Chinese Wall

What Is a Chinese Wall?

A Chinese wall — increasingly referred to as an “information barrier” or “ethical wall” — is an internal compliance mechanism within financial institutions that prevents the transmission of material non-public information (MNPI) between departments that could create conflicts of interest or facilitate insider trading. In M&A, Chinese walls separate the advisory teams working on a deal from the firm’s trading desks, research departments, and other client teams that could benefit from advance knowledge of the transaction.

The term originated in the aftermath of the 1929 stock market crash and was formalised as a regulatory concept in the United States through the Securities Exchange Act of 1934 and subsequent SEC guidance. Financial institutions are expected to maintain robust information barriers as a condition of operating across multiple business lines — investment banking, sales and trading, research, asset management, and principal investing.

How Chinese Walls Work in M&A

The Problem

A bulge-bracket investment bank advising on a hostile takeover possesses MNPI about the transaction — the identity of the target, the proposed price, the timing of the offer. If that information reaches the bank’s trading desk, proprietary traders could buy target company shares before the announcement and profit from the price increase. If it reaches the research department, analysts could issue buy recommendations that benefit the bank’s asset management clients.

The Solution

Chinese walls create physical, procedural, and technological separations:

Barrier Type	Implementation
Physical	Separate floors, restricted access areas, badge-controlled entry
Technological	Restricted email groups, deal codenames, limited file access, monitoring systems
Procedural	Watch lists, restricted lists, mandatory pre-clearance for personal trades
Personnel	Dedicated deal teams, information officers, compliance oversight

Watch Lists and Restricted Lists

Financial institutions maintain two key compliance tools:

• Watch list — a confidential list of companies about which the firm possesses MNPI. The watch list triggers enhanced surveillance of trading activity but is known only to compliance personnel
• Restricted list — a public-facing list that prohibits the firm and its employees from trading in specific securities. Companies are placed on the restricted list when the risk of information leakage is high or when the firm has a direct conflict

Chinese Walls in Sell-Side M&A

When an investment bank runs a sell-side process, Chinese walls become particularly important because the bank may have relationships with potential buyers:

1. The M&A advisory team has MNPI about the target (financials, price expectations, process timeline)
2. The bank’s coverage bankers may have lending relationships with potential acquirers
3. The bank’s private equity clients may be prospective bidders

The Chinese wall ensures that the bank’s knowledge of the sell-side process does not influence its advice to buy-side clients or its trading activities. Compliance teams monitor communications and may require deal team members to use separate systems and codenames for the transaction.

Wall-Crossing

Wall-crossing is the controlled, deliberate breach of a Chinese wall — bringing someone “over the wall” by sharing MNPI with them under strict conditions. In M&A, wall-crossing typically occurs when:

• A bank needs to sound out potential buyers before a public announcement
• Research analysts are brought over the wall to prepare coverage after a deal closes
• Trading desks need to hedge the firm’s exposure to a pending transaction

Wall-crossing requires compliance approval, written consent from the person being crossed, and an undertaking not to trade on the information until it becomes public.

Regulatory Framework

Chinese wall requirements exist across major financial markets:

• United States — SEC Rule 10b-5 prohibits trading on MNPI; FINRA rules require member firms to establish information barriers
• United Kingdom — the FCA’s Market Abuse Regulation (MAR) and the Senior Managers & Certification Regime impose personal accountability for information barrier failures
• European Union — MAR (Regulation 596/2014) requires “effective arrangements” to prevent inside information from being disclosed improperly

APAC Context

Information barrier requirements apply across Asia Pacific, with varying levels of regulatory prescription:

Hong Kong — the Securities and Futures Commission (SFC) requires licensed intermediaries to establish and maintain Chinese walls under the Code of Conduct for Persons Licensed by or Registered with the SFC. The SFC has brought enforcement actions against firms with inadequate barriers, including a notable case in 2017 resulting in significant fines for a global bank’s failure to manage conflicts between its advisory and trading functions.

Australia — ASIC Regulatory Guide 181 requires Australian financial services licensees to manage conflicts of interest, including through information barriers. The Corporations Act’s insider trading provisions (Part 7.10) make it a criminal offence to trade on inside information, creating strong incentives for robust Chinese wall structures.

Japan — the Financial Instruments and Exchange Act requires financial instruments business operators to establish information barriers between their securities and banking divisions. The Japan Financial Services Agency (JFSA) has progressively tightened enforcement, particularly following the 2012 insider trading scandal involving leaked IPO information.

“Chinese walls are the foundation of multi-service financial institutions’ ability to advise on M&A transactions,” notes Daniel Bae, founder of Amafi. “In APAC, where many deals involve banks that serve both buy-side and sell-side clients, the integrity of these barriers directly affects deal outcomes and market confidence.”

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Managing M&A advisory conflicts across Asia Pacific? Amafi helps navigate compliance requirements and deal processes across the region. Learn more.