Laws of the People's Republic of China

No. 34

Measures for the Administration of the Risk Control Indicators of Securities Companies, which have been adopted by the 185th president's meeting of China Securities Regulatory Commission on July 5, 2006, are hereby promulgated and shall come into force as of July 10, 2006. President Shang Fulin

July 20th, 2006

Measures for the Risk Control Indicators of Securities Companies Chapter I General Provisions

Article 1

These Measures are formulated in accordance with the Securities Law of the People's Republic of China and other laws and administrative regulations in order to establish a risk control indicator system centered on net capital, enhance the risk surveillance of securities companies and urge the securities companies to strengthen their inner control and to guard against risks.

Article 2

A securities company shall calculate the net capital and the risk reserve and work out the net capital calculation sheet and the risk control indicator surveillance statement subject to these Measures.

Article 3

The China Securities Regulatory Commission (hereinafter referred to as CSRC) may regulate the net capital calculation rules, risk control indicators and its standards, the calculation ratio of risk reserves and the calculation caliber of the scale of each business in accordance with the market development and the principle of cautious surveillance. Before the adjustment is made, it shall solicit the opinions of the industrial sectors in public and make certain transition arrangements for the implementation of the adjustment.

With respect to the new products and new businesses for which the risk adjustment ratio or risk reserve ratio fail to be stipulated in these Measures, the securities company shall report or submit to the CSRC or the agencies of the CSRC (hereinafter referred to as the agency) of the place of incorporation of the securities company for approval in accordance with relevant provisions before investing in the product or developing the business. The CSRC shall, in accordance with the features and the risk status of the new products and new businesses of the securities company, determine the corresponding risk adjustment ratio and the risk reserve calculation ratio on the basis of the opinions of the industrial sectors.

Article 4

The CSRC may, in accordance with the principle of classified surveillance, make suitable adjustments to the risk control indicator standards of different enterprises and the risk reserve calculation ratio of certain businesses pursuant to the governance structure, inner control level and risk control situation.

Article 5

The CSRC and its agencies shall make regular or irregular inspection to the generation process of the net capital or other data of all risk control indicators of the securities companies, and the truthfulness, accuracy and integrity of the calculation results.

The CSRC and its agencies may request the securities company to employ an accounting firm with relevant professional qualification to audit its monthly net capital calculation sheets and risk control indicator surveillance statements if it is required.

Article 6

A securities company shall set up a dynamic surveillance and complement mechanism of risk control indicators in light of its own assets and liability situation and business development in order to ensure that risk control indicator as net capital is consistent with the stipulated standards at any time.

A securities company shall, before implementing all businesses or distributing any profit, perform a sensitivity analysis on the risk control indicators in order to rationally determine the maximum scale of relevant businesses and the profits to be distributed.

Article 7

The securities company shall engage an accounting firm with relevant professional qualification to audit its annual net capital calculation sheets and risk control indicator surveillance statements.

Article 8

The accounting firm and its certified accountants shall perform their duties diligently to audit the truthfulness, accuracy and integrity of the net capital calculation sheets and risk control indicator surveillance statements of the securities company and be in charge of the authenticity and legality of the audit reports they produce.

Chapter II Net Capital and Its Calculation

Article 9

Net capital is a integrative risk control indicator determined after performing risk adjustment to the assets and liabilities and relevant businesses on the basis of the net capital in accordance with the business scope and the fluidity of the assets and liabilities of the securities company.

The basic calculation formula of net capital is: net capital = net assets - risk adjustment to financial products investment - risk adjustment to receivables - other risk adjustments to current assets - risk adjustment to the long-term assets - risk adjustment to contingent liabilities -/+ other adjustments determined or rectified by CSRC.

Article 10

A securities company shall calculate the net capital subject to the net capital calculation standard of securities company as stipulated by the CSRC.

Article 11

In the calculation of the net capital, a securities company shall sufficiently withdraw asset depreciation reserves on self-operated securities, receivables, long-term investments, fixed assets, construction in progress, intangible assets, and other items in accordance with relevant accounting standards. Among others, the declining price reserves of the self-operated securities shall be withdrawn on the monthly basis for each single item.

The CSRC and its agencies may require the company to make a special specification on the sufficiency and prudence of the withdrawal of asset depreciation reserves. In case of any evidence of insufficient withdrawal of asset depreciation reserves for the company, the CSRC and its agencies may ask the company to make complementary withdrawal of asset depreciation reserves and reduce the net capital likewise.

Article 12

A securities company shall be combine the current assets with the financial products investment of the long-term assets for calculation in order to make a uniform risk adjustment.

Article 13

Where a securities company engages in stock investment, it shall adopt the risk adjustment with different ratios in accordance with the classification and the liquidity of the stocks. With respect to those that meet two or more standards in the stock classification, the highest ratio shall be taken for the risk adjustment.

If a securities company holds a securities investment beyond the stipulated ratio, it may be required to raise the ratio of risk adjustment when calculating the net capital by the CSRC and its agencies.

Article 14

If a securities company participates in the portfolio asset management of the company with its self-owned capital, it shall stipulate the amount and term of the invested fund and the corresponding responsibilities in the portfolio asset management contract, and shall deduct the invested fund pursuant to corresponding responsibilities when calculating the net capital.

Article 15

The risk adjustment of the receivables shall be performed with different ratios in accordance with the age of the accounts and the collectible situation, while the age of the accounts shall be calculated from the point when the business occurs. As to those that meet two or more standards in the classification of receivables, the highest ratio shall be adopted for the risk adjustment excluding the guarantee deposits. In case of certain guarantee deposits that has been proved difficult to be recovered, the risk adjustment shall be performed subject to the age of the accounts.

In accordance with relevant requirements of accounting standards, a securities company shall transfer the overdue loans to other banks, purchase sell-back securities, agency of bond cashing into the receivables for accounting and make risk adjustment in light of the abatement principle of the receivables.

Article 16

The securities company shall, in the annotations of the net capital calculation sheet, sufficiently reveal the nature of contingencies (such as the pending lawsuit, external guarantee, etc), the amount, reasons, progress and the accounting treatment of the possible loss and initial loss estimated of the contingent matters involved at the end of a period of the company . With respect to the contingencies that may lead to the outflow of economic benefits, the estimated liabilities shall be determined; while as to those that will not very likely lead to the outflow of economic benefits, the contingent liabilities shall be deducted in accordance with a certain proportion when calculating the net capital.

Article 17

A securities company that borrows any junior debt may add the junior debt to the net capital in light of a certain proportion when calculating the net capital.

The long-term borrowings that are borrowed by the securities company from the shareholders or its affiliated enterprises with a borrowing term of five years or more and have a nature of junior debts may be charged to the net capital according to a certain proportion.

The detailed proportion shall be determined by the CSRC subject to the expiration term and the financial status of the securities company.

Chapter III Risk Control Indicator Standard

Article 18

If a securities company engages in the stock brokerage business, its net capital shall not be less than RMB 20 million.

If a securities company engages in any of such businesses as securities underwriting and recommending, self-operation of securities£¬portfolio management and other securities businesses, its net capital shall not be less than RMB 50 million.

If a securities company engages in the stock brokerage business and concurrently in any of such businesses as securities underwriting and recommending£¬self-operation of securities£¬portfolio management and other securities businesses, its net capital shall not be less than RMB 100 million.

If a securities company engages in two or more of such businesses as securities underwriting and recommending£¬self-operation of securities£¬portfolio management and other securities businesses, its net capital shall not be lower than RMB 200 million.

Article 19

A securities company shall conform to the risk control indicator standards as follows:

(1)

The proportion between the net capital and the sum of all risk reserves shall not be less than 100 percent;

(2)

The proportion of the net capital to the net assets shall not be less than 40 percent;

(3)

The proportion of the net capital to the liabilities shall not be less than eight percent;

(4)

The proportion of the net assets to the liabilities shall not be less than 20 percent;

(5)

The proportion of the current assets to the current liabilities shall not be less than 100 percent;

Article 20

Where a securities company engages in the stock brokerage business, it shall obey the provisions as follows:

(1)

The risk reserve shall be calculated on the basis of two percent of the total sum of the transaction settlement fund of the client;

(2)

The average commutation of net capital calculated according to the number of business departments (net capital/number of business departments) shall not be less than RMB five million per department.

Article 21

Where a securities company engages in the self-operated business, it shall abide by the provisions as follows:

(1)

The scale of the self-operated stock shall not be more than 100 percent of the net capital;

(2)

The business scale of the self-operated securities shall not be more than 200percent of the net capital;

(3)

The cost of holding one type of non-bond securities shall not be more than 30 percent of the net capital;

(4)

The proportion of the market value of one type of securities it holds to the total market value of this type of securities shall not be more than five percent, unless it is resulted in exclusive sale or it has been stipulated by the CSRC£»

(5)

As to a securities company that carries out self-operation beyond the stipulated proportion, its risk reserve of the said part beyond the proportion shall be calculated on the basis of 100 percent of the investment cost before the completion of the rectification.

The self-operated stock scale as mentioned in the preceding paragraph refers to the total sum of stock investment, which is held by the securities company and calculated according to the cost price. The securities self-operation business scale refers to the total sum of the stock investment and securities investment fund (excluding the money market funds) investment, which is held by the securities company and calculated according to the cost price.

Where a securities company creates any warrant, it may calculate the stock investment scale in light of the amount of stock investment cost after deducting the money gained from the sale of warrants (excluding the expenses for redeeming the warrants by the securities company).

Article 22

Where a securities company engages in securities underwriting, it shall observe the provisions as follows:

(1)

A securities company that underwrites stocks shall calculate the risk reserve according to ten percent of the underwriting amount of its underwriting obligation;

(2)

A securities company that underwrites corporate bonds shall calculate the risk reserve according to five percent of the underwriting amount of its underwriting obligation;

(3)

A securities company that underwrites government bonds shall calculate the risk reserve according to two percent of the underwriting amount of its underwriting obligation;

The amount subcontracted through the company by the member of the underwriting team and the amount subscribed by strategic investors in written agreement signed by the company shall not be contained in the underwriting amount .

If a securities company underwrites the securities issued in public by more than one issuer at the same time, and there is overlapping in the issuing terms and the issuances are still in process, it shall calculate the risk reserve pursuant to the underwriting amount of a single business and the corresponding proportion.

Article 23

Where a securities company engages in the portfolio management business, it shall comply with the provisions as follows:

(1)

The risk reserve shall be calculated according to two percent of the management principle of the asset management with a designated objective£»

(2)

The risk reserve shall be calculated according to one percent of the management principle of the portfolio asset management£»

(3)

The risk reserve shall be calculated according to 0.5 percent of the management principle of the special asset management.

Article 24

Where a securities company provides margin services in the clients' purchase and sale of securities, it shall adhere to the provisions as follows:

(1)

The financing business scale of a single client shall not be more than five percent of the net capital;

(2)

The securities borrowing business scale of a single client shall not be more than five percent of the net capital;

(3)

The market value of a single guarantee stock accepted shall not be more than 20 percent the total market value of the stock;

(4)

The risk reserve shall be calculated according to ten percent of the financing business scale;

(5)

The risk reserve shall be calculated according to ten percent of the securities borrowing business scale;

The financing business scale as mentioned in the preceding paragraph refers to the sum of the principals under which the client has raised funds; while the securities borrowing business scale refers to the sum of the market value of the borrowed securities on the raising day.

Article 25

the risk reserve of the operating risks shall be calculated according to ten percent of the total sum of the business expense of the previous year by a securities company.

Article 26

The CSRC shall set up an early warning standard for each risk control indicator. The early warning standard of the risk control index which is not allowed to stay below a certain standard is 120percent of the stipulated certain standard; while the early warning standard of the risk control indicator which is not allowed to stay above a certain standard is 80% of the stipulated certain standard.

Chapter IV Working out and Revealment

Article 27

A securities company with subsidiaries shall work out net capital calculation sheets and risk control indicator surveillance statements on the basis of the data of the parent company.

The CSRC and its agencies may require the securities company to work out the net capital calculation sheets and the risk control indicator surveillance statements on the basis of merging data when necessary.

Article 28

The directors and senior managers of a securities company shall sign to the semiannual and annual net capital calculation sheets and risk control indicator surveillance statements for confirmation.

The principal chief and the financial chief who are in charge of the operation and administration of the securities company shall sign to the monthly net capital calculation sheets and risk control indicator surveillance statements for confirmation.

The person who signs the net capital calculation sheets and the risk control indicator surveillance statements shall ensure the truthfulness, accuracy and integrity of the net capital calculation sheets and the risk control indicator surveillance statements and that there is no false record, misleading statement or significant omission therein. In case of any objection to the said two statements, the opinions and reasons shall be noted on the statements.

Article 29

At least once every half year, a securities company shall give a report in written form on the specific circumstances and information on meeting the standard of risk control indicator, such as net capital or other indicators, to all directors of the company after they have been signed and confirmed by the principal chief; and give a report in written form on the specific circumstances and information on meeting the standard of risk control indicator, such as net capital or other indicators, to all shareholders of the company after they have been signed and confirmed by the board of directors and shall obtain the documentary evidence of the receipt and confirmation of at least the principal shareholders.

If the net capital indicator changes for more than 30 percent as compared with that of the last month or does not satisfy the stipulated standard, the securities company shall issue a report in written form to all directors of the company within five workdays and all the shareholders within ten workdays.

Article 30

The securities company shall submit a monthly net capital calculation sheet and risk control indicator surveillance statement with the CSRC and its agencies within five workdays since the end of each month.

The agency may require a single securities company, some or all securities companies under its jurisdiction to work out and submit weekly or daily net capital calculation sheets and risk control indicator surveillance statements within a certain period as required.

Article 31

If the net capital indicator or other risk control indicator alters for more than 20 percent as compared with that of the last month, the securities company shall submit a report in written form to the CSRC and its agencies within three workdays since the occurrence of the change and shall specify the basic information and the reasons of alteration.

Article 32

If the net capital or other risk control indicators fail to reach the early warning standard or to meet the stipulated standard, the securities company shall, submit a report in written form to the CSRC and its agencies within three workdays and one workdays respectively since the occurrence of such failure and shall provide the basic information, the reasons, specific solutions to the problem and the time limit.

Chapter V Surveillance Measures

Article 33

If a financial report, net capital calculation sheet or risk control indicator surveillance statement of a securities company has been issued by a certified accountant with reserved opinions or clarifications without reserved opinions, the securities company shall make a special explanation of the matters involved.

If any matter concerned does not fall into any obvious violation of accounting rules, the net capital calculation rules of the securities company or other regulations, the CSRC and its agencies may require the securities company to specify the influence of the matter on the net capital and other risk control indicator of the securities company.

If any matter concerned includes in any obvious violation of accounting rules, the net capital calculation rules of the securities company or other regulations, the CSRC and its agencies may require the securities company to correct within a certain period or to work out the net capital calculation sheets and the risk control indicator surveillance statements over again. If the securities company fails to correct within the certain time limit, the CSRC and its agencies may determine that the net capital or risk control indicators of the securities company is below the stipulated standard.

Article 34

If a financial statement, net capital calculation sheet or the risk control indicator surveillance statement of a securities company has been issued by the certified accountant with negative opinions or on which it is difficult for a certified accountant to express his opinions on, the CSRC and its agencies may determine that such risk control indicator as the net capital of the securities company is below the stipulated standard.

Article 35

If the net capital or other risk control indicator of a securities company meets the early warning standard, the agency concerned shall adopt following measures against the securities company according to the different conditions:

(1)

Issuing a surveillance attention letter and send a copy of the letter to the principal shareholders of the securities company, and require the said company to explain the potential risks and control measures;

(2)

Performing surveillance talks with the senior managers of the securities company and require the said company to take measures to regulate the business scale and the assets liability structure in order to improve the net capital level;

(3)

Demanding the company to submit a special report five workdays before making a decision on any major business to explain the impact of the relevant business on the financial status and the net capital or other risk control indicators of the company;

(4)

Ordering the securities company to increase the frequency of the inspection to the inner regulation compliance and submit a report of regulation compliance inspection.

Article 36

If the net capital or other risk control indicator of a securities company fails to satisfy the stipulated standard, the company shall be ordered by the agency to correct within a certain time limit and work out and submit a rectification plan within five workdays. The rectification period shall not be longer than 20 workdays. Where the securities company fails to submit a rectification plan on schedule, its business activities shall be restricted by the agency at once.

In the rectification term, the CSRC and its agency shall adopt following measures against the securities company according to different conditions:

(1)

To stop approving new business;

(2)

To stop approving the establishment or purchase of new business branches;

(3)

To limit the distribution of profits;

(4)

To limit the transfer of property or the setup of other rights on the property.

Article 37

If, after rectification, the securities company has been checked and accepted as being in consistent with relevant risk control indicator by the agency of the CSRC, the CSRC and its agency may remove the measures taken against the company within three workdays after the accomplishment of the check and acceptance.

Article 38

If the securities company fails to complete the rectification work on schedule, since the following day after the expiration of the rectification time limit, the CSRC and its agencies shall adopt the following measures against the securities company in light of different conditions:

(1)

To restrict the business activities;

(2)

To order the suspension of part of the businesses;

(3)

To restrict the payment of remunerations and welfare to the directors, supervisors and senior managers;

(4)

To order it to alter the directors, supervisors, senior managers or restrict their power;

(5)

To order the controlling shareholder to transfer the stock rights or restrict the shareholders concerned in their exercise of stockholder's rights;

(6)

To determine the directors, supervisors or senior managers as inappropriate.

Article 39

If a securities company fails to complete the rectification work on schedule and the risk control indicator of which continues to deteriorate to such extent that it may rigorously harm the sound and stable operation of the securities company, relevant business licenses of this company may be canceled by the CSRC.

Article 40

Where the risk control indicator of a securities company fails to comply with the standard and then severely damage the order of the securities market and the interests of investors, the CSRC may adopt the measures as follows subject to different conditions:

(1)

To order it to suspend its business for rectification;

(2)

To assign or entrust any other institution to take it over;

(3)

To cancel the securities business license;

(4)

To cancel the company.

Chapter VI Supplementary Provisions

Article 41

description of the terms used in these Measures:

(1)

Risk reserve: due to certain risks involved in each business and the possible loss of net capital, it is clear that the risk reserve shall be calculated subject to a certain proportion of each business scale, and a corresponding relationship between the risk reserve and the net capital shall be established in order to ensure that there is equivalent net capital to support the risk reserve of each business.

(2)

Sensitivity analysis: refers to the analysis that studies the possible influence of the variation of one or more elements on the net capital and other risk control indicator under the prerequisite of remaining other conditions and estimates whether it may make such risk control indicator as the net capital fail to conform to the early warning standard or the stipulated certain standard or not.

(3)

Liability, current liability: refer to the exterior liability, excluding the money for buying and selling the securities.

(4)

Assets, current assets: refer to the self-owned assets, excluding the assets of clients.

(5)

Contingent liability: refers to the potential obligation formed through past transactions or matters, the existence of which shall be confirmed by means of the occurrence or nonoccurrence of uncertain matters in the future; or the current obligation formed through past transactions or matters, the obligation performance may result in the outflow of economic benefits of the enterprise or the unreliability of the calculated amount of obligations.

(6)

One type of securities: refers to the stock, securities or other securities issued by a single issuer, of which, the stocks issued in different markets do not include in one type of securities and it shall be calculated separately.

(7)

Guarantee deposits account: refers to the receivables that generated from the time differences between paying and collecting and the cash pledge that is deposited in other entities by the securities company.

(8)

Major business: refers to the business that may cause an alteration of more than ten percent of the net capital or other risk control indicator through measurement and calculation.

Article 42

These Measures shall enter into force as of November 1, 2006.