Laws of the People's Republic of China

Zheng Jian Fa [2006] No.69

All the securities companies:

For the purpose of regulating the pilot margin trading of securities companies, we have formulated the Measures for the Administration of Pilot Margin trading of Securities Companies, which are hereby promulgated and shall enter into force as of August 1, 2006.

China Securities Regulatory Commission

June 30, 2006

Measures for the Administration of Pilot Margin Trading of Securities Companies Chapter I General Provisions

Article 1

The present Measures are formulated in order to regulate the pilot margin trading of securities companies, prevent the risks of securities companies, safeguard the legitimate rights and interests of securities investors and the social public interests, perfect the securities dealing mechanisms and the stable and healthy development of the securities market.

Article 2

As regards developing the pilot margin trading, a securities company shall be in compliance with the provisions of the laws, administrative regulations and the present Measures, enhance the internal control, strictly prevent and control the risks, and earnestly maintain the safety of customer assets.

The term "Margin trading as mentioned herein refers to such business activity whereby the securities company lends customers capital to purchase listed securities or lends them listed securities to sell, and collects the collaterals.

Article 3

As regards developing the pilot margin trading, a securities company must be approved by China Securities Regulatory Commission (hereinafter referred to as CSRC). No securities company can lend the capital or listed securities to its customers or provide any convenience or services for margin trading between its customers or between its customers and any other person without approval by the CSRC.

Article 4

Under the principle of prudential surveillance, the CSRC shall approve those securities companies that meet the conditions prescribed in the present Measures to develop the pilot margin trading; and shall, in accordance with the pilot situation and the requirements for developing the securities market, gradually approve other securities companies meeting the prescribed conditions to engage in the margin trading.

Article 5

The CSRC and its representative offices shall implement surveillance and administration of the pilot margin trading of securities companies subject to the laws, administrative regulations and the present Measures.

The Securities Association of China, stock exchanges, and securities depository and clearing institutions shall conduct the self-discipline management of the pilot margin trading of securities companies pursuant to their own articles of association and rules.

Chapter II Approval of Business Operations

Article 6

Where a securities company applies for engaging in the pilot margin trading, it shall meet the following requirements:

(1)

It has engaged in the securities brokerage business for three years or more, and has been appraised by the Securities Association of China as an innovative pilot securities company;

(2)

It has sound corporate governance, effective internal control, and can effectively identify, control and prevent business operation risks and internal management risks;

(3)

Neither the company nor any of its directors, supervisors or senior managers has been subjected to administrative sanctions or criminal penalties within recent two years for illegal or irregular business operations, and none of them has been under the investigation of the CSRC or under the rectification because of being suspected of any illegal or irregular act;

(4)

It has sound financial status, has all of its risk control indicators meeting the provisions in recent two years, and has all net capital for each recent six months above 1.2 billion yuan or more;

(5)

It has the assets of customer to be safe and intact, has had the verification for its scheme of third party depository of customer transaction settlement funds by the CSRC, and has made clear arrangements for the implementation of the said scheme;

(6)

It has completed the centralized management of transactions, settlements, customer accounts and risk surveillance and control, and has specified the signs for historical irregular accounts and put them under centralized control; and

(7)

It has established practical and feasible schemes for implementing the pilot margin trading as well as internal management rules, and has necessary professionals, technical systems, capital and securities for performing the pilot margin trading.

Article 7

Where a securities company applies for the pilot margin trading, it shall submit the following materials to the CSRC, and send a copy thereof to the CSRC representative office at the locality of its registration:

(1)

an application form for the pilot margin trading;

(2)

the decision of the shareholders' meeting (the general assembly of shareholders) in respect of engaging in the margin trading;

(3)

the scheme for implementing the pilot margin trading, the text rules of internal management, and the criteria for choosing customers as formulated under Article 12 of the present Measures;

(4)

the explanations on carrying out the scheme for the third party depository of customer transaction settlement funds;

(5)

the roster and qualification certificates of senior managers and professionals responsible for the margin trading; and

(6)

other documents required to be submitted by the CSRC.

The legal representative of a securities company and its main principals for business management shall sign their names on the application form for the pilot margin trading, and promise the truthfulness, accuracy and completeness of the application materials, and bear corresponding legal responsibilities for the false records, misleading statements or major omissions in application materials, if any.

Article 8

The CSRC representative office shall issue the written opinions to the CSRC concerning whether or not to approve the applicant to implement the pilot margin trading within 10 working days as of the receipt of the application materials as prescribed in the preceding Article.

The CSRC shall, subject to the legal procedures and the conditions prescribed in the present Measures, examine the application materials, organize specialists to evaluate the scheme for carrying out the pilot margin trading as submitted by the applicant, make a decision on approval or disapproval, and notify the result to the applicant in written form.

Under same conditions, the securities companies with higher net capital will be approved preferentially for the pilot margin trading.

Article 9

A securities company that has obtained the approval shall apply to the company registration department for alteration registration of the business scope, and apply to the CSRC for re-issuing a Permit for Business Operations of Securities Business in accordance with relevant provisions.

A securities company can implement the pilot margin trading after obtaining a Permit for Business Operations of Securities Business as reissued by the CSRC.

Chapter III Rules for Business Operations

Article 10

Where a securities company carries out the pilot margin trading, it shall, in its own name, separately open a special securities lending account, a customer credit transaction guaranty securities account, a credit transaction securities delivery account and a credit transaction capital delivery account at securities depository and clearing institutions.

The special securities lending account shall be used for recording down the securities that are held by the securities company, planned to lend to customers, and returned by the customers, and the said account can not be used for securities dealings; the customer credit transaction guaranty securities account shall be used for recording down the securities that the customer submits to the securities company as the guarantee to the creditor's rights incurred from the margin trading with the customer; the credit transaction securities delivery account shall be used for securities settlement for the margin trading of the customer; and the credit transaction capital delivery account shall be used for capital settlement for the margin trading of the customer.

Article 11

Where a securities company carries out the pilot margin trading, it shall, in its own name, separately open a special capital financing account and a customer credit transaction guaranty capital account at a commercial bank.

The special capital financing account shall be used for depositing the capital that the securities company plans to lend to the customer and that the customer plans to return; and the customer credit transaction capital securities account shall be used for depositing the capital that the customer submits to the securities company as the guarantee to the creditors' rights incurred from the margin trading with the customer.

Article 12

A securities company shall, before performing the margin trading with any customer, conduct the credit investigation, and know the status, property, incomes, securities investment experiences and risk preferences of the customer, and record down and keep them in written form or by e-mail.

A securities company shall not conduct the margin trading with those customers that fail to provide the relevant information as required, that engage in the securities dealings in the said securities company for less than half a year, or transaction settlement funds of whose have not been incorporated into the third party depository, or the securities investment experiences of whose are insufficient, or who lack risk affordability or have records of serious breach of contract, or who are the shareholders or related representatives of the said securities company.

A securities company shall formulate specific standards for choosing customers as required by provisions in the preceding Paragraph.

Article 13

A securities company shall, before conducting the margin trading with any customer, sign a margin contract including the necessary provisions as prescribed by the Securities Association of China, and clearly stipulate the following matters:

(1)

the means for calculating the quota, term, interest rate (charging rate), and interests (expenses) of the margin trading;

(2)

the guaranty bonds proportion, the guaranty maintenance proportion, types and the conversion rates of securities that can be used as guaranty bonds, and the scope of secured creditors' rights;

(3)

the notification mode and the term for supplementing guaranty bonds;

(4)

the means for the customer to compensate debts, and the right of the securities company on disposing of the collaterals;

(5)

the disposal of rights and interests attached to the securities bought and sold in the margin trading; and

(6)

other relevant matters.

A customer can only sign a margin contract with one securities company and borrow the capital or securities from the same securities company.

Article 14

A margin contract shall stipulate that the securities in the customer credit transaction guaranty securities account and the capital in the customer credit transaction guaranty capital account of the securities company are the trust property of the securities company for guaranteeing the creditors' rights of the customer incurred from the margin trading.

The term of margin trading stipulated between the securities company and a customer shall not be longer than the maximum term as prescribed by the stock exchange, and shall not be renewed. The interest rate of capital financing shall not be lower than the base interest rate of financial institutions for the same term as prescribed by the People's Bank of China.

Article 15

A securities company shall, before signing a margin contract with any customer, assign a special person to explain to the customer about the operational rules and the contents of the contract, and give a risk presentation letter concerning the margin trading to the customer for signature and confirmation.

Article 16

A securities company shall, after signing a margin contract with a customer and on the basis of the application of the customer, open a real-name credit securities account for him in accordance with the provisions of the securities depository and clearing institution. The credit securities account for the customer to engage in the trading of listed securities at a stock exchange can only be a same account. The name or title of the account opener of the customer credit securities account shall be consistent with that of the common securities account of the customer.

A customer credit securities account is a second-tier account of the customer credit transaction guaranty securities account of the securities company, and can be used for recording down the detailed data for the guaranty securities that the customer entrusts the securities company to hold.

A securities company shall entrust the securities depository and clearing institution to modify the data in the customer credit securities account pursuant to the settlement and delivery results, and etc.

Article 17

A securities company shall sign a customer credit capital depository agreement with its customer and the commercial bank with reference to the mode of third party depository of customer transaction settlement funds. The securities company shall, after signing a margin contract with a customer, notify the commercial bank to open a real-name credit capital account for the customer under the customer's application. Only one credit capital account can be opened to a customer.

A customer credit capital account is a second-tier account of the customer credit transaction guaranty capital account of the securities company, and can be used for recording down the detailed data of the guaranty capital given by the customer for depository.

The commercial bank shall modify the data on the customer credit capital account pursuant to the settlement and delivery results, and etc. as provided by the securities company.

Article 18

Where a securities company lends any capital to any customer, it can only use the capital in the special capital financing account; and where a securities company lends any securities to any customer, it can only use the securities in the special securities lending account.

The securities bought or sold by the customer in the margin trading shall not exceed the scope as prescribed by the stock exchange.

A customer shall, when signing a margin contract with a securities company, declare all the securities accounts of himself and his related representatives to the securities company. During the term of securities lending, if the customer or any of his related representatives purchases the same securities as those he has borrowed, the customer shall declare it to the securities company within 3 trading days as of the date of the said purchase. The securities company shall monthly report the information as declared by the customer to the relevant stock exchange.

A customer, planning to sell the same securities as those it holds and has borrowed during the period of securities lending, shall observe the provisions as prescribed by the stock exchange, and shall not manipulate the market by selling the said securities against the provisions.

Article 19

Where a securities company implements the margin trading and sends out orders of securities trading and transfer under the customer's authorization, it shall ensure the truthfulness and accuracy of the said orders. Where a mistake of the securities company brings on the wrong orders so as to the losses customer, the customer may request compensation from the securities company according to laws, however, it shall not affect the business operations of the stock exchange or the securities depository and clearing institution that are being performed or have been performed.

Article 20

The proportion of the margin amount of all the customers, a single customer or a single securities to the net capital and other risk control indicators of a securities company shall be in accordance with the provisions of the CSRC.

Article 21

A customer that buys securities by financing from a securities company shall repay it with the capital from selling of the securities or by direct repayment.

A customer that sells the securities by securities lending from a securities company shall repay it with the securities to be bought or by direct repayment.

Article 22

Where a transaction of the securities is suspended, which is bought or sold by the customer in the margin trading, and the resumption day of the transaction is later than the expiry date of the debts incurred from the margin trading, the term for margin trading shall be postponed, unless it is otherwise prescribed by the margin contract.

Article 23

If the transaction of the securities is to be terminated, which is bought or sold by the customer in the margin trading, and the last transaction day is later than the expiry date of the debts incurred from the margin trading, the term for margin trading shall expire at the transaction day before the last one, unless it is otherwise prescribed by the margin contract.

Chapter IV Guarantee to Creditor's Rights

Article 24

Where a securities company lends the capital or securities to the customer, it shall collect a certain proportion of guaranty bonds from the customer, which can be substituted by the securities.

Article 25

The said guaranty bonds, all of the securities bought by the customer by financing and all of the capital acquired from the selling of the borrowed securities shall be separately deposited into the customer credit transaction guaranty securities account and the customer credit transaction guaranty capital account by the securities company as the collaterals for the creditor's rights incurred from the margin trading of the aforesaid customer.

Article 26

The proportion of the value of collaterals submitted by the customer to his debts shall be calculated day by day by the securities company, and when the aforesaid proportion is lower than the minimum guaranty maintenance proportion, the customer shall be notified to make up the balance within a certain term.

The securities company shall deal with the collaterals as stipulated at once, unless the customer makes up the balance or pay debts in time.

Article 27

The proportion of guaranty bonds, the types and conversion rates of securities that can be used as guaranty bonds as prescribed by Article 24 of the present Measures, and the minimum guaranty maintenance proportion and the term for the customer to make up the balance as prescribed in Article 26 shall be stipulated by the stock exchange.

A securities company can formulate specific provisions on the aforesaid matters on the basis of meeting the provisions of the stock exchange.

Article 28

The securities in the customer credit transaction guaranty securities account of the securities company or the capital in the customer credit transaction guaranty capital account may not be used by anyone but in case of the following circumstances:

(1)

the settlement of margin trading for the customer;

(2)

the collection of the capital or securities that shall be returned by the customer;

(3)

the collection of interests, fees or taxes that shall be paid by the customer;

(4)

the disposal of collaterals subject to the provisions in the present Measures or the stipulations with the customer;

(5)

the collection of default fines that shall be paid by the customer;

(6)

the withdrawal of remaining securities or capital after the principal and interests, taxes, expenses and default fines has been paid by the customer; or

(7)

other circumstances as prescribed by the laws, regulations or the present Measures.

Article 29

Where the proportion of the collaterals value deposited by the customer to his debts exceeds the percentage as prescribed by the stock exchange, the collaterals can be withdrawn by the customer subject to the provisions of the stock exchange and the stipulations in the margin contract.

Article 30

Where the judicial department adopts the measures of property preservation or compulsory implementation to the rights and interests in the customer credit securities account or the credit capital account, the securities company shall deal with the collaterals and fulfill the creditor's rights incurred from the margin trading with the customer, and assist the implementation of judicial department.

Chapter V Disposal of Rights and Interests

Article 31

In accordance with the records in the customer credit transaction guaranty securities account of a securities company, the securities depository and clearing institution shall confirm the fact that the securities company is entrusted to hold the securities, and register the securities company in the roster of securities holders as a nominal holder.

Article 32

As regards the securities recorded in the customer credit transaction guaranty securities account, a securities company shall, in its own name, exercise the rights of securities issuers for the interests of customers. Where a securities company exercises the rights of securities issuers, the opinions of customers shall be first solicited and be implemented accordingly.

The term "rights of securities issuers" as mentioned in the preceding Paragraph means the rights incurred due to the holding of securities, such as requesting to convene a securities holders' meeting, participating in the securities holders' meeting, submitting proposals, voting, subscribing the allotted shares, requesting to distribute investment proceeds, etc.

Article 33

A securities depository and clearing institution entrusted by a securities issuer to distribute investment proceeds shall register the distributed securities in the customer credit transaction guaranty securities account of the securities company, and modify the detailed data on the said customer credit securities account accordingly.

A securities depository and clearing institution entrusted by a securities issuer to distribute investment proceeds in cash shall register the distributed capital in the customer credit transaction guaranty capital account of the securities company, and shall notify the commercial bank to modify the detailed data in the said customer credit capital account after the capital is transferred to the account.

Article 34

After the customer borrows the securities but before the customer returns the securities, where a securities issuer distributes investment proceeds, allots or gratuitously distributes securities to securities holders or issues any of the securities to which the securities holders have the preemptive right, the customer shall, when repaying the debts, give the securities or capital equal to the interests that may be gotten from the borrowed securities to the securities company subject to the stipulations in the margin contract.

Article 35

A securities company may not merge the stocks holding through its customer credit transaction guaranty securities account into its self-owned stocks, and it is not required to perform such corresponding obligations as information reporting, information revealment or tender offer for the alteration of the amount of stocks in the aforesaid account.

Where the total amount of stocks of a listed company or the rights and interests held by a customer and its coordinated actors in the common securities accounts and the credit securities accounts amounts to the prescribed proportion, the customer shall perform such corresponding obligations as information reporting, information revealment or tender offer.

Chapter VI Surveillance and Administration

Article 36

A stock exchange can formulate restrictive provisions on the proportion of buying or selling amount of each single security to the market turnover and on the selling price of the borrowed securities in the margin trading.

Article 37

In accordance with the business operational rules, a stock exchange shall take measures and conduct initial-stage check of the orders for margin trading, and it shall refuse those trading orders in which the types of securities dealings or the selling price of the borrowed securities fails to meet the provisions.

Where the proportion of buying or selling amount of a single security in the margin trading to the market turnover reaches the prescribed maximum percentage, the stock exchange can suspend the acceptance of the orders for buying or selling the aforesaid type of securities in the margin trading.

Article 38

When any abnormality occurs in the margin trading, which has already harmed or may harm the market stability and it is necessary to suspend the trading, the stock exchange shall, in accordance with the business operational rules, suspend all or part of the margin trading and publicize the information.

Article 39

In accordance with the business operational rules, a securities depository and clearing institution shall supervise over the securities transfer in the margin trading and the capital transfer in the credit transaction capital delivery account of the securities company. Those orders on securities or capital transfer that violate the provisions shall be refused; and if any abnormality has been found, the securities company shall be required to make explanations, and then relevant information shall be submitted to the CSRC and the CSRC representative office at the locality where the said securities company is registered.

Article 40

A commercial bank that is responsible for the customer credit capital depository shall refuse those capital transfer orders of the securities company that violate the provisions in accordance with the stipulations in the contract on customer credit capital depository; and if any abnormality has been found, the securities company shall be required to make an explanation, and relevant information shall be submitted to the CSRC and the CSRC representative office at the locality where the said securities company is registered.

Article 41

A securities company shall deliver reconciliation statements to the customer by the methods as stipulated in the margin contract, and provide the inquiry services concerning the data of the credit securities account and the credit capital account to them.

A securities depository and clearing institution shall provide the inquiry services concerning data of the credit securities account to the customer. A commercial bank that is responsible for the customer credit capital depository shall provide inquiry services concerning data of the credit capital account to the customer subject to the stipulations in the contract on customer credit capital depository.

Article 42

In accordance with the provisions of the stock exchange, a securities company shall submit to the stock exchange about the information on the margin trading of the current day after the market is closed every day. The stock exchange shall collect and make statistics of the information submitted by securities companies, and publicize before the market opens on the next trading day.

Article 43

A securities company shall submit the following information in written form for the current month to the CSRC representative office at the locality of its registration and the stock exchange within 10 days upon conclusion of each month:

(1)

the number of accounts opened by the customers for the margin trading;

(2)

the balance of margin trading for all the customers as well as the said balance for the top ten customers;

(3)

the types and amount of collaterals submitted by the customers;

(4)

the number of the customers for mandatory buy-in, and the trading amount for mandatory buy-in;

(5)

the value of relevant risk control indicator; and

(6)

the profit status of the margin trading.

Article 44

The CSRC and its representative offices, the Securities Association of China, stock exchanges and securities depository and clearing institutions shall perform surveillance or self-discipline administrative duties in the margin trading of securities companies subject to relevant provisions, and can request a securities company to provide the information and materials concerning the margin trading.

Article 45

A CSRC representative office shall implement off-site and on-site inspections over the customer selection, contracts conclusion, determination of credit-granting quota, collection and management of collaterals, notice on the supplementation of collateral and disposal of collateral, etc, involved in the margin trading of securities companies and their branches as required by the jurisdiction monitoring accountability system.

Article 46

Where a securities company or any of its branches violates any of the provisions in pilot margin trading, it shall be deterred and be ordered to make corrections within a time limit by the CSRC representative office, in case of failing to make corrections or serious circumstances, the CSRC shall, pursuant to the specific circumstances, take such surveillant measures such as giving a warning, giving a public warning, ordering penalty to relevant persons who are held to be responsible, ordering relevant branches to stop the margin trading, or canceling the approval on the margin trading.

A securities company or any of its branches that engages in the margin trading without approval shall be applied sanctions subject to Article 205 of the Securities Law.

Chapter VII Supplementary Provisions

Article 47

Stock exchanges, securities depository and clearing institutions and the Securities Association of China shall formulate business operational rules and self-discipline rules for the margin trading in accordance with the present Measures, and implement the said rules after submit to the CSRC for approval.

Article 48

The present Measures shall enter into force as of August 1, 2006.