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CIRCULAR OF THE STATE COUNCIL CONCERNING APPROVING AND TRANSMITTING THE JOINT PROPOSALS OF THE SECURITIES COMMISSION OF THE STATE COUNCIL AND THE CHINA SECURITIES SUPERVISORY AND REGULATORY COMMISSION ON FURTHER STRENGTHENING SUPERVISION AND MANAGEMENT OF THE OPTION MARKET

    The State Council has approved the Joint Proposals on Further
Strengthening Supervision and Management of the Option Market submitted by the
Securities Commission of the State council and the China Securities
Supervisory and Regulatory Commission, and hereby transmits them to you for
the earnest implementation thereof.
Appendix: JOINT PROPOSALS ON FURTHER STRENGTHENING SUPERVISION AND
MANAGEMENT OF THE OPTION MARKET

    Complying with the overall strategy of the State Council, the Securities
Commission of the State Council and the China Securities Supervisory and
Regulatory Commission (hereinafter abbreviated to CSSRC) have strengthened the
management and restructuring of the option market. After two years' effort,
the tendency of disorderly development of the option market has to certain
extent been restrained, the market actions have been gradually regulated, the
competence of supervision and management has been further improved and the
pilot projects have been progressed to the right path. However, the option
market still suffers from some problems that should not been neglected. The
protruding problems are as follows: a few big clients, relying on their
capital strength, conspire to rig the market for staggering profits; a few
people embezzle public funds to speculate in futures for private profit at the
public expense, utilize bank loans or call money or collect capital under
disguise for forward business; some individual clients even commit financial
crimes in forward exchanges in violation of relevant regulations purposely.
Those offences not only obstruct other enterprises in lawful business
activities such as arbitrage transactions for value maintenance but also
disrupt the normal order of the option market and obstruct its healthy
development. To further restrain excessive speculations and strengthen the
supervision and regulation of the option market, following proposals are put
forward:

    1. Enterprises and institutions owned by the state or dominated by state
capital stocks (hereinafter referred to as state-owned enterprises and
institutions) shall be allowed to develop arbitrage transactions for value
maintenance only on futures commodities that are relevant to the production
and business of the enterprises and institutions in question and should not
conduct speculation or malicious manipulation in forward transactions.
State-owned enterprises and institutions who are to engage in arbitrage
transactions for value maintenance shall show the forward exchange or futures
agent institutions documents of approval obtained from relevant authority in
charge or from the board of directors. Those who fails to show the document of
approval may not be accepted by the forward exchange as an institutional
member or by futures agent institutions as a client. In case a forward
exchange or a futures agent institution violates the abovementioned
stipulations, the CSSRC shall, in addition to investigation into the
responsibilities of the persons in charge, order a correction, a fine, a stop
of business for futures exchange or disqualification from being a trial
forward exchange or a futures transaction agent in light of the seriousness of
the offence. State-owned enterprises or institutions who arbitrarily conduct
forward transactions without approval of the authority in charge or board of
directors or suffer a loss in speculation in forward business shall have the
persons in charge assessed in terms of responsibilities.

    2. Different kinds of banking institutions may not for itself or on
commission of others engage in forward business. Those banking institutions
who have begun forward business for itself shall within 40 business days after
the date of March 4, 1996 square the cash account for the business. Those
banking institutions who have begun forward business on commission of others
may not accept new clients ever from the date of March 4, 1996 and shall
within 40 business days thereafter conclude all agent business by squaring the
cash accounts or by transfer of the clients cash to other futures agent
institutions. All forward exchanges who have banking institutions as business
members thereof shall perform supervisory function so that those institutions
could within the prescribed time conclude forward business whether operated
for themselves or on commission of others, and shall deprive them of the
membership after matters concerning credits and liabilities are settled.
Futures agent institutions who have banking institutions as clients shall
perform supervisory functions so that those institutions could within the
prescribed time bring their accounts to a balance and shall cancel the
accounts after matters concerning credit and liabilities are settled.

    Any banking institution may not make out letter of security on capital
intended for forward transactions. It is rigorously prohibited to use bank
loans or call money for forward business. Banking institutions at all levels
shall strengthen supervision and management to guard against the flow of
credit funds into the option market.

    3. Futures agent companies may not engage in forward transactions for
themselves. Those who have begun such business for themselves shall within 40
business days from the date of March 4, 1996 square the account with the cash
held for forward business. In case a futures agent company continues the
forward transactions for itself against this stipulation, the CSSRC shall, in
addition to investigation into the responsibilities of the persons in charge,
order a correction, a fine, a stop of business for rectification, or
disqualification from being a forward business agent in light of the
seriousness of the offence.

    4. With a view to reinforcing the supervision and management of the option
market, effectively preventing from, investigating and dealing with market
manipulation cases, the CSSRC may in accordance with relevant procedures make
inquiries into the accounts opened at the commercial banks or other banking
institutions by forward exchanges, futures agent institutions and clients.

    5. All forward exchanges shall in consideration of their own individual
circumstances establish a system of "banning entrance into the market". Those
institutions or individuals who have proved to have rigged the market or
committed fraudulent conducts in forward transactions and have therefore
caused serious consequence shall be publicized as "the persons banned from
entrance into the market" and be reported to the CSSRC, who shall then
circulate a notice among all forward exchanges. In addition to issue of an
order for squaring the forward business accounts, all forward exchanges,
futures agent institutions shall immediately stop accepting new directions for
forward transaction from "the person banned from entrance into the market". If
the criminal law is violated, the case shall be transferred to the judicial
organs for assessment of criminal responsibilities. For those who have been
notified by the CSSRC as "persons banned from entrance into the market", no
forward exchange or futures agent institution may open accounts for their
forward business within three years. In case a forward exchange or a futures
agent institution accepts a person banned from entrance into the market, the
CSSRC shall, in addition to investigation into the responsibilities of the
concerned persons in charge, order a correction, confiscation of illicit
gains, a fine, a stop of business for rectification, disqualification from
being a trial forward exchange or from developing forward agent business.

    6. With a view to bringing into full play the functioning of the option
market for value maintenance through futures and prices identification, to
preventing from a large amount of capital being utilized on small commodity
futures, and to ridding the option market of the vicious circle of more and
more rampant speculation in smaller and smaller commodities futures, certain
kinds of staple commodities futures which are maturely developed in the
international market and that can most effectively perform the function of
value maintenance through futures should be selected in due course for trial
marketing by a few much standardized forward exchanges subject to strict
supervision and control.