed to enhance risk management and internal controls to boost investor confidence. The regulator has asked fund firms to build efficient internal controls and enforce strict supervision to identify illegal activities. 

Z-Ben's Shi said the CSRC's move was intended to bolster the confidence of foreign investors who were considering handing offshore renminbi mandates to domestic fund managers. 

'Rat trading', as it is known in China, is endemic in the country and has been a worry for foreign investors.

The bans came on the same day that the Asset Management Association of China (Amac), the CSRC-endorsed organisation, announced on its website it had recently banned a handful of firms from registering new products.

Amac banned seven firms, which included asset managers / fund house subsidiaries and brokers for three months: JT Asset Management; BOSC Asset Management; JF Fund’s subsidiary, Rui-yuan Capital Management; Donghai Securities; Aegon-Industrial Fund Management, a joint venture of Industrial Securities and Aegon; Wisdom Asset Management, a subsidiary of Aegon-Industrial; and Everbright Prestige Capital, a subsidiary of China Post Fund.

Amac said the bans were made because the firms had either launched products that violated laws and rules, used more than 10 times leverage, or started product operation before registration. The association also issued a warning to seven other fund firms due to infringement of various rules, including inadequate due diligence.

On January 16, the CSRC also punished 12 Chinese brokers, including Citic Securities, Haitong Securities and Guotai Junan Securities, which had breached rules on margin trading. The firms were banned from opening new margin-financing accounts for three months.

The punishments are part of the regulator's campaign against insider trading. The CSRC said last Friday that it had launched investigations in December into 15 fund houses that lacked internal controls in information management and guidelines for their investment and research teams. The punishments meted out to the five fund firms last Friday were the result of its investigations.

Last month CSRC said it had investigated 375 cases of suspected insider-trading since mid-2013 by using 'big data' technology. Of the firms probed, 142 cases had been passed to law enforcement authorities for investigation.

The CSRC's use of 'big data' refers to its collaboration with the Shanghai and Shenzhen stock exchanges to find evidence of insider dealings in trading records. 

Insider trading in China typically sees a portfolio manager buy a stock using a personal account and use their own funds ahead of a trade by the individual's firm, for their non-disclosed personal profit. China AMC’s former portfolio manager, Luo Zeping, was found to have made Rmb130 million in insider trading last year. 

Although this is not the first time the CSRC has punished fund firms in this way, the last time it happened was in December 2013 when Bosera Asset Management was banned from launching new funds for six months due to insider trading by former portfolio manager Ma Le. 

Z-Ben Advisors said penalties for insider trading had been few and far between in China, and when they did occur often focused on individuals rather than the firms.

The consultancy said the crackdown on multiple institutions was likely to be a reaction to the fact that last year saw incidences of insider trading go up while the amounts of money involved also increased. Seven cases uncovered involved transaction values of more than Rmb1 billion, Z Ben estimated.


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