First Luxembourg RQFII licence allocated

Elvinger, Hoss & Prussen has assisted Bank of China (Luxembourg ) S.A. on the Luxembourg elements of its application to become the first Luxembourg RQFII licensee . The licence will be used, among other things, for a Luxembourg UCITS Sicav currently in discussion with the Luxembourg regulator.

Background information on the Luxembourg RQFII quota

Since the launch of the RQFII scheme in 2011, asset management groups have used this access channel to the Chinese equity and bond markets in the structuring of their products to offer direct China exposure to their clients. Luxembourg was the first European jurisdiction to authorise the use of an RQFII quota in the context of a UCITS fund back in 2013. Since then, RQFII quotas available to asset managers in more and more jurisdictions have been used in Luxembourg fund structures.

On 29th April 2015, the People’s Bank of China announced that Luxembourg had been granted a 50 billion RMB RQFII quota. Given the reduced numbers of asset managers, banks or financial institutions being able or likely to use the RQFII quota, the Luxembourg authorities and fund industry quickly entered into discussions with the Chinese authorities to determine whether a quota could be used by Luxembourg management companies. The latter, while exercising their control functions, would delegate the day-to-day portfolio management to a specialised manager in a jurisdiction close to the markets (for example in Hong Kong or Singapore).

After several meetings and exchanges of documents with the competent authorities in China (being the CSRC, SAFE and PBOC ¹, Luxembourg For Finance and the Association of the Luxembourg Fund Industry were able to confirm at the end of September 2015 that the Luxembourg quota could effectively be used by those management companies. A Q&A² published by both associations gives interesting insight into the categories of financial institutions which are eligible to participate in Luxembourg RQFII scheme. The Q&A mentions the most relevant ones without excluding others which may apply in due course³ .

Among the different questions which are treated in the Q&A, three are of particular relevance:

• A UCITS management company or an authorised AIFM to which an RQFII licence and quota would be granted can delegate the investment management function to another investment manager. The Q&A recalls that such delegations of investment management functions are subject to the conditions of Article 110 of the 2010 Law⁴ for UCITS and Article 18 (1) c) of the AIFM Law⁵ . As such, the delegated investment manager will be subject to the approval of the CSSF and can only be appointed if the relevant qualitative requirements are met. It is clarified that in the event of such delegation the Luxembourg UCITS management company and/or AIFM retains full responsibility to comply with the PRC laws and regulations in its functions as RQFII licence holder. Further, it is made clear that the delegation of investment management is not linked to the fact that the delegated manager is established in an RQFII centre. In other words, investment management functions in relation to such mandates can be delegated to investment managers in countries which have not themselves been designated as RQFII centres.
• The Q&A clarifies that the Luxembourg UCITS management company or authorised AIFM can allocate its RQFII quota to investment funds and/or discretionary portfolio management mandates. The management company can even split its quota between different investment funds or sub-funds and discretionary accounts as deemed appropriate subject to notification/approval of SAFE (as necessary).
• The Q&A gives some information on the role of the PRC custodian which will first have to assist the RQFII licence and quota applicant in the preparation of the file in order to receive approval from the Chinese authorities. It is confirmed as for other existing RQFII arrangements that safekeeping of assets in the PRC is handled by the PRC custodian.

For any questions, please contact Gast Juncker.