Officials in China are seeking to prohibit online brokerage firms like Futu Holdings Ltd and UP Fintech Holdings Ltd from providing offshore trading services to mainland clients, the latest development in a comprehensive regulatory crackdown that has roiled a wide range of industries over the past year, said a report published by the news agency Reuters.
Two of the largest participants in the sector are Nasdaq-listed Chinese firms, and a ban would prevent millions of individual investors in mainland China from readily trading securities in markets like the United States and Hong Kong. the report quoted sources saying that the prospective ban is motivated by concerns about data security and financial outflows.
The impending limits follow a year-long crackdown that has impacted a wide range of enterprises in industries ranging from technology to education and real estate.
According to one of four people who spoke with Reuters, firms hit by the latest crackdown will likely be notified of a ban in “the coming months.” Because they were not authorised to speak to the media, all sources declined to be identified.
Both Futu and UP Fintech are registered with Hong Kong’s Securities and Futures Commission, but their licences do not extend to the mainland. According to the sources, there is no mainland licence for online brokerages that specialise in cross-border trades.
In a response to Reuters, Futu, a $5.5 billion firm by market value, said it had been in contact with Chinese officials but had not received any formal directives similar to those described by Reuters reporting. It went on to say that everything was fine.
It warned in a prospectus for a follow-on share offering in April that a shift in posture by authorities with broad discretion in interpreting legislation could have an impact on its business.
UP Fintech, which has a market capitalization of $737 million, said it has been obeying worldwide regulators’ standards and will follow and execute any new rules.
Futu’s stock was recently 1.5 percent higher, while UP Fintech’s was down around 2%. Following the Reuters report, both businesses’ stock prices dropped in premarket trade on Friday.
A request for comment was not immediately returned by the China Securities Regulatory Commission (CSRC), the State Administration of Foreign Exchange (SAFE), or the central bank.
In October, Chinese regulators expressed alarm about “cross-border” brokerages, worsening stock falls in both companies, which have fallen more than 80% since their February highs.
Over the last year, authorities have cracked down on a wide range of industries, and data security has emerged as a major worry.
The official People’s Daily warned in October that the large volumes of data acquired by these brokerages could be jeopardised if data was sought by authorities such as the US Securities and Exchange Commission. find out more
Authorities are also concerned about money outflows, and three individuals said they are afraid that the enterprises’ quickly developing businesses could run afoul of China’s foreign exchange control policy.
According to sources, Futu officials have been pushing authorities such as the CSRC, SAFE, and the central bank but have yet to obtain positive feedback.
According to the two sources, a prohibition would damage a significant portion of business at companies like Futu. According to one of Futu’s clients, almost 40% of their trading accounts were opened with Chinese ID cards. Those with US, Singapore, and Hong Kong IDs have opened the majority of the other accounts.
As of end-September, Futu had 2.6 million clients who had created one or more trading accounts. It is backed by Tencent Holdings, a gaming and social media behemoth.
Futu’s trading revenue rose to HK$1.4 trillion ($179 billion) in the July-September quarter versus HK$1.01 trillion the previous quarter, with more than 90 per cent of the total coming from U.S. and Hong Kong stocks.
People with mainland ID cards could still establish new accounts on Futu, but the firm now requires those customers to have foreign bank accounts, according to one source.
Besides of brokerages such as Futu and UP Fintech, mainland investors can only participate in securities outside of China through qualified domestic institutional investor (QDII) schemes and connect schemes that link the Hong Kong and mainland stock markets. Both of these schemes are heavily controlled.
(Adapted from Reuters.com)