Yu Xie and Julie Zhu

HONG KONG, (Reuters) – Chinese regulators plan to ban online brokerages like Futu Holdings (NASDAQ:) Ltd. and UP Fintech Holding Ltd. preventing clients from offshore trading due to capital outflow and data security concerns, sources familiar with the matter stated.

Chinese-listed firms that are listed at Nasdaq are the two largest in this industry. Bans would stop millions of Chinese investors trading securities on markets like the United States and Hong Kong.

According to one source who spoke with Reuters, firms are expected to be notified in the “coming months” of a ban. Sources declined to identify themselves as they were not authorized to speak to the media.

Futu Fintech and UP Fintech are in operation since 2011 and 2014. They allow clients from the mainland to open offshore accounts by using their personal information, such as tax records and bank cards.

They are both registered in Hong Kong with the Securities and Futures Commission, but the permit doesn’t extend to mainland China. According to sources, there’s no license for offshore brokerages that specialize in cross-border trading.

Futu (a market-value company of $5.5billion) stated that they have been in communication with Chinese authorities and had not yet received orders. Futu stated that the company is normal operating.

In April, it indicated in a prospectus that it was preparing for a follow on share offering that the authorities have broad discretion when interpreting regulations.

UP Fintech has a market capitalization of $737 Million. The company said that it had been adhering to the global regulations and would comply with any new ones.

China Securities Regulatory Commission(CSRC), State Administration of Foreign Exchanges (SAFE) or the central bank failed to respond immediately to a request.

Chinese officials raised concerns in October about cross-border brokerages. This has contributed to the sharp declines in share prices in both companies, which plunged over 80% from their peak in February.

FRUTLESS LOBBYING

Over the last year, Chinese authorities have increased their control over a variety of industries. Data security is a major concern.

The official People’s Daily in October warned of the dangers of the huge amounts information these brokerages had collected if they were required to provide data by government agencies like the U.S. Securities and Exchange Commission.

Three sources claimed that authorities are concerned about the outflow of capital and fear the rapid growth of firms could lead to China’s foreign exchange control agenda.

According to two sources, Futu executives lobby authorities such as the CSRC, SAFE, and central bank, but are yet to get any positive feedback.

Two sources claimed that a ban could affect large chunks of Futu’s business. According to one source, 40% of Futu’s clients have opened trading accounts with Chinese ID cards. Other accounts have mostly been opened by individuals with U.S. and Singapore IDs.

Futu was supported by Tencent Holdings, a social media and gaming giant. As of September 31, Futu had more than 2.6 million customers who opened trading accounts.

Futu’s trading turnover grew from HK$1.01 billion in the previous year to HK$1.43 trillion in July-September. This includes more than 90% trade in U.S. stock and Hong Kong stocks.

According to one source, individuals can open Futu accounts with their mainland ID cards. However, the company insists that these clients now have offshore bank accounts.

Except for services provided by Futu or UP Fintech brokerages, mainland investors cannot invest in securities from China via so-called Qualified Domestic Institutional Investors(QDII), as well as through connect schemes linking the Hong Kong stock market and mainland stock exchanges. These schemes are strictly regulated.