Analysis of the New Regulations by the State Administration of Foreign Exchange: "Measures for the Management of Bank Foreign Exchange Risk Trading Reports" and Its Impact

Recently, the State Administration of Foreign Exchange issued the "Administrative Measures for the Management of Bank Foreign Exchange Risk Trading Reports (Trial)". This new regulatory document raises higher requirements for the transparency, compliance, and risk management of bank foreign exchange trading activities. With the changing global financial environment and the increasingly complex cross-border capital flows, bank foreign exchange risk management has become a key area of focus for regulators. This article will analyze the core content of the measures in depth and discuss their potential specific impacts on traders.

1. The Main Obligations and Responsibilities of Banks

1. Risk Trading Monitoring and Reporting

   • When discovering or reasonably suspecting the existence of forex risk trading behaviors involving false trade, illegal cross-border financial activities, etc., banks must monitor and promptly submit reports.
   • Establish comprehensive and effective monitoring standards, referencing multiple factors to analyze and identify trading information.
   • Submit reports electronically in a timely manner, no later than 5 working days.
   • Regular assessment and optimization of monitoring standards.

2. Cooperate with supervision and inspection

   • Actively cooperate with the forex bureau's supervision and inspection work.
   • Provide relevant documents, materials, data, and information truthfully, accurately, completely, and in a timely manner.

3. Internal Management Measures

   • Formulate and improve internal management systems to standardize the forex risk trading reporting workflow.
   • Establish and improve the forex risk trading information monitoring system.
   • Achieve internal information sharing, reasonably determine the degree and scope of sharing.
   • Relevant materials should be kept for at least 5 years.
   • Strict confidentiality measures for the information obtained.

4. Responsibility for Violations

   • Violating the regulations will face penalties.
   • If it can be proven that due diligence was exercised and the reasons for not reporting are reasonable, relevant legal responsibilities may not be pursued.

2. The standards for banks to determine "reasonable grounds for suspicion"

When banks assess whether there is a "reasonable suspicion" regarding cross-border fund transfers, they mainly focus on the following aspects:

1. Transaction amount: Large cross-border fund flows that are seriously inconsistent with the client's economic strength and normal business scale.

2. Trading frequency: Abnormal changes can attract the attention of banks, such as suddenly frequent cross-border fund transfers.

3. Fund Flow: Inconsistent with the purposes claimed by the client, or flows to high-risk areas.

4. Industry Characteristics: Customers in a certain industry deviate from conventional capital transfers or encounter specific risk transactions highlighted by regulatory alerts.

3. Risk Identification of Virtual Currency Trading and Cross-Border Transfers

Virtual currency trading is easily subjected to high-risk regulatory scrutiny by banks and financial institutions:

• Article 3 of the "Regulations on the Management of Foreign Exchange Risk Trading Reports (Trial)" clearly regards cross-border financial activities involving virtual currency as high-risk transactions.
• Regulators emphasize that virtual currency trading lacks effective oversight, experiences significant price volatility, and has strong anonymity, making it susceptible to illegal fund transfers and money laundering.
• Financial institutions must remain highly vigilant regarding virtual currency transactions and implement strict control measures.

4. Abnormal Judgment of Large Fund Transfers or Frequent Cross-Border Transactions

When banks assess whether a transaction is abnormal, they will consider the following factors:

1. Is the transaction amount far beyond the regular income and expenditure range of the account.
2. Has the trading frequency increased dramatically in a short period of time?
3. Is the capital flow clear and is it related to the normal business activities of the account?
4. The high-frequency characteristics of virtual currency trading and the complexity of capital flow.
5. Are the sources and uses of funds matched.
6. Is there frequent exchange between fiat currency and virtual currency.
7. Is there a clear proof of the transaction, and does it correspond to the actual use of the account?

V. Measures Taken by Banks to Address Risky Transactions

If the bank determines that the transaction is risky, it may take the following measures:

1. Enhance risk levels and strengthen reviews: Raise the forex compliance risk level of trading entities and implement strengthened review measures for subsequent forex operations.

2. Adjust the approval levels: Raise the approval levels related to the trading entities.

3. Restriction of business relationships: Restrict the establishment of new forex business relationships, refuse to process subsequent forex transactions, and even terminate established forex business relationships.

4. Restrict non-face-to-face transactions: Reasonably limit the amount, frequency, and types of forex transactions conducted through non-face-to-face methods.

5. Measures such as account freezing: In extreme cases, accounts may be frozen or fund transfers may be restricted.

To avoid being frozen, traders should ensure that their transactions are legal and compliant, providing clear and reasonable explanations of the trading background and relevant documentation.

6. Account Freezing and Unfreezing

The method does not specify the exact duration and impact of the bank freezing accounts. If the account is frozen due to forex risk transactions, it is recommended to take the following steps:

1. Proactively explain the transaction background and purpose to the bank in detail.
2. Provide legal, compliant, and complete trading vouchers and other relevant materials.
3. Actively cooperate with the bank's investigation work.

After the bank reviews and confirms that the transaction poses no risk, the account may be restored to normal status.

7. Impact on Participants in Virtual Currency Transactions

The strengthening of risk monitoring, restrictions, and reporting by banks on virtual currency transactions may have the following impacts on participants in virtual currency transactions (such as "U merchants"):

1. Restricted capital flow: Banks may limit or freeze accounts involved in large or high-risk cross-border transactions, affecting platform liquidity and user experience.

2. Increased transaction costs: Banks may charge additional fees for virtual currency transactions or require more compliance materials, increasing platform operating costs.

3. Increased compliance pressure: Platforms need to comply with regulations in different countries, invest more resources in compliance audits and risk control, which increases operating costs and may affect efficiency.

4. Small platforms face challenges: Compliance burdens may place significant pressure on small platforms.

Overall, banking regulatory measures may restrict the flow of funds, increase transaction costs, and intensify compliance pressure, significantly impacting the overall operations of participants in virtual currency trading.