6 June, 2018
Starting in the second half of 2017, the regulators adopted a series of measures, including amending regulatory rules and reinforcing regulatory means, to strengthen the front-line supervision of the securities markets by the Shanghai Stock Exchange (“SSE”) and the Shenzhen Stock Exchange (“SZSE”, collectively, “Exchanges”). The following major aspects of these measures have been observed.
I. Amendment of Measures on Administration of Stock Exchanges to Monitor Abnormal Trading
On November 17, 2017, the China Securities Regulatory Commission (“CSRC”) issued the amended Administrative Measures for Stock Exchanges (“Measures”), which took effect as of January 1, 2018. The following amendments of the Measures concerning abnormal trading monitoring are noteworthy.
(1) For the supervision of securities trading, the Measures require the Exchanges to further strengthen their upfront control of behaviors that lead to abnormal trading, formulate rules to define the abnormal trading behaviors and the corresponding disciplinary actions, and prioritize the disciplinary actions against certain abnormal trading behaviors.
(2) For the supervision of members, the Measures require each member of the Exchanges to establish a management system for clients’ trading activities. At the same time, the Measures stipulate that the Exchanges may take self-disciplinary measures such as imposing punitive damages and cancelling membership.
(3) The Measures clearly state that the Exchanges shall conduct inspections to check on members’ compliance for operation and compliance with the articles of association and the business rules of the Exchanges and report the same to the CSRC. If a client conducts one serious abnormal trading activity or multiple abnormal trading activities within a certain period of time, the Exchanges shall conduct on-site or off-site inspection and report the same to the CSRC.
II. Establishing the Compliance and Inspection Department to Reinforce Onsite Inspection
In order to implement the front-line supervisory duties specified by the Measures, the SZSE established the Compliance and Inspection Department in 2017 to carry out on-site inspection. It was reported that the SSE and SZSE have undertaken frequent on-site inspections, checking on not only the listed companies but other market participants including bond issuers, securities brokers and intermediaries. Compared to the previous approach of issuing an “Inquiry Letter”, an on-site inspection measure is proving more likely to detect hidden and complicated illegal activities.
III. Intensifying the Management Responsibilities of Members
The Exchanges’ supervision of trading activities relies upon their members’ proper performance of their duties to manage client trading activities. To this end, the SSE and SZSE respectively promulgated the Circular on Strengthening the Management of Accounts under Special Monitoring (“Circular”) at the end of April 2018 to clarify the responsibilities of the members regarding their front-line role in controlling abnormal trading activities.
(1) Specifying the Supervision Requirements for Accounts under Special Monitoring
The provisions of the SSE Circular and the SZSE Circular regulating an account under special monitoring (“Account under Special Monitoring”) are basically the same, as illustrated in the following table.
| SSE | SZSE | |
|---|---|---|
| Definition of Account under Monitoring |
Refers to any securities account that is under special monitoring due to the occurrence of one serious abnormal transaction or frequent abnormal transactions. |
|
|
Circumstances where an account may be placed under special monitoring |
(1)Receiving two written warnings by the SSE within three months. (2)Being suspended for trading by the SSE. (3)Being restricted for trading disciplinary sanctions. |
(1)Receiving a warning for restriction on trading by the SZSE. (2)Being suspended for trading during the trading hours of a day by the SZSE. (3)Being suspended for trading after the end of trading hours by the SZSE. |
|
(4)By taking advantage of capital, shareholding, information or technology, conducting serious abnormal trading activities or being under suspicion of conducting market manipulation; (5)Other circumstances determined by the CSRC or the Exchange. |
||
| Special Monitoring Period |
6 months If a holder of an “Account under Special Monitoring” resumes an abnormal trading activity during the special monitoring period, such period shall be extended for an additional six months. |
12 months |
(2) Supervisory Duties of Members
Both Circulars stipulate the Exchange’s regular release of a list of “Accounts under Special Monitoring” and the related information to all members. When an account is listed as being an Account Under Special Monitoring, a member is required to take actions such as reaching out to the relevant client, entering into a supplemental agreement to the brokerage agreement with such client, re-verifying the status of such client and conduct additional monitoring on such client’s trading activities, and shall report to the exchange in a timely manner the actions that have been taken in relation to such “accounts under special monitoring”.
When abnormal trading activity is suspected, a member shall promptly alert the client and require it to correct such activity, while for an abnormal trading activity that may significantly affect the order of market or that is alleged to have violated a law or regulation, the member shall exercise its rights under the brokerage agreement to suspend the execution of orders entrusted by the client or even terminate the brokerage agreement with such client, and promptly file an interim report with the exchange.
(3) Liabilities of Members for Failing to Perform Supervisory Duties
Both Circulars specify that each respective Exchange has discretionary power to take self-disciplinary measures as appropriate against its members or the relevant responsible personnel, or to conduct on-site inspections on its members where necessary, under those circumstances where the supervision and management by the relevant member are believed inadequate. For example, if abnormal trading activity was found relating to an account that had been newly opened by an account holder under special monitoring, both the person in charge of compliance and risk management and the person in charge of the brokerage of the relevant securities broker may be called in for a cautionary conversation, and any personnel held responsible may be ordered to attend a trading compliance training session held by the exchange.
It was reported that both SSE and SZSE and the local agencies of the CSRC will conduct on-site inspections on certain brokers to examine their performance of the management duties for client trading activities and investor suitability.
IV. Our Observations
We anticipate that both SSE and SZSE will take further measures to perform their self-disciplinary duties and to promote a “member-focused” model of supervision, which means focusing on the securities brokers’ responsibility to manage the trading activities of their clients. On-site inspections conducted on the securities brokers will possibly become a routine means of supervision by the regulator.
For further information, please contact:
Natasha (Qing) Xie, Partner, Jun He
xieq@junhe.com
