Guotai Haitong: Tighter cross-border supervision is beneficial for securities firms' cross-border business. Optimistic about the sector's potential for increased valuations.

Guotai Haitong released a research report stating that the policy requires a comprehensive ban on illegal cross-border operations by overseas institutions, and existing businesses are required to withdraw within two years. With further regulation of cross-border securities business, it is expected to guide some overseas funds to flow back to compliant cross-border investment channels, benefiting the growth of high-quality top brokerage firms' cross-border business. Currently, under the warming market, brokerage firms' wealth management/investment banking/investment businesses are accelerating their recovery, with brokerage firms reaching historical highs in profit in the second quarter, coupled with stricter cross-border supervision leading to fund inflows benefiting high-quality top brokerage firms' cross-border derivative businesses, and expecting the sector's valuation to improve. It is recommended to consider brokerage firms leading in international business and wealth management characteristic brokerage firms whose share of retail business is expected to increase. Guotai Haitong's main points are as follows: Event: On May 22, with the approval of the State Council, eight departments including the China Securities Regulatory Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security, and the People's Bank of China jointly issued the "Comprehensive Remediation Plan for Illegal Cross-Border Securities, Futures, and Fund Management Activities" (hereinafter referred to as the "Rectification Plan"). Overseas institutions' illegal cross-border operations are completely banned, and existing businesses are required to withdraw within two years. In recent years, the phenomenon of overseas institutions soliciting clients within the country without approval and providing services such as account opening and trading in overseas stocks to domestic investors has severely disrupted the financial market order and harmed investors' rights and interests. The China Securities Regulatory Commission's crackdown on illegal cross-border business by overseas institutions can be traced back to September 2016, when the commission warned that overseas institutions providing Hong Kong and US stock trading services to domestic investors posed compliance risks. In November 2021, the commission interviewed Futu and Tiger, requiring them to regulate their cross-border securities business. In December 2022, the commission promoted the rectification of illegal cross-border operations, urging to "curb increment and resolve stock." The "Rectification Plan" this time bans overseas institutions from conducting illegal cross-border activities such as marketing/account opening/trading/fund transfers within the country, strictly prohibits overseas institutions from operating illegally within the country, and sets a 2-year period for centralized rectification to clear existing operations. The China Securities Regulatory Commission is investigating and plans to confiscate all illegal gains from Futu/Tiger/Changqiao's illegal cross-border operations. The China Securities Regulatory Commission opened investigations against domestic and foreign entities related to Tiger, Futu, and Changqiao's illegal securities business operations within the country and made prior administrative penalty notifications, accusing Tiger/Futu/Changqiao of conducting business within the country without obtaining permits, with plans to confiscate all their illegal gains. According to the regulatory provisions implemented in December 2022 allowing existing domestic investors to continue trading through their original overseas institutions, this penalty mainly targets violations of operations since 2023, with a total penalty of 1.85 billion RMB for Futu Holdings and 410 million RMB for Tiger Securities. In recent years, Futu/Tiger have accelerated their international layout, with the proportion of mainland businesses continuously declining; by the end of Q1 2026, the proportion of mainland assets under Futu's management was only 13%, while at the end of 2025, the proportion of retail clients' assets under Tiger in the mainland was only 10%. It is anticipated that the subsequent withdrawal of existing businesses will have a manageable overall impact on Futu/Tiger. Further regulation of cross-border securities business is expected to guide some overseas funds to flow back to compliant cross-border investment channels, benefiting the growth of high-quality top brokerage firms' cross-border business. The "Rectification Plan" clearly prohibits overseas institutions from illegally providing securities services within the country. In addition to imposing administrative penalties on Tiger/Futu/Changqiao, the China Securities Regulatory Commission will further carry out monitoring and investigation, resolutely handle illegal cross-border operations and their entities. It is expected that other non-compliant businesses of Hong Kong local brokerages/internet brokerages/foreign brokerages/banks will gradually exit; the "Rectification Plan" mentions that future regulations will be improved, guiding compliant investments, and is expected to promote the return of some domestic funds originally invested through unlicensed institutions to compliant cross-border channels such as Hong Kong Stock Connect, QDII, and cross-border wealth management platforms, benefiting the growth of top brokerage firms' cross-border business. Risk Warning: Significant fluctuations in the capital market.