Amid escalating global tensions and geopolitical uncertainties, numerous bills are being researched and proposed to minimize the impact to United States financial markets.
The PRC Risk Transparency Act, a bipartisan bill proposed by Chairman John Moolenaar and House Financial Services Subcommittee on National Security, Illicit Finance, and International Financial Institutions Chairman Blaine Luetkemeyer on July 25, 2024, aims to address American firms’ deeply entangled relations with the Chinese economy.
If passed and implemented, this act would amend the Securities Exchange Act of 1934 to require public U.S. companies to annually disclose what percentage of their revenue, capital investment, and supply chain management is tied to the People’s Republic of China (PRC), Hong Kong, and the Xingjian Uyghur Autonomous Region. In addition, issuers would need to generate documentation in the event of a “threat of sudden loss of market access” and disclose “relationships with certain entities” outlined in the bill.
This poses a significant dilemma to CCOs at investment firms operating with assets under management greater than $500,000,000 across the nation, as tracking country exposure on such a granular level is time-consuming, resource-intensive, and prone to errors. Most commercial order management systems (OMS) do not currently have out-of-the-box functionality to monitor this accurately, as it would require every issuer to determine and report their exposure to China. In other words, if this bill was enacted, it would significantly reshape compliance programs.
Compliance teams would need to implement trading rules to ensure issuer country exposure was being measured in accordance with the bill. Assuming that most issuers would report that only a percentage of their revenue was connected to China, security master records would need to have that partial exposure captured either on the security setup or on the issuer record. Typically, both types of records may have multiple country fields (e.g. country of domicile, country of risk), but they do not have the structure to allocate a percentage of a security—and therefore a position—to a country.
A potential workaround is to set securities up as pooled securities (like a mutual fund or ETF) and look through to the “underlying” records representing country exposure. However, that additional overhead will likely translate into extended processing time for OMS compliance—if and when firms can get the data.
The impact does not stop at compliance teams. The ability to aggregate country exposure monitoring across firm subsidiaries and business lines is an enormous undertaking. Firms would need to align country exposure measures across custodians, OMS systems, accounting systems, and data vendors. This integration requires significant technological investments and coordination between departments to ensure data accuracy.
If the bill was enacted, many firms may deem the risk of monitoring comprehensive country exposure too high and drop investments with any Chinese influence. A widespread divestment from Chinese securities could result in substantial shifts in global markets, potentially affecting international trade relations, altering investment flows, and negatively impacting U.S. companies with operations in China.
With over 20 years’ experience in trading compliance challenges, IMP can help COO’s and CCO’s assess the impact and scope the effort for major changes such as the PRC Risk Transparency Act. For more information, contact us at: Info@impconsults.com
