China’s securities regulator has officially recognised that securities held by QFII and RQFII separate accounts belong to the clients of the fund managers running those accounts or mandates.
The move, announced late on Friday, is part of Beijing's effort to smooth the way for the inclusion of mainland stocks in MSCI’s emerging-market benchmarks, ahead of the index provider’s annual review next month.
The announcement also covered bonds held in accounts under the qualified foreign institutional investor (QFII) scheme and its renminbi equivalent (RQFII).
In May last year, the China Securities Regulatory Commission (CSRC) had already clarified the question of beneficial ownership of A-shares bought via the Hong Kong-Shanghai Stock Connect. At the time MSCI had welcomed that move, but said Beijing needed to go further.
“It is China’s attempt to push A-shares to be included in MSCI indices,” said Ivan Shi, head of research at fund consultancy Z-Ben Advisors.
Given that many asset owners invest through separate accounts and delegate investment and operational decisions to their fund managers, recognising clear title to ownership is crucial, MSCI said in June, after it decided not to include A-shares in its EM indices.
Moreover, in a consultation paper published in April, the index provider said changes made in February under the qualified foreign institutional investor (QFII) scheme largely resolved two critical accessibility issues, namely quota allocation and capital mobility. But the firm added that it was awaiting further clarification on the beneficial ownership issue.
Foreign fund managers will need to open separate accounts for their proprietary money and their clients’ money under the QFII or renminbi-QFII (RQFII) schemes.
Beneficial ownership is seen as a particular issue under these programmes because most fund managers invest quota on behalf of their clients via sub-advisory business or lend quota to clients. Hence clients worry about their legal rights and shareholder protection.
The CSRC said separate accounts investments represented 23% and 20%, respectively, of the 981 QFII accounts and 942 RQFII accounts open as of the end of 2015. As of that date, there was $81 billion in issued QFII quota and the Rmb444 billion ($68 billion) in RQFII quota.
MSCI declined to comment for this article.