The CBIRC to tighten regulation on structured deposits of commercial banks

The China Banking and Insurance Regulatory Commission (CBIRC) said it would tighten regulations on structured deposits of commercial banks and enhance the compliance and soundness of bank operations to control risks to the investor. 

 |  HAO Xinyao

By HAO Xinyao

 

Structured deposits worth 10 trillion RMB will be under tough regulation. 

On October 18, the CBIRC issued the Notice on Further Regulating the Structured Deposit Business of Commercial Banks.  The change takes effect immediately.

The regulation intends to address the structured deposit business of commercial banks to effectively prevent risks and protect the legitimate rights and interests of investors.  It comes into force, in response to problems in product management, misleading sales, non-compliant operations and other issues that have arisen due to the rapid development of the structured deposit business at some commercial banks.

In 2002, foreign banks issued their first structured deposit products.  It was a response to a sharp decline in China's deposit rates and increasing pressure on banks to attract deposits which has only grown since the late-1990s. After that, Chinese banks also launched products of this kind

Since 2018, banks have competed for this business, and with the new regulations on capital management which prohibit guaranteed financial products, more and more Chinese investors have flocked to structured deposits.  But as structured deposits gained in popularity, problems surfaced; such as poor oversight of operation management, misleading sales and illegal transactions.

At the beginning of 2019, the bill discount rate diverged from the structured deposit rate, so some banks used the bill discount fund to purchase high-yield structured deposits, making the structured deposits an arbitrage tool, further contributing to the rapid growth of structured deposits.  The risks and problems surrounding structured deposits only deepened.

Changing Course

Comprising 14 articles, the notice is a systematic review of the existing regulatory provisions on structured deposits, supplementing the relevant provisions abolished in the Rules on Wealth Management Business of Commercial Banks

According to the CBIRC, a structured deposit refers to deposits embedded in financial derivatives pooled by commercial banks. It is linked to fluctuations in interest rates, exchange rates, indices, or to the credit situation of an entity, so that investors can make a profit while assume a corresponding level of risk.

The main contents of the notice include:

1. Commercial banks shall strictly distinguish between structured deposits and other deposits. In accordance with the nature and risk characteristics of the structured deposit business, they shall establish and improve the structured deposit business management system, including product access management, risk management and internal control, sales management, investment management, valuation accounting and information disclosure. 

Commercial banks shall, on the basis of a comprehensive analysis and assessment of their own risk management capability, the management ability of their derivatives trading business, capital strength and liquidity, design structured deposits, and shall not issue structured deposits whose returns do not match the actual risk-taking. 

2. Commercial banks shall, in view of the risk characteristics of the structured deposit business, formulate and implement corresponding risk management policies and procedures, continuously and effectively identify, measure, monitor and control all kinds of risks faced by the structured deposit business, and integrate the risk management of the structured deposit business into the comprehensive risk management system. 

3. Commercial banks shall include structured deposits into on-balance accounting as well as the scope of payment of deposit reserves and deposit insurance premiums in accordance with deposit management. The assets shall be capitalized and provisioned according to the relevant provisions of the banking regulatory authority under the State Council. 

4. Commercial banks shall issue structured deposits with the qualification of ordinary derivatives trading business, and the derivatives transactions linked to structured deposits shall strictly abide by the relevant provisions of the banking regulatory authority under the State Council on derivatives trading.  This shall include a requirement to have an authentic counterpart and trading behavior, legitimate market risk and operational venture capital.  Market venture capital should not be more than three percent of its tier one capital under the standard law of trading non-hedged derivatives.

5. Commercial banks shall sell structured deposits under relevant provisions, fully disclose the risks, implement sales in special zones with audio and video recordings, and shall not mislead investors. 

The sale of structured deposits by commercial banks shall meet the following requirements:

  • The starting point of the sales of a single investor shall not be less than RMB 10,000 (or equivalent foreign currency.) 
  • The risk to investor should be clearly stated, and the structured deposits shall not be purposely mistaken for other deposits.
  • A cooling-off period of not less than 24 hours shall be set, and the rights of investors during this period shall be indicated in sales documents.

6. Commercial banks that carry out structured deposit business shall disclose structured deposit information, including sales documents, issuance reports, product bills, due reports, reports on major matters and temporary information disclosure. This should be located on their official websites or in the manner agreed with investors. 

Commercial banks shall clearly stipulate in the sales documents the manner, channels and frequency of liaison and information disclosure with investors, and the responsibilities of all parties in the process of information disclosure to ensure that investors receive information in a timely manner. If commercial banks publish relevant information on their official websites without having agreed with investors that this is the manner of disclosure, it cannot be considered as proper disclosure of information to investors.

After the implementation of this notice, a transition period shall be set up by means of “dividing the old from the new” to ensure a smooth transition. The transition period shall be 12 months starting from the date of implementation of this notice.

During the transition period, commercial banks can continue to issue the former structured deposits; yet these products shall be strictly controlled within the overall scale of existing products and be reduced in an orderly way. For the old products issued before the end of the transition period, commercial banks shall settle them after they expire or are redeemed.  After the transition period, newly-issued structured deposits shall conform to the provisions of this regulation. If commercial banks cannot comply with the regulation due to special reasons, they must seek the consent of the banking regulatory authority so that appropriate arrangements can be adopted.

The CBIRC said it would prevent the disorderly growth of structured deposits and enhance the compliance and soundness of bank operations.  It will also help guide bank deposits and market interest rates to return to a reasonable level and regulate the design and trading of related derivatives products. This regulation is intended to put an end to the arbitrage of structured deposits and bills, guide the flow of funds to the real economy, and reduce the financing costs to the real economy.

In the next step, the CBIRC will further strengthen the supervision and management of structured deposit business, and it intends to urge commercial banks to strictly implement relevant regulatory provisions to effectively prevent risks. Commercial banks shall, in accordance with the requirements of the regulation, promptly carry out self-examination and rectification and develop their business in compliance with laws and regulations, to achieve steady and orderly development of the structured deposit business.