China Explicitly Bans Principal Guarantees by Custodian Banks
China's financial regulator has moved to eliminate one of the most persistent grey areas in its asset-management market. On December 12, the National Financial Regulatory Administration (NFRA) issued new custody rules that formally prohibit commercial banks from guaranteeing principal or returns for products they hold in custody, with effect from February 1, 2026.
For foreign asset managers and institutional investors, the value of the regulation lies in what it clearly forbids, not in broad policy language.
The Measures set out an explicit negative list. Commercial banks acting as custodians must not:
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Bear credit or market risk of custodial products
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Provide any explicit or implicit guarantee, including principal protection or “expected yield” commitments
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Advance funds, offer liquidity support, or make financing promises to custodial products
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Participate in investment decision-making or investor suitability management
These prohibitions apply regardless of whether support is written into contracts or provided informally. Regulatory language explicitly targets both direct and indirect forms of guarantees, closing loopholes that previously existed in practice.
TWO
At the same time, the Measures reaffirm what custodians are responsible for:
asset safekeeping, account segregation, clearing and settlement, accounting, valuation verification, information-disclosure coordination, and procedural investment oversight.
Crucially, custodians are not responsible for asset quality, transaction legality, or losses arising once assets leave their effective control. Custodial assets remain legally segregated and bankruptcy-remote from the bank itself.
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Where custodial products invest in non-standard debt, private equity, or other illiquid assets, banks must conduct a capacity and risk assessment before accepting the mandate. This includes reviewing the product manager’s governance, risk controls, disclosure practices, as well as transaction structure, valuation methodology, and exit mechanisms.
In practice, this narrows the scope for banks to custody highly bespoke or weakly governed structures.
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The Measures do not introduce new market access barriers, but they eliminate any assumption of bank-backed downside protection in China's onshore products. For foreign sponsors, insurers, pension funds, and fiduciaries, this brings China's custody framework closer to international standards—while requiring more disciplined product design and clearer investor disclosure.
The message from regulators is technical but unambiguous: custody does not equal risk absorption, and it never did.
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