Measures for the Supervision and Administration of Credit in the Securities and Futures Markets (Mainland China)

Joyce Wen

The China Securities Regulatory Commission (the “CSRC”) issued the CSRC Directive No. 139 on March 28, 2018 to amend the previous Interim Measures for the Supervision and Administration of Credit in the Securities and Futures Markets (the “Interim Measures”).  In addition, the new Measures for the Supervision and Administration of Integrity in the Securities and Futures Markets the “Measures”) will go into effect on July 1, 2018.  The main objective of the Measures is to accommodate new developments and circumstances in the capital market.  In the past three years, the state has issued a series of documents focused on building credit, and policy documents in other areas were also deployed to establish new mechanisms for the credit supervision system.  As these institutional mechanisms were not stipulated in the Interim Measures, an amendment is urgently needed to realize them.  On the other hand, major changes have taken place in the capital market with a need to improve the credit supervision system and to achieve “full coverage” of credit supervision over new areas, new entities, and new activities in the capital market.  In addition, the main objective of the Measures is to address the issues and insufficiencies in the establishment of the institutional mechanisms for the capital market that are exposed by the abnormal volatility of the stock market and to improve the fundamentals of credit supervision from the perspective of building integrity.

The promulgated Measures consist of six chapters and 50 articles, including the general principles, the collection and management of credit information, the disclosure and inquiry of credit information, the commitments, encouragement and guidance for credit, supervision and administration, and supplemental provisions.  Compared with the Interim Measures (a total of six chapters and 43 articles), 39 articles are retained (24 of which are amended), 11 are added, and 4 are deleted.  The key revisions are as detailed below:

(1) Expansion in the scope of the subjects covered by credit information

First, securities and futures market investors are included in the scope of subjects for credit information.  Companies listed in the National SME Shares Transfer System, companies and institutions listed and operated in regional equity markets, fund service institutions, futures contract delivery warehouses and agencies conducting quality inspections and quarantines for the transacted commodities in futures contracts, financial institutions such as commercial banks that provide securities and futures depository and custody services, securities and futures media agencies, and relevant personnel of the above-mentioned entities (Article 7) are also added as subjects of credit information.

(2) Expanded coverage of the scope of credit information

Firstly, the social credit code is to be uniformly used as the basic information for the identification of legal persons or other organizations.  Secondly, the results of the credit assessment of the relevant industry and market entities as conducted by the trade organizations of securities and futures markets are included in the scope of credit information collection.  Thirdly, default and breach-of-trust information concerning penalties imposed by relevant authorities as a result of a refusal to implement effective administrative penalties and regulatory measures, a refusal to accommodate regulatory inspection or investigation, interference against regulatory enforcement by improper means, refusal to perform a securities or futures dispute resolution agreement that has already been concluded, failure of a bond issuer to repay the principal and interest as scheduled, failure of a guarantor to assume the agreed-upon guarantor liability, and the default and failure to perform in margin financing, refinancing, pledge-style repurchase of securities, agreed-upon redemption or futures transactions are all included in the scope of collection to provide a comprehensive coverage of regulatory enforcement and market trading activities (Article 8).

(3) Establishment of a credit commitment system for market access

To accommodate the credit commitment requirements for market access, the Measures stipulate that when applying for administrative approval from the CSRC and its dispatched agencies, the applicant and the relevant parties involved shall submit written undertakings mainly covering the following two aspects: The submitted application materials are true, accurate, and complete, and the applicants will engage in securities and futures market activities in an honest and legal manner (Article 24).

(4) Establishment of a credit scoring system for major market entities

To give full effect to the discipline and restrictions on persons who have breached trust and to encourage and guide trustworthy persons in the course of credit administration, the Measures set up a credit scoring system for issuers, listed companies, companies listed in the National SME Shares Transfer System, securities firms, futures companies, fund managers, securities and futures service agencies, securities and futures fund personnel and other major market players.    The aforementioned market entities will be subject to categorical supervision and administration based on their credit scores (Article 23).

(5) Establishment of a “green passage” for administrative licensing

To strengthen incentives for trustworthy persons, the Measures stipulate that a priority track for administrative approval review shall be implemented for individuals with good credit, namely those who have no criminal record and have not been subject to administrative penalties imposed by relevant authorities in the past three years (Article 31).  In addition, trade associations can establish an annual credit membership system and confer recognition to encourage the trustworthy members (Article 40).

(6) Strengthening the ex post supervision of credit commitment requirements

To further increase the penalties and restrictions on illegal breach of trust and protect the legitimate rights and interests of investors, building on the provisions of the current Interim Measures, credit file review shall be an essential part in the decision to impose administrative penalties, prohibit of market access, and routine regulatory work such as exercising regulatory measures and conduct regulatory inspections.  This shall more strongly penalize illegal breach of trust and increase the costs of breach of trust (Articles 33 and 34).

(7) Strengthened credit commitments in market trading activities

First is the account opening process.  When a securities registration and clearing institution opens a securities account, or when a securities firm is requested by a securities registration and clearing institution to open securities accounts for its clients, or when a futures company opens futures accounts for its clients, they shall review the credit files of the investors and customers and proceed with the account opening pursuant to relevant requirements (Article 35).  Secondly, for financial pledge-related business, it is specifically stipulated that when a securities company applies for pledge-backed repurchase, contract repurchase or margin financing for its clients’ stocks, or when a securities financing company intends to establish a refinancing business, it shall review the credit files of its clients or of the securities firms and determine whether to accept such business or confirm or adjust the financing line according to the credit status of the applicants (Article 36).  Thirdly, issuers, listed companies, companies listed in the National SME Shares Transfer System, futures companies, fund managers and securities and futures service institutions intending to hire senior managers and practitioners and securities firms, and securities service institutions that have been entrusted to engage in market activities such as securities service business, shall review the credit files of relevant parties and use their credit status as the basis for determining whether to retain such parties, accept applications from such parties or determine the fee standard for such parties (Articles 37 and 38).

(8) Establishment of an information disclosure system for material illegal breach of trust

A system for disclosure of serious illegal breach of trust in the securities and futures markets may be built on the public illegal breach of trust inquiry platform in such markets.  The scope of such disclosure may include the following information: administrative penalties, prohibition of market access, securities and futures criminal offenses, refusal to accommodate regulatory inspections or investigations, refusal to timely comply with valid administrative penalties and material violation of an investor’s lawful rights and interests, as well as information on any other serious illegal breaches of trust that has incurred strong market reactions (Article 15).

In general, the newly amended Measures are focused on combining the relevant requirements from the state with the actual circumstances of the capital market, bringing together the new institutional requirements with the original institutional framework and joining the credit supervision authorities with the penalization of breach of trust and encouragement of maintaining credit.  This helps to further enhance the development of credit in the capital market and enhance the overall credit level thereof, as well as promote the healthy and stable development of the capital market.  Although compliance obligations will be increased to a certain extent, there will be more reliable information available for inquiry.