## cr17404 — IOSCO Principles Assessment: Executive Summary and Key Findings ## Source details **Canonical URL:** [cr17404 — IOSCO Principles Assessment: Executive Summary and Key Findings](https://www.imf.org/-/media/files/publications/cr/2017/cr17404.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17404.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17404.pdf.json) --- ### EXECUTIVE SUMMARY — Introduction and Methodology - Assessment conducted in the People’s Republic of China: - Assessment periods: from November 29 to December 21, 2016 and February 21 to March 1 2017. - Assessment team: Ana Fiorella Carvajal, Malcolm Rodgers, Thomas Yee. - Previous IOSCO assessment of the PRC: 2010. - Framework used: - IOSCO Principles approved in 2010 and Assessment Methodology adopted in 2011. - Principle 38 not assessed (separate standard for financial market infrastructure). - Information sources: - Self-assessment and written responses; legislation and regulation reviews; meetings with CSRC, PBoC, CBRC, CIRC, NDRC, MoF, Ministry of Public Security; exchanges, industry associations, CSDC, SIPF; samples of market participants. - Methodology note: - Requires judgment about implementation in practice including inspection programs, scope and enforcement follow-up. ### REGULATORY AND SUPERVISORY FRAMEWORK — Overview - Sectoral regulators: - Securities industry: China Securities Regulatory Commission (CSRC). - Banking and trust: China Banking Regulatory Commission (CBRC). - Insurance: China Insurance Regulatory Commission (CIRC). - CSRC institutional facts: - Established October 1992 as a ministry-level agency under the State Council (SC). - Governing body: Chairman (Ministerial rank) with four Vice-Chairmen and two Assistant Chairmen. - Strategic direction: - State Council guides capital markets development; notable Opinions cited: 2013 and 2014 opinions on small investor protection and healthy development of capital markets. ### KEY POSITIVE FINDINGS AND LEADING PRACTICES - Overall compliance: regulatory framework and supervisory program largely compliant with IOSCO Principles. - Notable initiatives since 2010: - Strengthened suitability requirements; enhanced investor rights; expanded investor education; expanded authorized intermediary activities; reviewed prudential/capital requirements; strengthened systemic risk monitoring tools over last three years; actions after 2015 market volatility to curb excess leverage; stronger enforcement in last year. - CBRC notable actions on WMPs: - Stronger distribution/sales rules; full segregation and separate accounting per WMP; stricter eligible investment rules. - Leading practices and innovations: - See-through system for clients’ accounts. - Creation of China Investor Services Corporation (can represent investors in court). - Multi-layer mediation system for investor protection. - Creation of Capital Markets Statistics and Monitoring Center (CMSMC). - Central Regulatory Information Platform. - Universal identification number for investors across securities and futures markets. ### MAIN CHALLENGES AND CORE RECOMMENDATIONS - Harmonization of regulatory regimes: - Implement JMC agreements to harmonize regulation for activities/products subject to multiple regulators. - Priority: harmonized regulations for asset management services to address operational differences causing regulatory arbitrage, investor protection gaps and systemic risk monitoring weaknesses. - JMC consensus to strengthen WMP regulation; harmonized framework should address disclosure, custody, bankruptcy remoteness and valuation weaknesses. - Implement JMC agreements for Bonds to harmonize issuance criteria, disclosure and coordination including enforcement. - Harmonization for CRAs: draft regulation under consultation. - Medium term: consider harmonized ABS regulations within Securities Law framework. - Resourcing and institutional capacity of CSRC: - Resource constraints: staff quota system and civil service salary scale bind CSRC. - Staffing evolution vs market growth (exact figures): - Number of listed companies: 2009 = 1,718; 2015 = 2,827. - Market capitalization: 2009 = 3.67 trillion; 2015 = 53.15 trillion. - CSRC staff: 2013 HQ 797; 2014 HQ 769; 2015 HQ 730. Total staff: 2013 3,183; 2014 3,167; 2015 3,097. - As of December 2015 CSRC had 3,097 staff, average age 36. - Recommendations: - Provide additional resources; consider greater autonomy for CSRC to decide staff numbers and a separate salary scale. - Keep inspection coverage under review including auditors. - Enforcement powers and strategy: - Continue enhancing enforcement strategy; strengthen administrative and criminal sanction levels. - Recommendations: - Eliminate gaps/inconsistencies in misconduct descriptions. - Increase fines and penalties available for administrative sanctions and criminal offenses; use criminal sanctions (including imprisonment) more vigorously for egregious violations. - Systemic risk monitoring and cross-sector coordination: - CSRC improved tools and processes; continue to expand data sharing on asset management and standardize data. - Explore continuous systemic joint monitoring for bond markets. - Market structure vigilance: - Monitor multi-tiered market implementation to safeguard investor confidence. - Monitor NEEQ and securities companies operating in it. - Implement standards for regional trading platforms; consider common framework for non-exchange trading platforms. - Further development of futures markets: consider more sophisticated business model for futures intermediaries, education programs and close monitoring. - Audit quality and oversight: - Authorities should unite efforts to ensure high quality audits and well-regulated profession. - Consider creation of a single, independent audit oversight body for the financial sector. *This summary is based on the EXECUTIVE SUMMARY section of the assessment contained in the provided source document.* ### DETAILED ASSESSMENT — Scope, Exclusions and Holistic Considerations - Assessment scope: - Focus on CSRC as main regulator except where particular principles required broader approach (Principles 1, 6, 12). - Exclusions: NEEQ and regional platforms (outside scope for grading because restricted to qualified investors), interbank bond market (institutional-only), some insurance/insurance asset management plans and trust plans (qualified investors only). - Holistic market considerations: - Authorities should maintain a holistic view given growing private offering regimes, OTC markets, and rapid evolution. - Supervisory efforts should extend beyond products/markets covered in assessment. --- ### Regulatory Mandate, Powers and Institutional Organization ### CSRC mandate, powers, and licensing - Legal foundation: Securities Law and Securities Investment Fund Law; complemented by SC regulations/decisions. - Authorizations and licensing: - CSRC authorizes public offering of securities/funds; licenses all intermediary categories except private securities investment fund managers (registration with AMAC). - CSRC licenses futures markets; licensing of equity markets falls to SC on CSRC recommendation. - CSRC licenses information service providers (CRAs, auditors) for securities and futures markets. - Rulemaking and supervision: - CSRC has rulemaking powers over all participant categories (including private fund managers) and exercises day-to-day supervision. - Enforcement: - Investigative and administrative enforcement authority; can impose administrative measures/sanctions including money penalties. - Criminal enforcement is responsibility of criminal authorities; CSRC and Securities Crime Investigations Bureau of the Ministry of Public Security assist. ### Organizational structure and supervisory responsibilities - Central office and 38 regional offices: - Central office responsibilities include market development planning, rulemaking, approvals (public offerings, intermediary licenses), risk prevention guidance, coordinating supervisory actions, organizing investigations/enforcement, investor protection coordination. - Regional offices undertake frontline supervision, investigations, enforcement and investor protection initiatives. - Coordination via annual statewide meetings. - Affiliated institutions and SROs: - 19 affiliated institutions including exchanges, SAC, CFA, AMAC, CSDC. - Exchanges and industry associations exercise SRO functions; CSRC retains licensing authority and supervisory programs; AMAC handles registration for private funds though CSRC runs supervisory program in practice. --- ### Market Structure — Key Statistics (preserve numbers as in source) ### Equity markets (as of end-2015) - Listed companies on two exchanges: 2,827. - Total market capitalization: RMB 53.15 trillion = 78.54% of GDP. - Table 1 (selected figures): - Number of companies (2015): Shanghai 1081; Shenzhen 1746; Total 2827. - Market capitalization (RMB trillion, 2015): Shanghai 29.52; Shenzhen 23.63; Total 53.15. - Number of new listings (2015): Shanghai 89; Shenzhen 130; Total 219. - Secondary market trading (Table 2): - Annual Turnover (RMB billion, 2015): Shanghai 132,559; Shenzhen 122,495; Total 255,054. - Average daily turnover (RMB billion, 2015): Shanghai 543; Shenzhen 502; Total 1,045. - NEEQ (end-2016): - Listed companies: 10,163. - Market capitalization: approximately RMB 4.06 trillion. - NEEQ annual turnover: RMB 814 million (2013); RMB 13,036 million (2014); RMB 191,062 million (2015); RMB 191.229 million (2016). ### Bond markets (Table 3) - Issuances in 2015 (RMB in billions) — Issuances first half 2016 (RMB in billions): - Government securities: 2105.8 — 1367.8 - Local government bonds: 3835.1 — 3575.5 - Financial bonds: 10209.5 — 8838.6 - Inter-bank certificates of deposit: 5302.4 — 6021.6 - Corporate issuances: 6842.3 — 4329.6 - Total: 22992.7 — 18111.5 - Interbank bond market (as of December 2016): debt instruments worth more than 56.3 trillion yuan. - ABS (end-2016): - Outstanding ABS in interbank issued by banking financial institutions: RMB 487.8 billion. - Outstanding ABS on exchanges: RMB 541.9 billion (up 233% year on year). ### Futures markets (Table 4, selected indicators) - CFFEX turnover (100 million RMB): 2013 1,410,066.21; 2014 1,640,169.73; 2015 4,177,604.71. - SHFE turnover (100 million RMB): 2013 604,167.73; 2014 632,353.25; 2015 635,552.63. - Contracts (end-2015): Commodity futures 46 contracts; CFFEX three stock index futures and two Treasury bond futures. ### Investor composition and accounts (selected figures) - Stock accounts (2015): almost 215 million stock accounts held by over 99 million investors. - Futures accounts (2015): 1.268 million futures accounts held by 1.075 million futures investors. - Retail participation: - Retail accounts with less than RMB 500,000 account for well over 90% of trading accounts on stock exchanges; about 80% of trading activity; 35% of market value. - Futures retail accounts: over 95% of total (as of February 3, 2017); retail trading about 79% of trading (68% in June 2015) and 50% of open interest. - Foreign institutional participation (end-June 2016): - 297 QFIIs, combined QFII quota USD 81.18 billion and QFII assets RMB 561.103 billion. - 207 RQFIIs, combined RQFII quota RMB 507.968 billion and RQFII assets RMB 149.865 billion. --- ### Asset Management, Private Funds and Wealth Management Products (WMPs) ### Collective Investment Schemes (CIS) under CSRC (end-June 2016) - Fund management companies managed 3,115 mutual funds offered to the public with AuM of RMB 7.95 trillion. - CIS industry composition (Table 5, end-June 2016): - Close-end: Number 205; AuM RMB 275.7 billion. - Open-end: Number 2,910; AuM RMB 7,674.2 billion (Money market funds: 234 funds; AuM RMB 4,200.9 billion). - Total: 3,115 funds; AuM RMB 7,949.9 billion. - Fund management companies total AUM (including specific client asset management): RMB 15.3 trillion (as of June 2016). - Retail participation in open-end funds (end-June 2016): - Individual investors: 99.96% of active accounts; institutional investors: 0.04% of accounts. - Individual investors and institutional investors accounted for 46.01% and 53.99% of net value holdings respectively. ### Private funds and AMAC registration (end-December 2016) - AMAC register: 17,433 private fund managers; 46,505 private funds; combined paid-in AUM RMB 7.89 trillion. - Table 6 (selected): - Private securities investment funds: managers 7,781; funds 27,015; AUM RMB 2.77 trillion. - Private equity: managers 7,988; funds 15,789; AUM RMB 4.32 trillion. ### Banks, trust companies, insurance and WMPs (end-June 2016) - Banks offering WMPs: 454 banking institutions; 68,961 products; total value RMB 26.28 trillion. - Of WMP value, principal-guaranteed products accounted for 23.2 percent of total value (including products guaranteeing both principal and return accounting for 8.5 percent of WMP value). - Collective retail WMPs AUM approximately RMB 8 trillion. - Trust companies: 68 trust companies licensed by CBRC with assets about RMB 7.34 trillion (as at December 2016); less than 40 percent of trust assets held by collective trust products. - Insurance asset management companies: insurance AUM approximately RMB 13.513.4 trillion as of December 2016 (text in source shows "RMB 13.513.4 trillion" as provided). ### Regulatory observations and assessments for CIS and WMPs - CSRC regime for public funds: - Robust licensing and disclosure; fund assets must be held by separate custodians (custodian may belong to same group as manager). - MMFs allowed to use amortized cost under conditions with shadow pricing and triggers (negative deviation thresholds 0.25 percent and 0.5 per cent). - Assessment highlights: - Principle 24 (eligibility/governance): BI (Broadly Implemented) for some elements; PI/FI distinctions across Principles in assessment tables. - Principle 25 (custody/segregation): PI (Partly Implemented) due to related-party custodians and legal uncertainty in some areas. - Principle 26 (disclosure): BI (Broadly Implemented) with recommendations for updated/replacement prospectuses and simplified information documents. - Principle 27 (valuation/pricing): PI for some aspects including MMF framework monitoring. - CBRC regime for WMPs: - High-level framework: separate accounting per WMP, pre-sale registration (10 days) for most products, custody requirements, detailed reporting to CBRC. - Key concerns: - Self-custody permitted if issuing bank is licensed custodian; legal uncertainty on bankruptcy remoteness. - Prospectuses and marketing can state expected returns; recommendation to prohibit expected returns in non-guaranteed collective WMPs offered to retail investors. - Lack of explicit minimum standards for subscription/redemption pricing, pricing errors, suspension/deferral of redemptions — recommended CBRC action. --- ### Intermediaries, Licensing, Prudential Regimes and Supervisory Practices ### Intermediary landscape (as of mid-2016) - Securities companies: 127 (including 2 in preparatory stage). - Fund management companies: 117 mutual fund managers (104 fund management companies, 12 securities companies or securities asset management companies, 1 insurance asset management company); 79 subsidiaries providing asset management. - Futures companies (end-2015): 149. - Overseas subsidiaries (end-2015): - Securities companies: 29 have set up subsidiaries overseas (27 Hong Kong SAR, 1 Laos, 1 Singapore). - Fund management companies: 25 set up subsidiaries overseas (all in Hong Kong SAR). - Futures companies: 18 approved to set up 19 overseas subsidiaries (18 Hong Kong SAR, 1 U.S). - Foreign participation (end-June 2016): - 11 of 127 securities companies joint ventures with foreign investors. - 44 of 104 fund management companies joint ventures with foreign investors. - 2 of 149 futures companies joint ventures with foreign investors. ### Licensing, capital, reporting and internal controls - Licensing robustness: licensing requirements described as robust for securities, fund management and futures companies. - Capital and prudential regimes: - Securities companies: updated net capital regime October 2016; early warning reporting within 3 days. - Fund managers: minimum registered/paid-up capital RMB 100 million. - Futures companies: net capital minimums and risk indicators (e.g., net capital not less than RMB 15 million; average net capital per branch not less than RMB 3 million). - Internal controls: - Annual internal control evaluations required; external auditor opinion required. - CSRC on-site inspections under risk-based approach assess controls. ### Failure framework and investor protection - CSRC has frameworks to deal with failure of firms (Regulations on Handling of Risks of Securities Companies; Measures for Administration of Risk Control Indicators of Futures Companies). - Investor compensation: - SIPF (Securities Investor Protection Fund) indemnifies creditors of a securities company if company cancelled/closed/bankrupt or subject to compulsory CSRC measures. - SIPF funding: statutory contributions 0.5 to 5 percent (amount varies by company relative risk), interest earnings and recoveries from liquidations. - SIPF compensation: settlement account losses paid in full; other individual losses paid up to RMB 100,000 (full payment up to limit; discounts above limit). - Futures Investor Protection Fund: funded by exchanges and futures companies; compensation rules: individual investor 100% of portion of margin loss ≤ RMB 100,000 and 90% of portion above RMB 100,000. --- ### Enforcement, Inspections and Resources ### Enforcement powers and activity - CSRC investigative and sanction powers include entering premises, questioning, accessing records, sealing documents, freezing funds/accounts (with limits), restricting trading during investigation (up to 15 trading days with extensions). - Administrative sanctions ranges preserved as presented in source (examples): - Minimum ranges for some violations: RMB 10,000 to 100,000. - Maximum ranges for some violations: RMB 300,000 to 3,000,000. - Some sanctions set as percentage of funds raised: 1% to 5%. - Enforcement staffing (as of July 2016): - Total enforcement staff: 640 (Enforcement Bureau 36; Enforcement Task Force 145; Regional offices 459). - Securities Crimes Investigation Bureau (SCIB) located in CSRC offices: 30 central; 120 in three largest regional offices. - Enforcement outputs (selected figures): - 2015: Enforcement Bureau accepted 723 valid clues; launched new investigations on 345 cases (68% increase from 2014); froze RMB 3.751 billion of funds; referred/imposed sanctions in 273 cases. - Fiscal Year penalties (selected): - Disgorgements and fines (RMB million): 2013 728; 2014 470; 2015 1,100; 2016 4,286. - Administrative penalties and market entry bans (table): - 2013 Administrative Penalties = 79; Market Entry Bans = 21. - 2014 Administrative Penalties = 158; Market Entry Bans = 18. - 2015 Administrative Penalties = 177; Market Entry Bans = 11. - 2016 Administrative Penalties = 221; Market Entry Bans = 21. ### Inspections and audit firm supervision - CSRC on-site inspections of audit firms (2015): comprehensive or targeted inspections on 32 audit firms (80% of audit firms authorized to provide securities services) and spot-checks on 225 audit engagements (8% of listed companies). - Audit firm approval for securities services: 40 audit firms authorized to conduct securities service business in China (as of end-2016). - CSRC inspections of audit firms (table): - 2013 Comprehensive 3; Targeted 116. - 2014 Comprehensive 2; Targeted 132. - 2015 Comprehensive 7; Targeted 139. - Enforcement measures against auditors (2013–2016 summary): - Regulatory measures 2013: 15 audit firms; 39 CPAs. - Administrative sanctions 2013: 4 audit firms; 2016: 5 audit firms. ### Assessment of enforcement effectiveness - Principles grading highlights (selected extract): - Principle 10 (inspection, investigation, surveillance powers): FI (Fully Implemented). - Principle 11 (comprehensive enforcement powers): BI (Broadly Implemented). - Principle 12 (effective and credible use of powers): PI (Partly Implemented). - Key assessor concerns: - Criminal enforcement thresholds/deterrence appear limited historically though improving; typical time from referral to judgment 350 to more than 1,000 days. - Recommendation: strengthen legal framework to compel testimony from third parties, ISP records, expand freeze-of-assets provisions, and increase penalty levels where low. - Continue monitoring enforcement mix and coordinate with prosecutorial authorities to enhance criminal law usage for securities offenses. --- ### Systemic Risk Monitoring, Data Integration and Cross-Sector Coordination ### Monitoring tools and indicators - CSRC developed multi-level systemic risk indicators at four levels: systemically important institutions, market infrastructure providers/CCPs, market indicators (liquidity, volatility, investor sentiment), bond market and macroeconomic indicators. - Heat indicator for stock market: 5-degree category system = too hot, hot, mild, cold, too cold. - Stress testing: - SAC annual stress tests for securities firms since 2011. - CFMMC stress tests for futures companies since 2008. - CSRC conducted two rounds of stress tests end-2015 and early 2016. ### Data integration and information platforms - CMSMC created September 2012 under CSRC to collect market/macro data. - Central Regulatory Information Platform implemented to aggregate lifecycle transaction data across cash and futures markets; managed by CMSMC. - Universal identification number implemented for investors across markets. - PBoC collects consolidated bond market data across regulators; JMC for Bonds coordinates bond data sharing. ### Coordination mechanisms - Financial Coordination and Regulatory Group (FCRG): established 2008, chaired by Vice Premier; includes PBoC, SAFE, NDRC, MoF, CSRC, CBRC, CIRC. - Joint Ministerial Conference (JMC): approved 2013; comprises PBoC, CSRC, CBRC, CIRC, SAFE; chaired by PBoC governor; focused on cross-sectoral issues (internet finance, asset management). - JMC for Bonds established 2012 (PBoC, NDRC, CSRC) to harmonize bond issuance/trading/disclosure and coordination. ### Assessment (Principle 6) - Assessment: BI (Broadly Implemented). - Comments: - Good progress and leading practices; critical need for additional qualified staff; standardize and expand data sharing especially on asset management and bond markets. --- ### Market Infrastructure, Exchanges, CCPs and Trading Transparency ### Exchanges, CCPs and clearing/settlement - Exchanges: SSE, SZSE, NEEQ, three commodity futures exchanges (SHFE, DCE, ZCE), CFFEX. - CSDC provides registration, clearing and settlement; acts as CCP for cash markets. - Settlement cycles: A shares T+1; B shares T+3. - Clearing default waterfalls and CCP resources in place; PFMI assessment recommended considerations: review intraday margin and recalibration of initial margins; consider separate legal entity status for CCPs. ### Market surveillance, trading controls and volatility management - Exchanges have automated surveillance and alert systems; annual IT evaluations required. - Volatility controls include price limits (+/- 10% standard for single stocks; +/- 5% for "special treatment"), margin requirements, position limits in futures, and exchange suspension powers. - 2015 market volatility context: - Reported bank lending peak related to leverage: RMB 2.3 trillion; total leverage may have reached RMB 5 trillion per market participant statement. - CSRC actions: changed margin financing rules (raising limit from 30% to 50%); enforcement against unofficial lending channels. ### Transparency and pre-/post-trade information - Pre-trade and post-trade transparency required; some asymmetry: - Shanghai Futures Exchange displays only best bid/offer (one level) pre-trade — assessors recommend review. - Recordkeeping obligations: 20 years for most intermediaries and exchanges; specific periods for fund distributors (15 years) and private funds/managers (10 years). ### Market integrity, manipulation and insider trading - Legal framework prohibitions detailed in Securities Law and Futures Regulations; criminal provisions in Criminal Law Articles 160–161. - Sanctions (examples preserved): - Market manipulation fines: where no illegal gains or gains < 300,000 yuan, fines between 300,000 yuan and 3,000,000 yuan; for units fines 100,000 yuan to 600,000 yuan for insider trading-related penalties on units. - Enforcement statistics examples (2013–2015): - Insider trading cases: 2013 51; 2014 69; 2015 64. - Market manipulation: 2013 8; 2014 15; 2015 18. - Assessment: Fully Implemented for detection/deterrence mechanisms with continued recommendations on sanction calibration and criminal enforcement vigor. --- ### Principles Assessment — Selected Implementation Grades and Policy Recommendations (extracts) - Principle 1 (Regulator responsibilities): Partly Implemented. - Recommendation: implement JMC agreements; harmonize asset management regimes into three regulatory “sets”; finalize new Securities Law and Futures Law; consider consolidating rules for clarity. - Principle 2 (Operational independence and accountability): Partly Implemented. - Recommendation: consider transferring approval responsibility for equity exchanges to CSRC; enhance transparency and procedural safeguards. - Principle 3 (Powers, resources and capacity): Partly Implemented. - Recommendation: consider greater autonomy for staffing and separate salary scale. - Principle 4 (Regulatory processes and pilots): Fully Implemented. - Recommendation: publish negative pilot selection decisions to enhance transparency. - Principle 5 (Staff conduct/conflicts): Broadly Implemented. - Recommendation: implement prompt notification system for all CSRC staff holdings. - Principle 6 (Systemic risk): Broadly Implemented. - Recommendation: continue enhancing tools and expand cross-sectoral data sharing. - Principle 10: Fully Implemented (inspection/investigation/surveillance powers). - Principle 11: Broadly Implemented (enforcement powers); increase penalty levels and criminal enforcement vigor. - Principle 12: Partly Implemented (effective and credible use of powers); monitor enforcement intensity and deterrence. - Principle 16 (Disclosure): Broadly Implemented. - Recommendation: shorten deadlines for annual financial statements for larger companies; strengthen disclosure’s role through corporate governance, gatekeeper compliance, investor empowerment and institutional investor growth. - Principles 24–27 (CIS): mixed PI/BI/FI grades across specific KQs; recommendations include improved custody safeguards, updated prospectus rules, MMF framework monitoring, standardized data and strengthened supervision of WMPs. - Principle 35 (Transparency): BI (Broadly Implemented) — review pre-trade transparency asymmetry (e.g., Shanghai Futures Exchange). --- ### Closing Observations and Forward-Looking Commitments - CSRC response and commitments: - CSRC highly committed to FSAP and IOSCO assessment; acknowledges recommendations and commits to law-based, market-oriented reforms. - CSRC actions: strengthen coordination under FSDC/JMC; enhance criminal enforcement cooperation; analyze disclosure recommendations; maintain staff integrity rules. - Forward-looking priorities identified by assessors and CSRC: - Increase regulatory resources; strengthen coordination and information sharing; improve governance of listed companies; strengthen enforcement powers; intensify supervision of gatekeepers; consider independent audit oversight body; bolster futures market risk management; explore differentiated hedge fund regulation if systemic importance emerges. *Italic: Source — cr17404 (IMF staff assessment and IOSCO Principles assessment excerpts from the provided PDF).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### INTRODUCTION - An assessment of the level of implementation of the IOSCO Objectives and Principles of Securities Regulation (IOSCO Principles) was conducted in the People’s Republic of China: - Assessment periods: from November 29 to December 21, 2016 and February 21 to March 1 2017. - Assessment team: Ana Fiorella Carvajal (IMF staff on assignment with the World Bank), Malcolm Rodgers, and Thomas Yee (external experts working for the IMF-WBG). - The previous IOSCO assessment of the PRC was conducted in 2010. - The assessment was made on the basis of the IOSCO Principles approved in 2010 and the Assessment Methodology adopted in 2011. - Principle 38 was not assessed due to the existence of a separate standard for financial market infrastructure. ### INFORMATION AND METHODOLOGY USED FOR ASSESSMENT - Sources used: - A self-assessment and additional written responses prepared by the authorities. - Reviews of relevant legislation and regulations. - Meetings with CSRC management team and staff. - Meetings with public officials including representatives from the PBoC, the CBRC, the CIRC, the NDRC, the MoF, and the Ministry of Public Security. - Meetings with exchanges, industry associations, the CSDC, the SIPF, and samples of market participants (listed companies, securities companies, fund management companies, future companies, banks, insurance companies, auditors, credit rating agencies, consultancy firms, and law firms). - The IOSCO Assessment Methodology requires judgment about implementation in practice, including review of inspection programs, cycle, scope and quality of inspections, and follow-up on findings including enforcement actions. ### REGULATORY AND SUPERVISORY FRAMEWORK — OVERVIEW - The regulation and supervision of the financial sector in China is organized broadly along sectoral lines: - Securities industry: China Securities Regulatory Commission (CSRC). - Banking industry and trust company industry: China Banking Regulatory Commission (CBRC). - Insurance industry: China Insurance Regulatory Commission (CIRC). - CSRC institutional facts: - Established in October 1992 as a ministry-level government agency directly under the State Council (SC). - Main governing body: the Chairman (Ministerial rank), supported by four Vice-Chairmen and two Assistant Chairmen. - Executive team appointed by the State Council (SC). - Strategic direction: - The State Council provides strategic direction; capital markets development strategy aims to expand the role of capital markets in financing the real economy. - Relevant guiding opinions include: - Opinion on Further Enhancing the Protection of Small Investors’ Rights and Interests (2013). - Opinion on the Healthy Development of the Capital Markets (2014). - CSRC strategic priorities are driven by such opinions; the CSRC can influence development of these opinions through consultation. ### KEY POSITIVE FINDINGS AND LEADING PRACTICES - The regulatory framework and supervisory program for the securities markets is largely compliant with the IOSCO Principles. - Notable regulatory and supervisory initiatives since 2010: - Strengthening suitability requirements for intermediaries. - Enhancing investors’ ability to exercise their rights. - Expanding investor education programs. - Expanding authorized activities for some categories of securities intermediaries to develop investment banking culture. - Reviewing and strengthening prudential and capital requirements for some participants. - Strengthening tools to monitor systemic risk over the last three years. - Actions taken following market volatility of 2015 to curb excess leverage, some jointly with other public authorities. - Stronger stance on enforcement in the last year. - Notable initiatives by the CBRC: - Strengthened regulatory framework for wealth management products (WMPs), including: - Stronger distribution and sales rules. - Requirement for full segregation and separate accounting for each WMP. - Imposition of stricter rules on eligible investments. - Leading practices and innovative approaches: - See-through system for clients’ accounts. - Creation of the China Investor Services Corporation, which can represent investors in court. - Development of a multi-layer mediation system for investor protection. - Creation of the Capital Markets Statistics and Monitoring Center. - Development of the Central Regulatory Information Platform. - Implementation of a universal identification number for investors across the securities and futures markets. ### MAIN CHALLENGES AND RECOMMENDATIONS - Harmonization of regulatory regimes: - Authorities should implement existing agreements aimed at harmonizing regulation of activities and products subject to more than one regulatory regime and supervisory authority. - Priority: harmonized regulations for asset management services to address differences in key operational aspects that allow regulatory arbitrage and affect investor protection and systemic risk monitoring. - Under the Joint Ministerial Conference (JMC) the PBoC, the CSRC, the CBRC and the CIRC have reached consensus to strengthen regulation of WMPs and are developing uniform regulatory rules for the same type of WMPs. - Harmonized framework should address weaknesses identified in disclosure, custody, bankruptcy remoteness and valuation, as appropriate. - Authorities should implement JMC agreements for Bonds aiming at harmonizing regulations and enhancing coordination mechanisms including enforcement actions. - Harmonization for credit rating services: a draft regulation has been submitted for consultation. - Medium term: consider development of harmonized regulations for asset-backed securities within the framework of the Securities Law. - Resourcing and institutional capacity of the CSRC: - The CSRC faces resource challenges limiting its ability to keep up with a market growing in complexity and pace. - Constraints: staff quota system and salary scale binding the CSRC and other financial regulatory commissions. - Recommendations: - Provide additional resources to ensure a robust program of supervision and enforcement. - Consider granting the CSRC greater autonomy to decide staff numbers and a separate salary scale from the civil service. - Importance of keeping coverage of monitoring programs under review, including auditors given their system role. - Enforcement powers and strategy: - Continue to enhance enforcement strategy and strengthen powers to impose appropriate sanctions so CSRC and criminal authorities can implement a program that provides investor confidence. - Evidence of movement toward more vigorous use of administrative measures and sanctions, including larger monetary penalties and bans across a full range of market participants. - Recommendations: - Eliminate gaps and inconsistencies in descriptions of misconduct. - Increase level of fines and penalties available for administrative sanctions and criminal offenses, including terms of imprisonment where appropriate. - Use criminal sanctions, in particular imprisonment, more vigorously for the most egregious violations to send clear deterrence messages. - Systemic risk monitoring and cross-sector coordination: - CSRC has improved tools and processes for systemic risk identification and monitoring; efforts should continue to ensure effective tools and expertise for all markets under its remit. - Given multiple regulators for key products and markets, cross-sectoral mechanisms to share information and identify and monitor systemic risk should be strengthened. - Specific actions: - Continue expanding data sharing on asset management and prioritize efforts to standardize data. - Explore whether a more continuous and systemic mechanism is needed to jointly monitor risks stemming from bond markets. - Ongoing vigilance and timely adjustments: - Authorities responsible for regulation and supervision should remain continuously alert to adjustments needed in regulation and supervisory practices given rapid market growth. - Even where the system is considered fully aligned with the Principles, authorities are encouraged to keep a critical eye. - Market structure and product-specific considerations: - Ensure multi-tiered market implementation does not adversely affect investors’ confidence in capital markets as a whole. - Keep close monitoring of the National Equities Exchange and Quotation Corporation (NEEQ) and securities companies operating in it. - Implement planned standards to facilitate safe development of regional trading platforms and their role in bringing local financing to local businesses. - Consider development of a common framework encompassing all non-exchange trading platforms, allowing differences in the CSRC’s oversight role. - Further development of futures markets requires: - Consideration of a more sophisticated business model for futures intermediaries. - Assessment of regulatory framework changes, education programs, and continued close monitoring of market activity and risk management practices to foster confident participation by end users. - Audit quality and oversight: - Because of the importance of audits for reliability of financial information across the financial sector, authorities should unite efforts to ensure high quality audits and a well-regulated profession. - Consideration: creation of a single, independent oversight body for auditing. ### DETAILED ASSESSMENT AND FOLLOW-UP - The assessment combines evaluation of legal and regulatory frameworks with judgment on implementation effectiveness, including supervisory practice, inspection programs, follow-up, and enforcement. - The assessors recognize cooperation and information provided by Chinese authorities and market participants as essential inputs to conclusions. _This summary is based on the EXECUTIVE SUMMARY section of the assessment contained in the provided source document._ ### 8. In general, the mandate of the CSRC covers the regulation and supervision of the ### 8. In general, the mandate of the CSRC covers the regulation and supervision of the ### Mandate, powers, and enforcement - Mandate: regulation and supervision of the securities and futures markets. - Legal foundation: Securities Law and the Securities Investment Fund Law; complemented by regulations and decisions of the SC. - Authorizations and licensing: - CSRC authorizes the public offering of securities and funds. - CSRC licenses all categories of intermediaries with the exception of private securities investment fund managers (which are only subject to registration with the Asset Management Association of China (AMAC)). - CSRC licenses futures markets. - Licensing of equity markets falls to the SC acting on the recommendation of the CSRC. - CSRC licenses information service providers, including credit rating agencies and auditors that provide services in the securities and futures markets. - Rulemaking and supervision: - CSRC has rulemaking powers over all categories of participants (including private fund managers). - CSRC exercises day-to-day supervision of their operations. - Enforcement: - CSRC has investigative and administrative enforcement authority and can impose administrative measures and administrative sanctions, including money penalties, on regulated entities and persons who breach laws and regulations. - Criminal enforcement is the responsibility of criminal authorities; the CSRC and the Securities Crime Investigations Bureau of the Ministry of Public Security assist criminal investigations. ### Overlapping regulatory regimes and coordination - General observation: certain activities and products are subject to regulation and supervision by more than one regulatory authority; authorities have reached agreements aimed at harmonization and strengthened coordination. - The provision of asset management services — three regimes: - (i) Provision of individual and collective portfolio management and advisory services by intermediaries under the CSRC. - (ii) Provision of these services by banks and trust companies, administered by the CBRC. Pursuant to this regime only banks can offer asset management services to retail investors. - (iii) Provision of asset management plans by insurance asset management companies, administered by the CIRC. Pursuant to this regime the plans can only be offered to institutional investors and in practice are mainly used by insurance companies to manage their insurance funds. - Offering, placement and trading of bonds — three regimes: - (i) Corporate bonds issued to the public and which must be listed on the exchanges: regulated and supervised by the CSRC, and by listing rules of the exchanges. The exchanges are the front-line supervisor and support CSRC supervision. - (ii) Bonds and debt instruments issued strictly to institutional investors in the interbank bond market: issued under PBoC regulation, and instruments by non-financial corporations to institutional investors subject to self-regulation by NAFMII, which is overseen by the PBoC. Market infrastructure providers and NAFMII perform first-line monitoring and self-regulation assisting the PBoC. The CSRC can investigate and sanction violations of the Securities Law such as fraudulent information disclosure, insider trading and price manipulation in the bond market. - (iii) Enterprise bonds (issued for specific projects): issuance subject to regulation and supervision of NDRC; enterprise bonds can be traded on exchanges or in the interbank bond markets and thus are subject to the applicable market supervision. - Offering, placement and trading of asset backed securities (ABS): - Under the current framework credit ABS are under the regulations of PBoC/CBRC and enterprise credit ABS under the regulations of CSRC. - Asset backed notes (ABN) are registered and issued through NAFMII and subject to self-regulation by NAFMII. - All such products can only be issued to qualified investors. - Provision of credit rating services: - PBoC is the lead regulator for credit rating services. - All credit rating agencies must fulfill the record filing procedures regulated by the PBoC. - CRAs are subject to licensing or recognition by the corresponding regulator(s) depending on the type of bond to which they provide services. ### Organizational structure and supervisory responsibilities - CSRC central office and regional network: - Central office in Beijing complemented by 38 regional offices. - CSRC central office responsibilities: - (i) preparing market development plans; - (ii) formulating, amending and revising regulations and rules concerning the securities and futures markets; - (iii) carrying out the approval function in key matters such as public offerings and licenses of intermediaries; - (iv) guiding and coordinating efforts on risk prevention and mitigation; - (v) coordinating supervisory actions; - (vi) organizing investigations and enforcement activities in relation to cases involving misconducts or material violations of securities and futures laws; - (vii) coordinating and planning investor protection initiatives. - CSRC regional offices responsibilities: - frontline supervision of entities and activities under their jurisdiction; - supervision, investigation of misconduct, corresponding enforcement actions; - implementation of investor protection initiatives, including investor education. - Coordination mechanisms: include annual statewide meetings to discuss supervisory and enforcement priorities. - Affiliated institutions and self-regulatory functions: - CSRC supported by 19 affiliated institutions, which include stock and futures exchanges and industry associations: Securities Association of China (SAC), China Futures Association (CFA) and AMAC. - Exchanges and industry associations exercise self-regulatory functions assigned by Law. - Exchanges have listing authority and key roles in monitoring listed companies’ compliance with listing obligations including disclosure obligations, member regulation, and market surveillance. - Membership in industry associations is mandatory for specific categories: - securities companies must be members of SAC; - futures companies of the CFA; - private securities investment fund managers of AMAC. - Industry associations’ main roles: - development and administration of a system for qualification of practitioners; - development and monitoring of rules for the industry that add granularity to CSRC regulations. - Licensing authority: CSRC retains licensing authority over all intermediaries and has supervisory programs for all categories; industry association programs complement CSRC programs. - Exception: managers of private securities investment funds and the private funds themselves are not subject to licensing or approval by CSRC but only to registration with AMAC; however CSRC has regulatory powers over them and runs its own supervisory program in practice. ### Market structure — Cash markets (equity) - Strategy: building a multi-tiered equity market to ensure access to capital for a wide range of business enterprises; authorities actively involved in establishing different markets and trading platforms. - Major exchanges and boards: - Shanghai Stock Exchange (SSE): has only one board, caters mainly to blue chip SOEs. - Shenzhen Stock Exchange (SZSE): three levels — main board, SME board, Growth Enterprise Board (GEB, also known as ChiNext); GEB has the least stringent listing requirements and caters to innovative growth enterprises; SZSE mainly caters to private (non SOEs) companies. - Market scale (as of end-2015): - There were 2827 companies listed on the two exchanges. - Total market capitalization: RMB 53.15 trillion which is equivalent to 78.54% of China’s GDP. - Table 1: China: Key Market Indicators (preserve numbers as presented) - Number of companies - Shanghai: 2013 953, 2014 995, 2015 1081 - Shenzhen: 2013 1536, 2014 1618, 2015 1746 - Total: 2013 2489, 2014 2613, 2015 2827 - Market capitalization (RMB trillion) - Shanghai: 2013 15.12, 2014 24.40, 2015 29.52 - Shenzhen: 2013 8.79, 2014 12.86, 2015 23.63 - Total: 2013 23.91, 2014 37.25, 2015 53.15 - Number of new listings - Shanghai: 2013 0, 2014 43, 2015 89 - Shenzhen: 2013 0, 2014 82, 2015 130 - Total: 2013 0, 2014 125, 2015 219 - Source: CSRC. - Cross-border trading arrangements: - Prior to November 17, 2014, foreign investors accessed Chinese equities mainly via Hong Kong listings; institutional access to Shanghai and Shenzhen via QFII and RQFII; onshore retail investors via QDII products. - Shanghai-Hong Kong Stock Connect (Stock Connect) implemented mutual market access between Shanghai and Hong Kong using local brokers and clearing houses, within certain volume caps. - Shenzhen-Hong Kong arrangement commenced in December 2016, with no total volume caps. - Trading through these mechanisms is jointly supervised by exchanges and regulators in each jurisdiction. - Secondary market trading and investor composition: - Secondary market trading grew significantly; very significant increase in 2015 with large swings in market prices. - Direct participation by retail investors is very high by international standards; institutional investor participation remains small compared to other large markets — a factor contributing to high market volatility. - Table 2: China: Secondary Market Trading (preserve numbers as presented) - Annual Turnover (RMB billion) - Shanghai: 2013 23,027, 2014 37,563, 2015 132,559 - Shenzhen: 2013 23,846, 2014 36,675, 2015 122,495 - Total: 2013 46,873, 2014 74,239, 2015 255,054 - Average daily trading volume (million contracts) - Shanghai: 2013 1.12, 2014 1.74, 2015 4.17 - Shenzhen: 2013 0.91, 2014 1.26, 2015 2.84 - Total: 2013 2.03, 2014 3.00, 2015 7.01 - Average daily turnover (RMB billion) - Shanghai: 2013 97, 2014 153, 2015 543 - Shenzhen: 2013 100, 2014 150, 2015 502 - Total: 2013 197, 2014 303, 2015 1,045 - Source: CSRC. - NEEQ (“New Third Board”): - Established in 2013 as National Equities Exchange and Quotations (NEEQ) to cater to innovative, entrepreneurial and growth micro, small and medium enterprises (MSMEs). - National platform for transfer and trading of securities subject to CSRC regulation. - Companies in NEEQ may have more than 200 investors but are only allowed to sell shares to qualified investors (experienced investors with at least RMB 5 million in financial assets). Trading in NEEQ restricted to qualified investors. - Issuers subject to disclosure and corporate governance requirements; compliance monitored by NEEQ. - No financial indicators required for NEEQ companies. - As of end-2016: - 10,163 companies were listed on NEEQ. - Market capitalization approximately RMB 4.06 trillion. - NEEQ annual turnover: - RMB 814 million in 2013, - RMB 13,036 million in 2014, - RMB 191,062 million in 2015, - RMB 191.229 million in 2016. - Regional trading platforms: - 40 regional “trading platforms” operate as OTC markets to raise capital and are restricted to qualified investors. - Established mainly pursuant to SC instruments (Guo Fa [2011] No. 38; Guo Ban Fa [2012] No. 37; Guo Ban Fa [2017] No.11). - Each regional platform should only trade companies located in the region. - Companies trading on these platforms cannot engage in a public offering; limited to private placements to qualified investors (cannot have more than 200 shareholders). - Secondary market trading restricted to qualified investors: institutional investors or individuals with more than 500,000 RMB in financial assets per recent SC guidance. - Trading mechanism constraints: - No market-making systems; - No continuous auction or electronic matching capability; - A lapse of 5 days must occur between purchase and sale of the same security. - At the end of 2016: - about 17,400 companies listed on these platforms. - In 2016, companies raised RMB 287.1 billion through various financing activities on the system. - Inter-institutional quotation system: - China Securities Internet System Co., Ltd. (“CSIS”) established February 27, 2013 with CSRC approval and administered by SAC. - CSIS licensed to: - provide quotation, offering, and transfer services for non-publicly offered products; - facilitate exchange of information and interconnection of trading networks in the private market; - provide depository, clearing, settlement, and third-party collateral management services for non-publicly offered products; - provide monitoring and statistical analysis of the private market and advise on the private market and its operations. - CSIS is described as a well-functioning company with growing membership and business operations. ### Market structure — Bond markets - Multilayered bond market: exchange and interbank bond market. - Interbank bond market: - Established after 1997 and regulated by PBoC; OTC market positioned for institutional investors (financial institutions, legal entities, and their financial products). - In 2016, roughly 90 percent of new issuance of bonds originated and traded in the interbank market. - As of December 2016, the inter-bank bond market consisted of debt instruments worth more than 56.3 trillion yuan. - ABS markets: - Incipient and ABS can only be offered to qualified investors. - As of end-2016: - Outstanding ABS issued by banking financial institutions in the interbank bond market stood at RMB 487.8 billion. - Outstanding ABS issued on the exchanges reached RMB 541.9 billion up by 233% year on year. - Table 3. China: Bond Markets (numbers preserved) - Type of bonds — Issuances in 2015 (RMB in billions) — Issuances in first half of 2016 (RMB in billions) - Government securities: 2105.8 — 1367.8 - Local government bonds: 3835.1 — 3575.5 - Central bank bills: 0 — 0 - Financial bonds: 10209.5 — 8838.6 - Of which: Financial bonds issued by the China Development Bank and policy financial bonds: 2605.1 — 2002.4 - Inter-bank certificates of deposit: 5302.4 — 6021.6 - Corporate issuances: 6842.3 — 4329.6 - Of which: Debt-financing instruments of non-financial enterprises: 5432.6 — 2737.2 - Enterprise bonds: 503.1 — 325.7 - Corporate bonds (issued in exchange market): 906.6 — 1256.1 - International bonds: — — 10.6 - Total: 22992.7 — 18111.5 - Source: CSRC. - Local government bonds: - Rapid growth; by end-2016 outstanding volume around RMB 10 trillion, close to the size of the treasury bond market. - MoF guidelines exist for issuance by way of public offering, requiring initial and ongoing disclosure; documents filed with MoF. - Only local government bonds listed in the exchange market could be offered to retail investors; this segment remains small. - Banks and bond product offerings: - Banks can offer a limited number of bond products over the counter, but they cannot be offered to retail investors — only to high net worth individuals. ### Market structure — Futures markets - Exchanges: - Three commodities futures exchanges: Shanghai Futures Exchange, Dalian Commodity Exchange, Zhengzhou Commodity Exchange — trade only commodity-based futures contracts; all mutualized exchanges. - One financial futures exchange: China Financial Futures Exchange (CFFEX) — owned by other commodity futures exchanges and the two stock exchanges; trades only financial futures contracts. - Contracts (as at end-2015): - Commodity futures: 46 commodity futures contracts traded (gold, oil, copper, aluminum, zinc, steel, rubber, rice, corn, soybeans, sugar). - CFFEX: three stock index futures and two Treasury bond futures traded. - Separately, one ETF options contract traded on the Shanghai Stock Exchange. *Source: cr17404 - 8. In general, the mandate of the CSRC covers the regulation and supervision of the (PDF chapter/section).* ### 25. Trading in futures contracts has seen significant growth in recent years. In the ### 25. Trading in futures contracts has seen significant growth in recent years. In the ### Growth and characteristics of futures markets - Chinese futures markets have become the global reference point for the pricing of some commodities. - Market growth most striking in the financial futures market operated by CFFEX, with market demand for an increasing range of new products. - High level of retail participation in futures trading may in part account for market volatility that is sometimes high by international standards. - Contracts in the commodities markets allow physical delivery; in practice physical delivery is low, estimated at 1-3 percent. ### Table 4. China: Future Markets (selected indicators) - Shanghai Futures Exchange (SHFE): - Number of contracts: 242 (2013), 270 (2014), 313 (2015) - Turnover (100 million RMB): 604,167.73 (2013), 632,353.25 (2014), 635,552.63 (2015) - Trading volume (10,000 contracts): 64,247.40 (2013), 84,229.42 (2014), 105,049.41 (2015) - Open positions (10,000 contracts): 209.39 (2013), 239.34 (2014), 385.02 (2015) - Zhengzhou Commodity Exchange (ZCE): - Number of contracts: 183 (2013), 239 (2014), 265 (2015) - Turnover (100 million RMB): 188,978.30 (2013), 232,399.31 (2014), 309,794.68 (2015) - Trading volume (10,000 contracts): 52,524.92 (2013), 67,630.63 (2014), 107,022.37 (2015) - Open positions (10,000 contracts): 199.87 (2013), 262.9 (2014), 247.8 (2015) - Dalian Commodity Exchange (DCE): - Number of contracts: 224 (2013), 303 (2014), 315 (2015) - Turnover (100 million RMB): 471,527.27 (2013), 414,944.32 (2014), 419,359.74 (2015) - Trading volume (10,000 contracts): 70,050.08 (2013), 76,963.70 (2014), 111,632.34 (2015) - Open positions (10,000 contracts): 315.39 (2013), 384 (2014), 532.54 (2015) - China Financial Futures Exchange (CFFEX): - Number of contracts: 20 (2013), 23 (2014), 52 (2015) - Turnover (100 million RMB): 1,410,066.21 (2013), 1,640,169.73 (2014), 4,177,604.71 (2015) - Trading volume (10,000 contracts): 19,354.93 (2013), 21,758.11 (2014), 34,086.93 (2015) - Open positions (10,000 contracts): 12.32 (2013), 23.7 (2014), 12.96 (2015) - Source: CSRC. ### Cross trading - No cross-listing of securities or futures traded on regulated financial markets; products trade on only one market. - Exception: bonds traded on one or other of the stock exchanges and on the interbank bond market, including government and local government bonds, and bonds issued by financial institutions and enterprise bonds. - Trading of bonds on the public markets accounts for a relatively small percentage of overall bond trading (no numeric share provided). ### Investors in the exchanges and futures markets - Retail participation is high; institutional participation is relatively lower than in many other jurisdictions. - Retail investors with less than RMB 500,000 account for well over 90 percent of trading accounts on the stock exchanges, about 80 per cent of trading activity and 35 per cent of market value. - In futures markets: - Retail accounts (accounts held by natural persons) were over 95 per cent of the total as of February 3, 2017. - Retail trading accounts for about 79 per cent of trading (68 per cent in June 2015), and 50 per cent of open interest. - Account counts: - In 2015, almost 215 million stock accounts held by over 99 million investors. - In 2015, 1.268 million futures accounts held by 1.075 million futures investors. - Foreign institutional participation (as of end-June 2016): - 297 QFIIs, combined QFII quota of USD 81.18 billion and QFII assets of RMB 561.103 billion. - 207 RQFIIs, combined RQFII quota of RMB 507.968 billion and RQFII assets of RMB 149.865 billion. ### Asset management services — fund management companies and CIS - As of end-June 2016: - Fund management companies managed 3,115 mutual funds offered to the public, with AUM of RMB 7.95 trillion. - CIS industry relatively small and underdeveloped in product types; bulk of assets in open-end funds, particularly money market funds (MMFs). - MFs experienced important redemption pressures in late 2016 due to stress in bond markets. - Retail participation in CIS (end-June 2016): - Individual investors accounted for 99.96% of the total number of active accounts in open-end funds; institutional investors accounted for 0.04% of accounts. - Individual investors and institutional investors accounted for 46.01% and 53.99%, respectively, of the net value of holdings. - Table 5. China: CIS under the CSRC (end-June 2016): - Close-end: Number of Funds 205; AuM (RM billion) 275.7 - Open-end: Number of Funds 2910; AuM (RM billion) 7,674.2 - Equity funds: 615 funds; AuM 665.5 - Hybrid Funds: 1400 funds; AuM 1,903.7 - Money market: 234 funds; AuM 4,200.9 - Bond Funds: 550 funds; AuM 813.6 - QDII Funds: 11 funds; AuM 90.4 - Total: 3115 funds; AuM 7,949.9 - Source: CSRC. - Additional asset management services: - Total AUM of fund management companies and subsidiaries providing asset management for specific clients was RMB 15.3 trillion (as of June 2016). ### Private funds and AMAC registration - As of end-December 2016: - AMAC had 17,433 private fund managers on its register and records on 46,505 private funds with combined paid-in AUM of RMB 7.89 trillion. - Most private funds are not hedge funds in practice; about 90% of investors in these funds are natural persons (high net worth individuals). - Table 6. Nonpublicly Offered Securities Investment Funds Registered with AMAC: - Private securities investment funds: Number of managers 7,781; Number of funds 27,015; AUM (RMB trillion) 2.77 - Private equity: Number of managers 7,988; Number of funds 15,789; AUM (RMB trillion) 4.32 - Venture capital: Number of managers 1,218; Number of funds 2,143; AUM (RMB trillion) 0.36 - Others: Number of managers 446; Number of funds 1,558; AUM (RMB trillion) 0.44 - Source: CSRC. ### Banks, trust companies, insurance and WMPs - Banks offer asset management services to all types of investors; key component are WMPs. - End-June 2016: 454 banking institutions offering WMPs; total of 68,961 products; total value of WMPs RMB 26.28 trillion. - Of WMP value, products that involve a guarantee of the principal (and in some cases also of return) accounted for 23.2 percent of total value. - Collective products which involve managing a pool of assets for retail clients amounted approximately to RMB 8 trillion in AUM. - Trust companies: - Offer asset management services, especially trust plans, but only to qualified investors. - Collective money trust product limits: may not have more than 50 individual investors whose investment is smaller than RMB 3 million. - As at December 2016 there were 68 trust companies licensed by the CBRC with assets of about RMB 7.34 trillion. - Less than 40 percent of trust assets are held by collective trust products. - Insurance companies and insurance asset management companies: - Offer unit-linked insurance products with protection component; sum insured must be at least 120 percent, 140 percent or 160 percent of premium or account value depending on age profile. - Unit-linked insurance products are on balance-sheet items and regulated under the C-ROSS solvency framework. - Insurance asset management companies’ insurance AUM approximately RMB 13.513.4 trillion as of December 2016. ### Intermediaries: specialized securities intermediaries and other providers - Four types of specialized licenses: securities companies, futures companies, fund management companies and securities and futures investment consultancy firms. - Securities companies are the only intermediaries authorized to engage in “principal” business (proprietary trading, margin trading and securities financing) in regulated and OTC markets. - As of end-June 2016: - Securities companies: 127 (including 2 in preparatory stage); 95 standalone; 30 subsidiaries of securities companies. - Fund management companies: 117 mutual fund managers (104 fund management companies, 12 securities companies or securities asset management companies licensed to manage mutual funds, and 1 insurance asset management company); 79 subsidiaries providing asset management to specific clients. - Futures companies (as of end-2015): 149 futures companies: - All hold licenses for commodity futures brokerage. - 147 hold licenses for financial futures brokerage. - 108 hold licenses for investment consultancy. - 16 hold licenses for fund distribution. - 88 securities companies act as introducing brokers for futures business (as of 2015). - Consultancy firms (as of end-June 2016): 84 securities investment consultancy businesses that hold only a securities investment consultancy license. - Overseas subsidiaries (as of end-2015): - Securities companies: 29 have set up subsidiaries overseas (27 in Hong Kong SAR, 1 in Laos, 1 in Singapore); 3 approved for establishment/acquisition in Hong Kong SAR but not completed. - Fund management companies: 25 set up subsidiaries overseas, all in Hong Kong SAR. - Futures companies: 18 approved to set up 19 overseas subsidiaries (18 in Hong Kong SAR, 1 in the U.S). - Foreign participation in domestic intermediaries (as of end-June 2016): - 11 of the 127 securities companies were joint ventures with foreign investors. - 44 of the 104 fund management companies were joint ventures with foreign investors. - 2 of the 149 futures companies were joint ventures with foreign investors. - Other intermediaries: - Banks can provide asset management, market making and trading of bonds in the interbank bond markets, distribution of funds, custody services (subject to relevant regulators and licenses). Banks are not allowed to invest in equity. - Trust companies provide asset management to qualified investors under CBRC supervision. - Insurance asset management companies provide asset management services exclusively to institutional investors and are subject to CIRC oversight. ### Information services providers and auditors - Credit Rating Agencies (CRAs): - CRAs required to fulfill filing requirements with the PBoC (lead regulator) and to be licensed or recognized by the regulatory authority of the market in which the rated company will issue securities. - As of June 2016 there were 7 CRAs licensed by the CSRC to engage in securities markets services. - Auditors: - Auditors providing services related to securities and futures markets must obtain approval from the CSRC and the MoF. - All auditors must be licensed jointly by the CSRC and the MoF and are subject to CSRC supervision. - As of end-2016 there were 40 audit firms authorized to conduct securities service business in China. ### Preconditions for effective securities regulation — findings and challenges - Company Law: - Considered sound overall; however, it still allows the use of unregistered stock (essentially bearer shares), and companies are not required to maintain a record of the names of holders of unregistered stock, posing challenges to verification of ownership. - SAIC established an Enterprise Information Disclosure Regime (EIDR) in March 2014 creating a database with information on businesses and companies. - Challenge does not apply to companies listed on the exchanges and the NEEQ — shares are dematerialized, registered and deposited at CSDC; China adopts a direct holding system and beneficiary ownership is limited to a few programs including the Stock Connect. - Enterprise Bankruptcy Law: - Contains restructuring procedures to be guided by the courts; out-of-court restructuring procedures are not permitted (issue under consideration by the Supreme People’s Court). - Judicial system and investor rights: - Role of judiciary in effective resolution of disputes is still a challenge; Judiciary has yet to develop more expertise in securities markets matters. - CSRC has developed mechanisms to enhance investor ability to exercise rights: - Investor Services Corporation (CSISC), created in 2014, can support small and medium size investors in bringing civil lawsuits; class action suits not permitted. - CSISC has acted in three lawsuits and implemented a pilot program buying small share packages (100 shares) to exercise shareholder rights and educate shareholders. - CSRC and Supreme People’s Court have taken steps to enhance use of mediation services; mediation agreements reached through notarization, arbitration and the judicial system can apply for compulsory enforcement by the people’s court. - Accounting and auditing standards: - Recognized by the international standard setting body as converged with international standards. - All CPAs are under MoF oversight; auditors for securities and futures markets must obtain CSRC and MoF approval. - Quality of financial disclosure by issuers and of auditing work remains an issue of concern. *Source: CR17404 (CSRC and related authorities, as presented in the assessment).* ### 46. The way the assessors have applied the IOSCO Principles and Methodology vis-à-vis the ### cr17404 - 46. The way the assessors have applied the IOSCO Principles and Methodology vis-à-vis the ### Assessment scope and exclusions (paragraph 46) - Assessment relied on the framework for the CSRC as the main regulator and supervisor of the securities and futures markets, except where the scope of a particular principle demanded a broader approach (Principles 1, 6 and 12). - Participation of other authorities in regulation or supervision of specific components was assessed under the corresponding sectoral principles. - Issuers in scope: - Focus on issuers whose securities are offered to retail investors or traded in platforms open to retail investors (per IOSCO Methodology). - Companies in NEEQ and regional platforms were outside scope because they can only offer securities to qualified investors and trade on platforms restricted to qualified investors. - Issuers that raise funding in the interbank bond market were outside scope because offerings and trading are restricted to institutional investors. - Local governments issuing bonds by public offering were not covered given the market size at time of assessment. - Credit rating agencies (CRAs): - Principle covers rating services in the securities markets as a whole. - Assessment relied mainly on regulation and supervisory program of CRAs subject to CSRC supervision due to overlap among authorized CRA lists. - Collective investment schemes (CIS): - First four Principles for CIS covered products offered to retail investors. - Non-guaranteed wealth management products (WMPs) offered by banks to retail investors were covered under Principles 24-27, along with traditional mutual funds. - Trust plans offered by trust companies and asset management plans by insurance asset management companies were outside scope (offered only to qualified or institutional investors). - Unit-linked insurance products were outside assessment due to significant insurance component preventing full assimilation with CIS. - Hedge funds (HFs): - Assessment focused on private investment securities funds and their managers because only a subset of CIS meet characteristics commonly associated with HFs. - Intermediaries: - Focus on provision of investment services. - Regime applicable to banks in provision of asset management services covered in these Principles, but banks were assessed only under Principle 31 (Basel Core Principles cover licensing, capital and resolution). - Regime applicable to trust companies was outside scope because bulk activities are management and distribution of private funds not meeting HF characteristics. - Secondary markets: - Focus on regulated markets, particularly exchange markets. - NEEQ’s “hybrid” nature recognized; details included in assessment but not considered for grading. - Regional trading platforms were outside scope due to relative importance, inability of companies to do public offerings, trading restricted to qualified investors, and nature of trading mechanisms. - Interbank bond market outside scope as a wholesale OTC market. - NEEQ and NAFMII were not covered in Principles for SROs. ### Holistic market considerations (paragraph 47) - Authorities should keep a holistic view of markets. - Growing importance noted of: - Private offering regime for capital raising including electronic platforms. - OTC markets for trading of equities and bonds as part of a multilayer strategy for capital markets development. - Supervisory efforts should extend beyond products and markets covered in this assessment due to rapid development and evolving nature of many activities and markets. ### Main findings — General Considerations (paragraphs 48–53) - Authorities have a clear vision of capital markets’ role in transforming the economy toward a more market-oriented model; policies adopted to develop different market segments to better serve the real economy. - Market structure characteristics: - Strong direct participation of retail investors in markets by number of accounts and trading volumes. - Institutional investors do not play as significant a role in secondary market trading as in other large jurisdictions. - Limited presence of end-users (hedgers) in futures markets. - Investors are widely dispersed and not accustomed to asserting legal rights; courts lack developed jurisprudence for effective exercise of these rights. - Intermediaries not yet providing the full suite of services necessary for authorities’ capital markets vision. - CSRC regulatory approach: - CSRC has taken a stronger role in market establishment, ensuring quality of companies entering market, and pacing market development and innovation, including timing of new issuers, products and services. - Balancing development and stability has been difficult; challenges stem from market volatility, investor expectations of authorities’ role, and authorities’ concern for social stability. - Need for more market-based solutions combining stronger disclosure and transparency with enhanced public enforcement and private exercise of rights to align incentives and achieve investor protection, fair transparent efficient markets, and financial stability. - CSRC initiatives and progress: - Pilot for exercise of investors’ rights; authority given to CSISC to represent investors; new arrangements to strengthen mediation. - Steps to increase domestic institutional investor participation and to gradually open to foreign institutional investors. - Efforts to develop market intermediaries’ functions, encouraging full range of intermediary services (particularly investment banking) and strengthening monitoring of internal controls and risk management—moving away from brokerage-dominated business models and tightly compartmentalized regulation. - Transition toward market-based solutions to be gradual, accompanied by: - Improvements in market structure, - Strong processes for emerging and systemic risk monitoring, - Robust supervisory and enforcement program, - Strong educational and capacity building programs for all market participants. - Limitations of IOSCO assessment noted: - IOSCO assessment does not judge merits of a development vision or regulator’s role. - Focus on public markets may not capture the full complexity of China’s market. - Methodology reflects judgments at a point in time and may not capture dynamics of rapidly developing markets. - Assessors provided additional comprehensive and forward-looking analysis in detailed assessment. ### Findings by sets of principles (paragraphs 54–60) - Principles for the regulator (para 54): - CSRC has broad mandate to regulate and supervise securities markets; operates with high degree of operational (day-to -day) independence, although under strong strategic direction of the SC. - Certain activities, products and markets (asset management services and bond markets) subject to regulation and supervision by more than one authority. - Authorities working toward harmonized regulations and strengthened coordination/cooperation arrangements. - During the last three years CSRC significantly enhanced tools and processes to identify and monitor systemic risk; authorities working to improve cross-sectoral mechanisms for risk-identification, monitoring and management, though additional steps needed. - CSRC resources have not kept pace with market growth nor expanding mandate; salaries not competitive with industry—poses challenge to delivering intense supervisory and enforcement program required by market with large retail presence. - Principles for self-regulation (para 55): - Exchanges and industry associations have SRO functions assigned by legislation. - SROs have developed supervisory programs; resources seem limited, particularly for industry associations. - Coordination mechanisms being developed to avoid duplication and strengthen complementarity with CSRC supervisory program. - CSRC oversight over exchanges and industry associations via participation in rulemaking, reporting obligations, participation in appointment of key personnel (exchanges) and representatives in key organs (industry associations); increasing use of inspections. - Principles for enforcement (para 56): - CSRC has broad supervisory and investigative powers and can impose administrative measures and sanctions; can refer matters to criminal authorities and has established an office to enhance coordination on criminal matters. - CSRC implemented monitoring and inspection program covering issuers, intermediaries and gatekeepers; coverage should be kept under review. - Recent more vigorous enforcement approach—stronger penalties and bars—still needs time to take hold. - Criminal enforcement is weak and not yet a clear deterrent, although criminal authorities have recently taken steps to enhance pursuit of these crimes; more severe penalties are starting to be applied. - Deficiencies in legal framework, including low level of sanctions for some misconduct, limit authorities’ ability to implement effective enforcement. - CSRC has initiatives aimed at empowering investors to exercise private rights of action. - Principles for cooperation (para 57): - CSRC has legal authority and capacity to share information and cooperate domestically and internationally. - Signatory to many MOUs, including IOSCO Multilateral MOU (MMOU) and bilateral MOUs; record of active cooperation. - Does not require permission of outside authority to share/obtain information nor an independent interest to assist. - Domestic coordination mechanisms developed at policy level; CSRC demonstrates cooperation with other financial authorities. - Principles for issuers (para 58): - Issuance to public subjects issuers to initial disclosure (prospectus) and periodic/ongoing disclosure obligations in line with international practices. - Publicly offered equities must be listed on an exchange. - Financial statements must be prepared according to Accounting Standards for Business Enterprises (ASBE) that have substantially converged with IFRS. - Regime provides safeguards for fair and equitable treatment of holders, including shareholders’ approval of major transactions and information obligations; changes of control subject to full disclosure; prompt notification of holdings by substantial shareholders and insiders required. - Exchanges monitor listed issuers’ compliance with disclosure obligations; CSRC reviews annual reports for compliance with accounting standards and conducts risk-based on-site inspections; NDRC has on-site inspections program. - Principles for auditors, CRAs, and other information service providers (para 59): - MoF is competent authority for CPAs; audit firms providing audit services for securities and futures markets must obtain securities services license jointly issued by CSRC and MoF. - These firms subject to CSRC ongoing supervision mainly through on-site inspections; comprehensive inspections limited due to resource constraints. - PBoC is lead regulator for CRAs; all firms must fulfill record filing procedure regulated by PBoC and obtain license or recognition from regulatory authority of market where rated companies will issue securities. - CSRC regulations require CRAs to observe governance rules addressing quality and integrity of rating process, independence and avoidance of conflicts of interest. - CSRC has robust supervisory program over CRAs including on-site inspections of all CRAs. - Securities analysts subject to rules mitigating conflicts of interest (including disclosure) and are inspected as part of intermediaries’ supervision. - Principles for collective investment schemes (para 60): - Management of funds offered to the public can only be done by fund management companies and other entities authorized by CSRC; licensing requirements are robust. - Funds subject to initial disclosure (prospectus) and periodic/ongoing disclosure obligations in line with international practices. - Fund assets must be held by a separate custodian, which can belong to same group as fund manager. - Legal provisions separate assets of funds from assets of fund manager and custodian, protecting assets in event of their insolvency. - Fund assets must be valued according to ASBE. - Under condition that NAV can fairly reflect portfolio value, MMFs are allowed to use amortized cost and keep a stable NAV. - In extreme market conditions, liquidity risks may arise when investors redeem a large amount of MMF in a short time. - CSRC supervisory program includes off-site monitoring and on-site inspections under a risk-based approach. - Private securities investment funds (including HFs) must register with AMAC and are subject to reporting and an on-site inspection program commensurate to current risk. - Some bank-offered WMPs are retail CIS; banks offering these WMPs are subject to organizational requirements and reporting obligations. - Assets of these WMPs must be held by a custodian but self-custody is permitted; there is legal uncertainty about bankruptcy protection. - WMPs must be issued under a prospectus but requirements are at a high level of generality; banks are allowed to quote expected returns in prospectus and marketing material. - Assets of a WMP must be valued according to ASBE and thus at fair value. - Current regulatory framework for these products does not contain specific provisions setting out minimum standards for subscription and redemption pricing, pricing errors or suspension or deferral of redemption. *Source: cr17404 - 46. The way the assessors have applied the IOSCO Principles and Methodology vis-à-vis the market structure and the structure of financial regulation in China.* ### 61. Principles for market intermediaries. Securities companies, fund management companies ### 61. Principles for market intermediaries. Securities companies, fund management companies and futures companies are subject to licensing by the CSRC. ### Licensing, capital and reporting - Securities companies, fund management companies and futures companies are subject to licensing by the CSRC. - Licensing requirements are described as robust. - Capital requirements need to be adjusted based on the activities and risks undertaken on an on-going basis. - An early warning system is in place, where reporting takes place within 3 days. - The CSRC monitors compliance via a supervisory program of off-site monitoring and on-site inspections that are carried under a risk-based approach. ### Investor protection and compensation - There are robust requirements for the protection of investors’ assets both in the securities and futures markets. - Investor compensation schemes come into play in the event of the insolvency of an intermediary. ### Conduct obligations, suitability and information - Conduct obligations apply, including information and suitability requirements towards clients. - Particular attention in recent years is being paid to issues related to internal controls, as well as suitability and information obligations. ### Internal controls, audits and evaluations - All intermediaries are required to conduct annual evaluations of their internal controls. - An external auditor must also issue an opinion about the adequacy of such controls. - The CSRC’s supervisory program includes on-site inspections under a risk-based approach to assess these controls. ### Failure framework and historical testing - A framework to deal with the failure of firms is in place. - This framework has been tested particularly after the failures that took place in the early 2000s. ### Banks providing asset management services - Banks providing asset management services and products are required to have internal control and supervision systems. - Strong suitability rules apply to banks offering these services. - The CBRC carries out inspections of banks that provide these services, under a risk-based approach. *Source: cr17404 - 61. Principles for market intermediaries. Securities companies, fund management companies and futures companies are subject to licensing by the CSRC.* ### 62. Principles for secondary markets. The constitution of equity and futures exchanges is ### cr17404 - 62. Principles for secondary markets. The constitution of equity and futures exchanges is ### Summary findings on secondary markets structure and supervision - The constitution of equity exchanges is subject to the approval of the SC, upon recommendation of the CSRC; the constitution of futures exchanges is subject to approval of the CSRC. - Robust requirements aim to ensure fair access and reliability of exchange systems, including a requirement of annual IT evaluations for exchanges. - Exchanges are the frontline supervisors for real time surveillance and play a critical role in ex-post monitoring to support the CSRC in identifying unfair trading practices. - All exchanges have developed automated surveillance systems with alert triggers and a reasonable level of resources dedicated to investigation of alerts. - Mechanisms for cross-market surveillance (between equities and futures) have been established, as well as cross-border mechanisms with Stock Connect. - Pre- and post-trade transparency obligations apply to all exchanges, although for one exchange fewer bid/offer details are provided pre-trade than in the other markets. - Current mechanisms to address volatility include price limits; in futures markets they also include margins, transactions fees and position limits. Exchanges can suspend trading as appropriate. - The current market structure, particularly the large and active presence of retail investors, poses challenges to the management of volatility. - Clearing and settlement in both securities and futures markets are conducted via central counterparties (CCPs); mechanisms to manage clearing and settlement risks have been developed and the level of settlement failures is very low. - All exchanges have mechanisms to deal with the default of an intermediary, including clear procedures and a default waterfall. - Only covered short-selling is allowed and disclosure obligations apply. ### Implementation grades for IOSCO Principles (selected extract from Table 7) - Principle 1. The responsibilities of the Regulator should be clear and objectively stated. — PI - Principle 2. The Regulator should be operationally independent and accountable in the exercise of its functions and powers. — PI - Principle 3. The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers. — PI - Principle 4. The Regulator should adopt clear and consistent regulatory processes. — FI - Principle 5. The staff of the Regulator should observe the highest professional standards, including appropriate standards of confidentiality. — BI - Principle 6. The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate. — BI - Principle 7. The Regulator should have or contribute to a process to review the perimeter of regulation regularly. — FI - Principle 8. The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed. — FI - Principle 9. Where the regulatory system makes use of Self-Regulatory Organizations (SROs) … such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality. — BI - Principle 10. The Regulator should have comprehensive inspection, investigation and surveillance powers. — FI - Principle 11. The Regulator should have comprehensive enforcement powers. — BI - Principle 12. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program. — PI - Principle 13. The Regulator should have authority to share both public and nonpublic information with domestic and foreign counterparts. — FI - Principle 14. Regulators should establish information sharing mechanisms that set out when and how they will share both public and nonpublic information with their domestic and foreign counterparts. — FI - Principle 15. The regulatory system should allow for assistance to be provided to foreign Regulators who need to make inquiries … — FI - Principle 16. There should be full, accurate and timely disclosure of financial results, risk and other information that is material to investors’ decisions. — BI - Principle 17. Holders of securities in a company should be treated in a fair and equitable manner. — FI - Principle 18. Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality. — FI - Principle 19. Auditors should be subject to adequate levels of oversight. — BI - Principle 20. Auditors should be independent of the issuing entity that they audit. — FI - Principle 21. Audit standards should be of a high and internationally acceptable quality. — FI - Principle 22. Credit rating agencies should be subject to adequate levels of oversight. — FI - Principle 23. Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market … — FI - Principle 24. The regulatory system should set standards for the eligibility, governance, organization and operational conduct of those who wish to market or operate a CIS. — BI - Principle 25. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets. — PI - Principle 26. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a CIS for a particular investor and the value of the investor’s interest in the scheme. — BI - Principle 27. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a CIS. — PI - Principle 28. Regulation should ensure that hedge funds and/or hedge funds managers/advisers are subject to appropriate oversight. — FI - Principle 29. Regulation should provide for minimum entry standards for market intermediaries. — FI - Principle 30. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake. — FI - Principle 31. Market intermediaries should be required to establish an internal function that delivers compliance … — BI - Principle 32. There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk. — FI - Principle 33. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight. — FI - Principle 34. There should be ongoing regulatory supervision of exchanges and trading systems … — FI - Principle 35. Regulation should promote transparency of trading. — BI - Principle 36. Regulation should be designed to detect and deter manipulation and other unfair trading practices. — FI - Principle 37. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption. — FI ### Key policy recommendations (selected extract from Table 8) - Principle 1 (cross-linkages to Principles 8, 16, 24-27, 28, 31 and 33): - Implement agreements reached in the JMC to develop harmonized regulations for asset management services, allowing differentiation by product type, investor type and systemic importance; consider three regulatory “sets”: (i) CIS offered to retail investors based on IOSCO Principles and Methodology (including considering application of disclosure and conduct obligations of CIS to insurance products with investment components such as unit-linked products), (ii) CIS offered to non-retail with flexibility while enabling monitoring and prudential requirements where necessary (including in the case of HFs), and (iii) regulations for other asset management services (individual and portfolio management and advisory services). - Continue strengthening coordination and cooperation arrangements. - Implement JMC for Bonds agreements to (i) unify issuance criteria and disclosure requirements gradually, (ii) establish coordination mechanisms, (iii) promote cross-market issuance and (iv) engage the CSRC in cross-market enforcement. - Continue work toward a single regulatory regime for CRAs via the draft regulation under consultation and ensure it meets IOSCO Principles and Methodology. - In the medium term, develop harmonized regulations for ABS including strong lifecycle disclosure and retention requirements. - Prioritize development and implementation of a code of conduct and oversight mechanisms for regional equity trading platforms; consider a unified regulatory framework for all non-exchange trading platforms. - Develop regulations for equity crowdfunding and review gaps in online financing regulation. - Consider whether to further strengthen the framework for OTC derivatives transactions. - Finalize drafts for a new Securities Law and a Futures Law. - Consider consolidating current rules/regulations into fewer normative documents for clarity. - Principles 2–3: - Consider providing the CSRC with greater autonomy to decide on the number of staff and to have a separate salary scale to hire and retain qualified personnel. - Consider transferring responsibility for approval of equity exchanges and markets more generally to the CSRC. - Principles 3, 11, 36: - Prioritize review of the legal and regulatory regime for administrative sanctions to increase penalty levels where currently too low and ensure consistent penalties across securities and futures markets. - CSRC should work actively with criminal authorities so criminal sanctions (including imprisonment) provide sufficient deterrence. - Principle 4: - CSRC should monitor implementation of pilot programs to ensure pilots do not create an unleveled playing field and consider additional transparency in selection. - Principle 5: - CSRC should implement a system of prompt notification of any change in holdings of securities by its staff. - Principle 6: - Continue enhancing tools to monitor all markets under CSRC supervision. - Consider expanding the mandate of the stock market crisis group to regularly discuss emerging and systemic risks. - Incorporate market intelligence meetings for systemic risk identification and continue strengthening cross-sectoral data sharing (particularly on asset management and bond markets), standardizing data, and strengthening institutional framework for systemic risk identification. - Principle 7: - Develop a more structured framework for identification of emerging risks considering impact and probability and implement a risk registry. - Principle 8: - Continue attention to governance practices in listed companies and intensify monitoring of OTC equity markets. - Monitor compensation arrangements for intermediaries and their effects on products offered to clients, including in the context of MFs. - Review securitization framework to consider stronger lifecycle disclosure and retention requirements. - Principle 9: - Keep SRO resources under review to ensure sufficient resources for regulatory functions including on-site inspections. - Review whether comprehensive inspections of SROs are needed. - Require SROs to appoint independent members in decision-making and disciplinary bodies. - Principle 10: - Eliminate the legal authority of corporations to issue unregistered stock. - Principle 11: - Consider changes to strengthen CSRC legal backing to request testimony from third parties and ISP records and tools to make powers effective, review powers to freeze assets, and ensure these powers can assist foreign regulators. - Continue work to address challenges preventing investors from effectively exercising rights in courts, including exploring class action systems and changes in burden of proof. - Continue implementing the multilayer system of mediation. - Principle 12: - Give priority to securities markets offenses in current criminal enforcement. - Keep enforcement strategy under monitoring to ensure appropriate use of administrative sanctions (monetary penalties and bans), including for breaches of business conduct obligations such as suitability rules. - Principles 12, 16, 24, 31: - Keep intensity of issuer monitoring and intermediary supervision under review and calibrate as needed. - Enhance theme identification framework and develop a similar framework for futures companies and fund management companies. - Principles 14–15: - Shorten time required to answer requests for foreign assistance, particularly where information collection is required. - Principle 16: - Shorten deadlines for submission of annual financial statements at least for larger companies. - Consider a package of measures to strengthen disclosure’s role in investment decisions: (i) strengthen corporate governance of issuers, (ii) ensure gatekeepers comply with responsibilities, (iii) enhance investors’ ability to exercise rights, and (v) foster additional institutional investor participation. - Principle 17: - Consider requiring longer notice periods for shareholder meetings for important matters requiring a two third’s majority. - Principle 19: - Expand use of comprehensive inspections for supervision of auditors and explore creation of an independent oversight body for auditors in the financial sector. - Principle 23: - Review whether adjustments are needed to current rules for futures analysts and provide more guidance on conflict situations for securities analysis disclosure. - Principle 24: - CSRC and CBRC should keep intensity of CIS supervision under review and ensure appropriate use of full range of enforcement actions. - Principle 25: - CSRC and CBRC should consider requiring fully independent custodians or introduce additional measures to protect investors when self-custody or related-party custodians are used, including enhanced reporting and supervision. - CBRC and relevant authorities should consider provisions to ensure WMP assets are protected if the issuing bank becomes insolvent. - Principle 26: - CSRC should require updated or replacement prospectuses for significant changes in a fund’s circumstances and consider requiring a simplified information document in addition to the prospectus. - CBRC should prohibit use of expected return information in non-guaranteed collective WMPs offered to retail investors and require WMP offer documents to disclose valuation methodology, redemption and pricing arrangements, custodial arrangements and financial information; review prospectus content guidance and material events disclosure. - Principle 27: - CSRC should monitor implementation of the new MMF framework to assess sufficiency of changes. - CBRC should establish minimum standards for subscription and redemption pricing, pricing errors, suspension/deferral of redemptions, and reporting obligations for suspensions or deferrals. - Principle 28: - CSRC in coordination with AMAC should continue monitoring the HF industry and consider differentiated regulation if large, systemically important funds emerge (including transfer of registration to CSRC, additional reporting and more intense on-site supervision). - Other authorities should continue monitoring non-retail asset management activity for systemic risk. - Principles 30, 31: - CSRC is encouraged to consider more prompt notification requirements for capital deficiencies in securities companies. - CSRC and CBRC should keep supervision intensity under review and ensure appropriate use of enforcement actions. - Principles 33, 37: - CSRC is encouraged to enhance monitoring of the NEEQ market. - As part of PFMI assessment on CCPs, CSRC is encouraged to review whether intraday margin is needed for clearing members and whether recalibration of initial margins is warranted. - Principle 35: - CSRC should review current transparency requirements for exchanges and ensure an appropriate level of pre-trade transparency applies to all of them. *Source: IMF staff assessment text (Table 7 and Table 8 excerpts) as provided in the supplied content.* ### 63. The CSRC is highly committed to the FSAP exercise and views the IOSCO Principles assessment ### The CSRC is highly committed to the FSAP exercise and views the IOSCO Principles assessment ### Regulatory progress since China’s first FSAP (paragraphs 64–65) - Since China’s first FSAP in 2009, the CSRC has taken real actions on the assessment recommendations and achieved significant progress in many areas identified for action. - Areas of progress highlighted: - Continued development of China’s multi-tiered capital markets to support national development strategies and the real economy. - Enhanced communication and coordination on financial regulatory policies under the Joint-Ministerial Conference (JMC) spearheaded by the PBoC. - Strengthened regulation of listed companies and intermediaries by raising quality standards for listed companies and requirements for intermediaries in regard to risk management and internal control. - Improved mechanism for risk monitoring, surveillance and contingency response in capital markets. - Forceful action against violations and misconduct to provide effective protection for investors’ legitimate rights and interests. - Steady expansion of two-way opening-up of China’s capital markets. - Establishment of a database on the integrity record of market participants and promotion of the use of information technology in regulation. - The assessment report acknowledges that the regulatory framework is largely compliant with the IOSCO Principles and recognizes authorities’ efforts to mitigate risks, deepen reforms, and promote development since the first FSAP. - The report notes that China’s innovative approaches to investor protection and market surveillance could serve as a reference for other jurisdictions, while also identifying some specific challenges at the current stage. ### Key recommendations from the assessment report (paragraph 66) - Recommendations listed in the report include: - Increase regulatory resources. - Strengthen regulatory coordination and information sharing. - Improve governance practices of listed companies. - Strengthen regulators’ investigation and enforcement powers. - Increase the intensity of supervision on capital market gatekeepers. - Consider creating an independent authority for audit oversight. - Bolster the risk management function of the futures market. - Explore differentiated regulation of hedge funds. - The CSRC states these recommendations align with its philosophy of pursuing law-based, comprehensive, and strict regulation and will be of great value when strengthening the legal and regulatory framework. ### CSRC clarifications and responses to specific issues (paragraph 67) - Harmonized regulation of like products: - Under the leadership of the PBoC, financial regulators have reached important consensus on harmonizing regulation of asset management products and services and are developing unified regulatory rules. - The CSRC will, under the guidance of the Financial Stability and Development Commission (FSDC) of the State Council, continue to enhance regulatory coordination to eliminate supervisory shortfalls, prevent financial risks, and safeguard national financial security and the sound development of the capital markets. - Use of criminal enforcement: - Over the past few years, the CSRC has strengthened cooperation with judicial authorities to impose stricter criminal sanctions against securities crimes. - Synergies are created through coordinated administrative and criminal investigations to ensure timely information sharing between securities regulators and public security authorities. - The police force has established specialized offices targeted on criminal offenses in the securities and futures markets. - The CSRC will continue to assist China’s legislature to expand the scope of applicability and increase the level of sanctions of the Criminal Law with regard to securities crimes. - Information disclosure by listed companies: - The CSRC has employed a disclosure-focused supervisory regime and steadily raised the transparency of listed companies. - Next steps: analyze recommendations on expanding the coverage of periodic report review, shortening deadlines for submitting annual reports and extending the notice period for ad hoc shareholder meetings in light of China’s situation. - Preventing conflicts of interest for CSRC staff: - The Securities Law prohibits the CSRC staff from holding or trading stocks. - In practice, the CSRC has set out more stringent requirements, e.g., disallowing the staff to open securities accounts, eliminating the possibility for them to hold, let alone trade bonds on the stock exchanges. - The CSRC has issued specific rules to regulate the trading of securities investment funds by its staff; such rules have proved effective in maintaining high standards of integrity and preventing conflicts of interest. ### Forward-looking commitments and reform strategy (paragraph 68) - The CSRC believes the report’s recommendations will: - Facilitate future plans of the regulators. - Foster consensus among regulators, legislators and other stakeholders to create a positive environment for reform and development of the capital markets. - The CSRC commits to: - Apply international standards to China’s particular circumstances and capital markets. - Stick to a market-oriented and law-based reform path with a global vision. - Accelerate formation of multi-tiered capital markets featuring a full range of financing functions, sound underlying structures, an effective regulatory regime and adequate investor protection. - Enable markets to better support China’s real economy and become more resilient to financial risks. ### Purpose and scope of the IOSCO Principles assessment (paragraph 69) - The assessment’s primary purpose: - Ascertain whether the legal and regulatory securities markets requirements of the country and the operations of the securities regulatory authorities in implementing and enforcing these requirements in practice meet the standards set out in the IOSCO Principles. - The assessment is intended to: - Identify potential gaps, inconsistencies, weaknesses and areas where further powers and/or better implementation of the existing framework may be necessary. - Serve as a basis for establishing priorities for improvements to the current regulatory scheme. *Source: cr17404 - 63. The CSRC is highly committed to the FSAP exercise and views the IOSCO Principles assessment* ### 70. The assessment of the country’s observance of each individual Principle is made by assigning ### 70. The assessment of the country’s observance of each individual Principle is made by assigning to it one of the following assessment categories ### Assessment categories and methodology - Assessment categories: fully implemented, broadly implemented, partly implemented, not implemented, not applicable. - The IOSCO assessment methodology provides assessment criteria for each Principle to achieve designated benchmarks. - Methodology recognizes variation in means of implementation depending on domestic context, market structure, and stage of development. ### Principles for the Regulator — Principle 1: The responsibilities of the regulator should be clear and objectively stated (Mandate) - Sectoral regulatory structure: - Securities industry regulated by the China Securities Regulatory Commission (CSRC). - Banking industry and trust company industry regulated by the China Banking Regulatory Commission (CBRC). - Insurance industry regulated by the China Insurance Regulatory Commission (CIRC). - CSRC mandate and functions (as established by law, Securities Law, Securities Investment Fund Law, Regulations on the Administration of Futures Trading): - Authorizes the public offering of securities and funds. - Licenses all categories of intermediaries except private fund managers (private fund managers register with AMAC). - Licenses futures markets and other market infrastructure providers; licensing of equity markets falls to the State Council (SC) on recommendation of the CSRC. - Licenses information service providers, including credit rating agencies and auditors in securities and futures markets. - Rulemaking authority and day-to-day supervision of participants; investigative and administrative enforcement authority; can impose administrative measures and sanctions including money penalties. - Criminal enforcement handled by criminal authorities with CSRC and the Criminal Enforcement Bureau of the Ministry of Public Security assisting investigations. - Self-regulatory organizations (SROs) and industry associations: - Exchanges have listing authority; monitor listed companies’ compliance and conduct market surveillance. - Three industry associations: SAC, CFA, and AMAC. Membership mandatory for securities companies (SAC), futures companies (CFA), and managers of private securities investment funds (AMAC registration). - Industry associations: develop/administer practitioner qualification systems and develop/monitor industry rules that provide granularity to CSRC regulations. - CSRC retains licensing authority over all intermediaries and has supervisory programs; SRO programs complement CSRC programs. - Private securities investment funds: registration with AMAC; CSRC retains regulatory powers and has its own supervisory program. - CSRC coordination with SROs: multiple mechanisms to coordinate supervisory plans and exercise oversight (further explained in Principle 9). ### Capacity to interpret laws and regulations - CSRC power to develop rules within authority granted by the Securities Law, the Fund Law and the Legislation Law. - CSRC’s Regulations on the Procedures for Formulation of Securities and Futures Laws set procedures for developing CSRC rules and normative documents. - CSRC issues opinions on application of securities laws (mainly Q&A) available on CSRC website. - Interpretation of administrative regulations is responsibility of the Legal Affairs Office of the SC. ### Securities market activities or products subject to more than one regulator — Key cases - Asset management services (three regimes): - (i) Regime for individual and collective portfolio management and advisory services by intermediaries under CSRC. - (ii) Regime for banks and trust companies administered by CBRC (banks can offer asset management services to retail investors). - (iii) Regime for asset management plans by insurance asset management companies administered by CIRC (plans offered only to institutional investors; mainly used by insurance companies). - Bonds — three regimes: - (i) Corporate bonds issued to the public must be listed on exchanges; subject to CSRC regulation and exchange listing rules. - (ii) Bonds/debt instruments issued strictly to institutional investors in the interbank bond market; PBoC competent authority; NAFMII self-regulation for non-financial corporations’ debt instruments subject to PBoC oversight. - (iii) Enterprise bonds issued for specific projects; issuance subject to NDRC regulation and supervision; may be traded on exchanges or in the interbank market. - Asset-backed securities (ABS): - PBoC and CBRC share regulation responsibilities of credit asset securitization; CSRC regulates enterprise asset securitization. - Asset backed notes registered/issued through NAFMII and subject to NAFMII self-regulation. - Credit rating services: - PBoC lead regulatory agency; firms must fulfill record filing procedures regulated by PBoC. - Firms must obtain a license or recognition from the regulatory authority of the market in which rated companies would issue securities. - 2016 draft: PBoC, CSRC and NDRC jointly drafted the Provisional Regulation for the Credit Rating Industry to promote unified access standards (draft sent to public for comments). ### Perimeter of regulation issues and Internet finance - Circulars in 2015: ten regulatory authorities issued Guideline on Promoting the Healthy Development of Internet Finance; allocated peer-to-peer lending regulation to CBRC and equity crowdfunding to CSRC (Yin Fa [2015] No. 221). - CBRC has developed the framework for peer-to-peer lending; concerns remain about financing activities that do not fit peer-to-peer definitions and need further regulation. - CSRC created a working group to review equity crowdfunding; pilot programs within CSRC scope have not started. ### Coordination and cooperation — institutional mechanisms and activity - Financial Coordination and Regulatory Group (FCRG): - Established in 2008; chaired by the Vice Premier of the SC in charge of financial sector. - Includes PBoC, SAFE, NDRC, MoF, CSRC, CBRC, CIRC. - Topics chosen based on financial system developments; PBoC prepares financial stability reports with input from three Commissions, MoF and NDRC as necessary. - Met 10 times in 2015; met 7 times in 2016 (as of assessment time). - Financial Regulatory Coordination Joint Ministerial Conference (JMC): - Approved in 2013 by the SC to strengthen coordination of financial regulation. - Comprises PBoC, CSRC, CBRC, CIRC, SAFE; as necessary NDRC and MoF participate. - Functions include harmonization of monetary and regulatory policies; coordination of cross-sectoral products and innovations; information sharing and statistics; maintenance of financial stability. - JMC is a coordinating body; does not alter regulatory decision-making responsibilities among member agencies; decisions made by consensus and major cross-sectoral proposals sent to the SC for approval. - Chaired by governor of PBoC; PBoC holds secretariat and leads agenda preparation though all members can submit topics. - Since establishment convened eight times and dealt with over 2O topics. - JMC focused on cross-sectoral issues (internet finance, asset management); current financial stability conditions are not a standing agenda item but considered when explicitly included. - CSRC support to PBoC and JMC efforts: - Provided monthly data on financing activities in capital markets and assisted collection of Total Social Financing statistics. - Worked with PBoC on Statistical Framework for Bonds and submission of exchange-traded bonds data. - Supporting pilot program of integrated statistics for the financial sector with CBRC and CIRC. - Assisted PBoC in sharing credit information and credit product information arising from securities and futures regulation/supervision. - Set up a dedicated transmission line for data sharing between PBoC and CSRC. - JMC for Bonds: - Established in 2012 upon SC approval; comprises PBoC, NDRC, CSRC; led by PBoC. - Duties: promote reform/development of corporate credit bond market; harmonize and improve issuance, trading and disclosure rules; draft development strategy and policy; strengthen supervision coordination; establish information sharing for comprehensive market risk monitoring. - Holds meetings on a "need" basis; met five times to date. November meeting reached consensus on key points to harmonize issuance criteria and disclosure requirements, promote cross-market issuance, and engage CSRC in cross-market enforcement. - PBoC collects monthly information from all regulators on bond issuances, trading and defaults to facilitate oversight. - Memoranda of Understanding (MoUs): - CBRC-CSRC-CIRC MoU signed in 2004: establishes five guiding principles for Commissions (separate supervision, understand mandates, collaborate/coordinate, make operating rules/public, efficiency and anti-corruption) and commits them to cooperate with MoF and PBoC. - Bilateral MoU between CBRC and CSRC for data sharing on stock dominant securities investment trust products and equity pledge financing. ### Assessment outcome for Principle 1 - Assessment: Partly Implemented - Comments and rationale: - Challenges related to Key Questions KQ 2(a), 2(b) and 2(d) due to activities subject to multiple regulators and perimeter of regulation issues — these factors were considered in the grade. - Multiple regulatory regimes for materially similar products can affect investor protection, market liquidity, and authorities’ ability to monitor systemic risk. - Assessors recommend prioritizing implementation of JMC agreements to harmonize regimes, recognizing possible differentiation by product nature, investor type, and systemic relevance. - Specific recommendations and observations: - Asset management services: - Current regimes and supervisory programs broadly compliant but with material gaps. - Differences in regimes for CIS offered to retail investors create opportunities for regulatory arbitrage and can negatively impact investor protection and systemic risk monitoring. - Recommendation: prioritize JMC agreements toward a harmonized regime; consider three sets of regulations: - (i) one for CIS offered to retail investors, - (ii) one for CIS offered to non-retail investors (with further distinction based on systemic relevance), - (iii) one for other asset management activities (individual portfolio management and advisory services). - Bonds: - Public market regime found compliant with Principles. - Recommendation: work on harmonized regulatory regime allowing investor-based differentiation; strengthen coordination including enforcement for investor protection, efficient markets, and oversight. - Credit Rating Agencies (CRAs): - CSRC framework compliant; other regulations more high-level. - Recommendation: implement unified regulations for CRAs and strengthen supervision; leverage JMC for Bonds for coordination. - Asset-backed securities (ABS): - ABS markets at an early stage; potential systemic importance noted. - Recommendation: develop harmonized regulations with strong disclosure obligations, retention requirements, and standardization to align incentives and minimize regulatory arbitrage. - Regional equity trading platforms: - Can expand capital markets for small companies; if improperly set up, can pose investor protection and confidence risks. - Notice on Supervising and Developing Regional Equity Markets issued January 2017; CSRC issued Trial Measures in May 2017 (implemented after mission; not evaluated by assessors). - Recommendation: ensure swift enforcement against fraud; consider long-run development of a single regulatory regime for all non-exchange trading platforms with operational criteria and differentiation by size, importance, and investor access. - Internet financing: - Need for clarity on regulatory framework for different forms of Internet financing. - Recommendation: CSRC prioritize work on equity crowdfunding; financial authorities should review online financing regulation for gaps. - Legal and regulatory framework updates: - Need for more detailed legal framework for futures; updates to Securities Law to account for crowdfunding and other developments. - Administrative and criminal enforcement frameworks for securities and futures need strengthening (discussed further in Principles 3 and 11). - Recommendation: finalize work to update Securities Law and develop a Futures Law; consider prioritizing administrative and criminal enforcement updates. - Anticipatory recommendation: review whether enhancements are needed regarding OTC derivatives transactions in light of Methodology changes. - Consider consolidation of the significant number of rules and regulations plus SRO rules to improve clarity. - Developmental role of CSRC: - IOSCO Principles do not address a developmental role; many regulators in emerging markets have such roles. - In China, CSRC has taken a stronger role in market establishment, quality control of issuers, and pacing development/innovation (timing of new issues, products, services). - Such approach has posed challenges balancing development and stability due to market volatility and investor expectations; assessors note need to move toward more market-based solutions combining stronger disclosure/transparency with enhanced public enforcement and private exercise of rights. - Authorities have signaled intention to move in this direction and steps are underway. ### Principle 2: The regulator should be operationally independent and accountable in the exercise of its functions and powers — Description (Independence, Governance) - CSRC establishment and governance: - Established October 1992 as a ministry-level government agency directly under the State Council (SC); accountable to SC. - In 2006, CSRC approved to be governed under the Civil Servant Law of the PRC. - No administrative affiliation with other SC departments or organizations directly under SC. - CSRC leadership and tenure: - Main governing body: the Chairman (Ministerial rank), supported by four Vice-Chairmen and two Assistant Chairmen. - Chairman responsible for all matters; Vice-Chairmen and Assistant Chairmen oversee day-to-day operations of specific departments. - Senior officials cannot hold positions in regulated entities. - Civil Servants Law article 9: civil servants have rights including protection from removal/demotion/dismissal without due cause and legal procedures. - Separate rules govern appointment, dismissal and tenure of senior officials: - “Rules on the Selection and Appointment of Party and Government Officials” and “Provisional Rules on the Tenure of Party and Government Officials”. - Senior officials have 5-year terms, renewable once. - Reasons for not completing full term include reaching retirement age, health reasons, considered unsuitable for current position, resignation (voluntary or involuntary), deposition, and special needs for reassignment. - Appointments and dismissals formalized by letters issued by the SC and publicly disclosed pursuant to the Civil Servants Law. - Strategic direction: - SC exercises strategic direction on capital markets development and regulation/supervision via issuance of opinions (e.g., Opinion of the SC on Further Enhancing the Protection of Small Investors’ Rights and Interests, 2013; Opinion of the SC on the Healthy Development of the Capital Markets). *Italic: Source — cr17404 (PDF chapter/section).* ### 2014. CSRC strategic priorities are driven by such opinions. CSRC staff highlighted that the ### Governance, Resources and Operational Independence of the CSRC ### Organizational accountability and legal framework - CSRC is directly under the supervision of the State Council (SC); SC issues Opinions that drive CSRC mid- to long-term priorities. - CSRC exercises day-to-day operations (approval of public offerings, licensing of intermediaries, supervision including on-site inspections, and imposition of administrative measures and sanctions) without the need for external approval. - Licensing of securities exchanges is responsibility of the SC, although a recommendation of the CSRC is required; CSRC decisions are subject to reconsideration by the SC via the administrative reconsideration procedure. - CSRC can issue administrative rules; formulation does not require other departments' approval but is subject to consultation procedures (Principle 4). - Assessment (Principle 2): Partly Implemented. ### Key procedural safeguards and transparency - CSRC discloses on its website: organizational structure, rules and normative documents, development plans and reports, statistics, administrative licensing details, listings approved for exchanges, approvals and records of articles of association and self-regulatory rules, licensed institutions’ names/addresses, decisions on market bars/penalties/reconsideration, and other legally required disclosures. - Procedural fairness requirements: - Licensing: written decisions required; reasons for disapproval (Provisions of the CSRC on the Procedures for Implementation of Administrative Licensing; Administrative Licensing Law). - Enforcement: written decisions for administrative penalties with facts, reasons and legal basis (Administrative Penalty Law). - Inspections: CSRC must present letter of inspection/investigation (article 181 Securities Law). - Opportunity to be heard: hearings available for licensing and administrative penalties (Administrative Licensing Law; Administrative Penalty Law). - Internal checks and balances: double-check system for licensing; expert committees (“Public Offering Review Committee”, “M&A and Restructuring Committee”); separation of investigation and hearing functions; Administrative Sanctions Committee; joint approval for complex compulsory measures. - Review and remedies: - Administrative reconsideration available (Administrative Reconsideration Law); applicants may also initiate administrative litigation (Administrative Litigation Law). - CSRC has independent department for reconsideration; Administrative Reconsideration Committee for complex cases; SC Legal Affairs Office conducts final rulings when appealed to SC. - 2015 example: CSRC made 117 administrative reconsideration decisions; 4 were brought to SC; SC affirmed CSRC’s decisions in all 4 cases. ### Confidentiality and protection against suits - Legal protection for staff performing bona fide functions: state compensation regime (Opinions of the Supreme People’s Court; State Compensation Law). - CSRC and other organs must safeguard state secrets, trade secrets, and privacy under Securities Law, Fund Law, Regulations on the Administration of Futures Trading, State Secrets Law and implementing rules, and CSRC confidentiality measures. - Article 12 of CBRC-CSRC-CIRC MOU: recipient of information must follow confidentiality principle; information only for supervisory purposes. *Source: CSRC.* --- ### Funding, Staffing and Capacity ### Budgeting and staffing constraints - CSRC is funded by the general budget of the government; supervision fees are paid directly into the national Treasury. - Article 32 of the Budget Law (PRC) requires annual budgets submitted to the MoF; CSRC budget is finalized by the MoF. - In practice CSRC budget largely based on historical spending; additional central government funding provided for specific projects. - Example: for 2017 a decrease of 5% was applied to the budget of all departments and thus affected the CSRC budget. - CSRC staff quota subject to Civil Servants Law; quota has been relatively “frozen” for 7 years: from 3338 in 2009 to 3455 in 2016. Changes in CSRC structure require approval of an administrative organ of the SC. ### Market growth vs staff evolution (exact figures preserved) - Number of listed companies: 2009 = 1,718; 2015 = 2,827. - Market capitalization: 2009 = 3.67 trillion; 2015 = 53.15 trillion. - NEEQ (created 2013): by 2016 had 10,163 listed companies. - Assets under management by fund management companies: 2009 = 0.4 trillion; (by 2015) = 12.42 trillion. - Securities companies: number grew from 106 to 125, with assets of 6.4177 trillion. - CSRC staff indicated current staffing level has mainly affected workload per person. ### CSRC staffing statistics and turnover - As of December 2015 CSRC had 3097 staff, average age 36 years. - Training in 2015: orientation training 176 person-times; on-job training 35 person-times; pre-appointment training 80 person-times; overseas training 61 person-times; special business training 2,606 person-times; aggregate 3,386 person-times = 51% of total staff. - Staff departures: example given—100 staff left the institution in the last year referenced. - Hiring constraint: staff can be hired only one time in the year. - Salary context: CSRC staff salaries subject to civil service pay scale; internal system links a small part of salary to performance; salaries have modestly increased but a wide gap remains between CSRC and industry salaries (of about 10 times), affecting recruitment/retention, particularly at higher levels. ### Organizational footprint - CSRC central office functions: preparing market development plans; formulating/amending regulations; approvals for public offerings and licenses; coordinating risk prevention; organizing investigations and enforcement; investor protection planning. - Central office staff as of December 2015: 730. - CSRC has 38 regional offices; regional offices are frontline supervisors, e.g., Shanghai office had 167 staff and Shenzhen 113 staff as of December 2016. - CSRC staff table (exact numbers): - Staff 2013 2014 2015 - HQ 797 769 730 - Regional branches 2386 2398 2367 - Total 3183 3,167 3097 ### Assessment and recommendations (Principle 3) - Assessment: Partly Implemented. - Key capacity concerns: - Staff quota system and civil service salary scale limit ability to keep pace with market growth and complexity. - High turnover and inability to match industry salaries impede recruitment and retention of expert staff. - Recommendation: consider granting greater autonomy to CSRC on staffing numbers and a separate salary scale to recruit/retain expert staff and support systemic risk capabilities. - Additional operational constraint: current framework for administrative sanctions contains deficiencies (see Principle 11) that limit enforcement effectiveness; some fines are low and sanctions for similar misconduct differ across securities and futures markets. --- ### Rulemaking, Pilots and Regulatory Processes ### Rulemaking and consultation procedures - Rulemaking statutory basis: Legislation Law article 67; Regulations on the Procedures for Formulation of Administrative Regulations articles 19 and 22; Regulations on the Procedures for Formulation of Rules articles 14 and 15. - CSRC issued: Regulations on the Procedures for Formulation of Securities and Futures Rules and Tentative Rules on Soliciting Public Comments on Drafts of Securities and Futures Regulations. - Rulemaking phases: project initiation, drafting, review, decision, promulgation. Consultation includes stakeholders and public consultation via CSRC website and Legal Affairs Office website; CSRC provides an email for comments and must prepare a special report summarizing how comments were considered. - All rules, including those with “trial”, “pilot” or “interim” in their names, are fully implementable and remain in force until repealed; solicitation obligation applies equally. ### Use of pilots and eligibility - Pilot approach widely used for significant regulatory changes and innovation; experience from pilots informs broader application. - Example pilots: - Risk indicators on a consolidated basis (pilot). - Margin trading and securities lending pilot launched in 2010: initial 6 firms, second round +5 firms, third round +14 firms; became routine business open to all firms in October 2011. - Eligibility requirements for pilot securities companies (Guidelines for Business (or Product) Innovation by Securities Companies (for Trial Implementation)): - maintain sufficient capital and met requirements for all risk control indicators within the most recent two years; - well-developed risk management/internal control/compliance rules; - no major sanctions within the most recent two years and no major regulatory measures within the most recent one year; - information system safe and stable with no major incidents within the most recent year; - other necessary prudential requirements. - Since 2015 CSRC requires ex-ante formulation of self-regulatory guidelines/rules for pilots that involve innovative businesses/products expanding beyond current authorizations. ### Transparency and selection for pilots - For CSRC-initiated pilots CSRC publishes list of pilot securities companies after evaluation. - For firm-initiated pilots CSRC informs the applying securities company of results of discussions. - CSRC publishes all legal documents and interpretative documents via “Information Disclosure” section on CSRC website and CSRC Announcements. - Assessment (Principle 4): Fully Implemented. - Comment: assessors encourage CSRC to consider publishing negative pilot selection decisions and reasons to enhance transparency. --- ### Staff Conduct, Conflicts of Interest and Confidentiality ### Conflict of interest rules - Civil Servants Law articles 53, 68, 70 and 102: prohibit bribery and require recusal; establish cooling-off periods. - Cooling-off period: three years after resignation if staff held a leading position at the regulator; two years for other positions. - Securities-specific prohibitions: - Holding positions in regulated entities: article 187 Securities Law; article 118 Fund Law — CSRC staff may not take positions in supervised institutions. - Taking benefits from regulated entities: Articles 15–17 Code of Conduct for the Staff of CSRC prohibit taking bribes or benefits. - Cooling-off requirements expanded to three years for mid-level positions in CSRC regulations. - Trading in securities: article 43 Securities Law; article 25 Regulation on the Administration of Futures Trading prohibit CSRC staff members and their immediate family from holding and trading stocks and futures; prior holdings must be divested. Prohibition does not cover bonds or mutual funds. - Declaration of assets: annual declarations required for director level up; holdings of securities included; signed off by person one level higher. ### Confidentiality obligations and sanctions - Confidentiality obligations: article 182 Securities Law; article 114 Fund Law; article 63 Regulations on the Administration of Futures Trading require staff to keep trade secrets confidential. - CSRC Code of Conduct Articles 19–21: prohibit unauthorized inquiry or disclosure of confidential information; prohibit disclosure of inside information or trade secrets; public statements must be truthful and objective. - Legal/administrative sanctions: - Article 199 Securities Law and 69 Regulations on the Administration of Futures Trading: apply to persons who breach prohibition on holding/trading shares — confiscation of illegal gains and a fine; for civil servants also administrative penalty. - Article 202: violations of non-disclosure/use of inside information — divestment of illegally held securities, confiscation of illegal gains, and fine of no less than RMB 30,000 but no more than RMB 300,000; CSRC employees must receive heavier punishment under this article. - Article 228: CSRC employee failing to discharge duties, abusing power, dereliction, seeking unlawful gains, or disclosing commercial secrets must be held liable according to law. - Investigative procedures: provided in Securities Law, Administrative Penalty Law, Administrative Supervision Law, Civil Servants Law, State Council Regulations on Complaint Reporting, Regulations on the Punishment of Civil Servants of Administrative Organs, Code of Conduct for CSRC staff, and CPC Regulation on Disciplinary Actions. - CSRC reported cases where staff were indicted on corruption and received criminal penalties in addition to administrative dismissal. ### Assessment (Principle 5) - Assessment: Broadly Implemented. - Comment and recommendation: - Framework robust for integrity and conflict avoidance, but regime limitations exist regarding securities transactions (bonds excluded) and lack of prompt notification by all staff. - Recommend implementing a prompt notification system for all CSRC staff. --- ### Systemic Risk Monitoring and Cross-Sector Coordination ### Tools and indicators - CSRC developed multi-level systemic risk monitoring and early warning indicators at four levels: - Indicators for systemically important institutions (SIFIs): credit risk, liquidity risk, general business risk, operational risks. CSRC view: intermediaries currently small and dispersed, with no institutions of real systemic importance. - Indicators for financial market infrastructure providers and CCPs: operational risks, settlement reserves, margins, settlement risk funds. - Market indicators: liquidity, volatility, investor behavior, investor sentiment, contagion, transparency, innovative areas. Futures-specific: (i) investor structure, (ii) futures-spot correlation, (iii) delivery risk indicators. - Bond market indicators: (i) fluctuation in bond market indices, (ii) inventory and trading data for spot transactions and pledged repos in exchange-based bond market, (iii) benchmarks for cost of capital including interbank overnight and 7-day repo rates, SSE overnight and 7-day repo rates, and (iv) leverage focusing on leverage ratio of exchange-traded pledged repos. - Macroeconomic indicators: domestic and overseas issues; monitoring frequency daily/weekly/monthly/quarterly/semi-annual/annual as feasible. - Heat indicator for stock market: 5-degree category system = too hot, hot, mild, cold, too cold; synthesizes vulnerabilities, liquidity, market sentiment into one grade to trigger tiered response plans. - Stress testing: - SAC annual stress tests for securities firms since 2011. - CFMMC stress tests for futures companies since 2008 (negative margin balance scenarios). - Fund management industry stress tests for money market funds liquidity. - CSRC conducted two rounds of stress tests: end of 2015 and early 2016 for key players and industry as a whole. ### Data integration and institutions - CMSMC (Capital Market Statistics & Monitoring Center Co., Ltd.) created September 2012 under CSRC to collect market/macro data and identify/assess capital market risks. - Central Regulatory Information Platform being implemented to aggregate/sharing lifecycle transaction data across cash and futures markets and regulated entities; platform managed by CMSMC. - Universal identification number implemented for investors across all markets (cash and futures). - CSRC set standards for data submission by exchanges; pilot underway with securities companies to overhaul data transmission mechanisms. ### Cross-regulatory coordination - Financial regulators coordinate via FCRG (Financial Crisis Response Group) / JMC and SC for systemic risk discussions. - Data sharing improvements: - Monthly shared data on stock, bond (including data from various regulators), and futures markets. - Quarterly shared data on securities intermediaries. - Asset management: CSRC and CBRC share monthly data on stock-dominant securities investment trust products (scale, quantity, portfolio composition, single-account and umbrella-structured products, average leverage ratio). Data on insurance companies’ asset management products not yet shared regularly. - Working group of JMC exploring unified identification code for all asset management products in China. - PBoC collects consolidated bond market data across regulators on issuances, trading and defaults. ### Institutional arrangements and meetings - Steering committee on stock market risk chairs quarterly; includes CSRC executive team and relevant departments and affiliated institutions (SSE, SZSE, CMSMC); minutes taken. - Recommendation: consider expanding mandate of steering committee to cover emerging and systemic risks across other markets; add market intelligence meetings; continue strengthening cross-sectoral data sharing and standardization. ### Assessment (Principle 6) - Assessment: Broadly Implemented. - Comment: good progress and some leading practices; critical need to secure additional qualified staff and standardize/expand data sharing, especially for asset management and bond markets. --- ### Regulatory Perimeter and Emerging Issues ### Processes to review perimeter - CSRC uses supervisory processes, risk tools, thematic meetings, chairman working conferences, and the steering committee to identify issues requiring perimeter adjustments. - Annual statewide meetings with regional bureaus and annual review of supervisory/enforcement program inform perimeter work. - Implementation Outline for Building a Government Ruled by Law (2015-2020) requires periodic evaluation of rules; CSRC Notice (CSRC General Office [2016] No. 69) launched pilot program for Post-Legislation Evaluation of Securities and Futures Rules and Normative Documents; pilot to start with Department of Listed Company Supervision and Department of Fund and Intermediary Supervision. ### Handling innovations and cross-jurisdiction issues - Approaches: - SRO-issued rules later incorporated into CSRC rules when mature (example: new prudential framework for securities companies). - Pilot programs to test regulatory changes before wider application (see Principle 4). - Organizational restructuring to address new issues (e.g., combining securities firms and fund management firms in one department; creation of department on anti-market misconduct). - Cross-authority issues elevated to JMC and SC (example: 2015 joint guideline on internet financing by ten authorities). - Legal changes: draft new Securities Law advanced; passed first reading of the Standing Committee of the NPC and being revised; second reading due in December 2016 per legislative schedule. Draft Futures Law in second draft; CSRC working with Legislative Affairs Office on Interim Provisions on Administration of Private Investment Funds revisions. ### Assessment (Principle 7) - Assessment: Fully Implemented. - Comment: assessors encourage development of a more structured framework to discuss emerging risks (e.g., risk registry) and highlight value of post-legislation evaluation system. --- ### Conflicts of Interest in Regulated Entities ### Requirements and supervision - Regulated entities required to establish mechanisms to identify, monitor and mitigate conflicts of interest: intermediaries (Principles 24 and 31), auditors (Principle 20), credit rating agencies (Principle 22), sell-side analysts (Principle 23), and SROs (Principle 9). - CSRC reviews conflict-of-interest policies at licensing and on an ongoing supervisory basis; administrative measures and sanctions available for non-compliance (see Principle 11). - Issuers: disclosure to shareholders/public and shareholder approval for major transactions; related party transactions require shareholder approval. On-site inspections emphasize corporate governance (Principle 18). - Securitization: CSRC and CBRC frameworks restrict offerings to qualified investors; CSRC uses negative list for asset eligibility; prospectus required and filed with AMAC; ongoing information obligations exist; retention requirements not imposed under CSRC but sponsors often hold an “equity” tranche in practice; CBRC imposes retention requirements. ### Assessment (Principle 8) - Assessment: Fully Implemented. - Comments: - Authorities should continue monitoring corporate governance of listed companies and the OTC markets. - Monitor intermediary compensation practices and research analysis independence; monitor fees and commissions in mutual fund industry. - Encourage reviewing securitization frameworks for consistent regulation across regimes, stronger lifecycle disclosure possibly with standardized templates, and consideration of retention requirements. --- ### Self-Regulatory Organizations (SROs) and Oversight ### Types and roles - CSRC supported by 19 affiliated institutions including exchanges, NEEQ, industry associations (SAC, CFA, AMAC), CSDC, SIPF, CSF, CFMMC, CMSMC, CIFCM, CSITS, CSISC. - Two main types of SROs: - Market institutions: stock exchanges, futures exchanges, CSDC. - Industry associations: SAC (securities), CFA (futures), AMAC (fund management). ### Market institutions’ obligations and powers - Stock exchanges: - Obligations under Securities Law: ensure fair centralized trading (Article 113), real-time monitoring and disclosure supervision (Article 115). - Membership limited to exchange members; Membership Management Rules set admission criteria; extensive exchange rules (listing, membership, trading, investor suitability). - Exchanges can take regulatory action against members for rule breaches. - CSDC: - Measures for the Administration of Securities Registration and Clearing require CSDC to establish eligibility rules for participation; rules on account management, clearing participants, trustee services for corporate bonds. - CSDC can impose penalties under Measures and its own rules. - Futures exchanges: - Futures exchanges adopt self-regulatory model under Regulations on the Administration of Futures Trading; obliged to make rules and supervise trading and members (Article 10). - Measures for the Administration of Futures Exchanges require membership qualification, management rules, and approval for membership; exchanges have extensive self-regulatory rules and disciplinary powers. *Source: CSRC.* ### Chapter IX of the Securities Law for the securities industry association (SAC); Chapter V of the ### cr17404 - Chapter IX of the Securities Law for the securities industry association (SAC); Chapter V of the Regulations on the Administration of Futures Trading for the futures industry association (CFA); and Chapter XII of the Fund Law for the fund association (AMAC) ### Industry associations: mandate and core functions - Membership in an industry association is mandatory for securities companies, futures companies, fund management institutions and custodians. - Industry associations described: SAC (securities), CFA (futures), AMAC (funds). All are non-profit organizations established under relevant laws and the Regulations on the Administration of the Registration of Public Organizations. - Professional qualifications system: - Industry associations establish and administer arrangements for professional qualifications, including setting minimum standards and administering examinations (Article 176 of the Securities Law; Article 112 of the Fund Law; Article 46 of the Regulations on the Administration of Futures Trading). - AMAC examination pass rate: less than 50%. - Rulemaking: - Associations adopt and enforce disciplinary rules; consult with CSRC, members, relevant exchanges (for SAC and CFA) and the public. - Some rules directly mandated by CSRC; others developed by associations in consultation with CSRC (example: SAC rules for OTC market intermediaries requiring reporting of all OTC transactions). - Once approved or filed with CSRC, associations provide training on rules. ### Supervisory, inspection and disciplinary functions of associations - Supervisory powers: - Constitutions and rules grant power to supervise and conduct inspections of members. - Associations conduct routine off-site monitoring and develop annual inspection plans that are generally risk-based. - SAC thematic inspections: - 7 thematic inspections in 2014 (covering 129 members) - 9 in 2015 (106 members) - 4 in 2016 (59 members) - CFA expectation: cover all firms within 3-4 years, with self-inspections by the firm every 2 years; annually selects a sample of 30-40 firms. - AMAC inspections: - 10 inspections in 2104 (sic as in source) - 34 in 2015 - 20 in 2016 - Inspections focus on compliance with SRO rules; CSRC inspections focus on CSRC rules. - Disciplinary measures available under associations’ constitutions and rules: - Minor: interviews, warnings, rectifications. - More serious: criticisms, public censure, temporary suspension, revoke of membership. - SAC disciplinary activity (examples): - 2014: 21 self-regulatory matters and 14 disciplinary cases - 2015: 36 SR matters and 36 disciplinary cases - 2016: 17 SR matters and 9 disciplinary cases ### Capacity, staffing and resource observations - Staff levels (absolute numbers preserved): - SAC: 100 staff - AMAC: 130 staff - CFA: 60 staff - Associations sometimes use outside experts (lawyers, accountants) for functions such as on-site inspections; AMAC particularly reliant on external experts and is in the process of hiring additional staff. - Assessors’ observations: - Staff of industry associations, particularly AMAC, are small relative to the size of memberships. - Current level of resources dedicated to on-site inspections is limited; associations focus on compliance with SRO rules rather than CSRC-administered laws and regulations. - Assessors recommend CSRC consider the value of a more expansive inspection program by industry associations and assess additional resource needs. - Assessors encourage consideration of “full integration” of SRO rules with public rules for supervision to leverage SRO rules in improving market standards. ### Governance, governance involvement by CSRC, and conflict mitigation - Governance structure: - Members’ general assembly is the supreme organ; board of directors is the decision-making body; constitutions set rights and obligations for the general assembly, board of directors, board of supervisors. - CSRC involvement: - CSRC appoints non-member directors on boards (varies by institution), nominates chairman and vice-chairman for exchanges, and is represented on disciplinary committees in most cases. - For exchanges and industry associations: - Non-member directors must not exceed one fifth of total number of directors for SAC and AMAC. - For CFA: non-member directors must not exceed a fourth of total number of directors; special members (four futures exchanges and China Futures Margin Monitoring Center) are ex-officio directors. - Measures to avoid anti-competitive situations: - Exchanges, CSDC and industry associations must seek market comments when developing/revising business rules; CSRC analyses whether rules create anti-competitive situations. - Assessors’ governance recommendations: - Consider strengthening independence of disciplinary processes (for example, committees comprised of a majority of independent persons (non-members) and making committees, rather than boards, responsible for imposing sanctions). - Consider requirement for dual board for SRO functions with majority independent members if SROs are given stronger roles over time. - Consider replacing CSRC-nominated representatives with appointment of additional independent members in key bodies over the long run. ### CSRC oversight of market institutions and industry associations - Rule approval and filing: - Exchanges’ rules and any amendments must be approved by the CSRC (Article 118 of the Securities Law; Article 10 of the Regulations on the Administration of Futures Trading). - Industry association rules must be filed with CSRC; major rules require ex-ante CSRC approval while others follow a filing procedure allowing CSRC review for legal/regulatory compliance. - Some association rules (e.g., CFA rules for futures practitioners) must be submitted to CSRC for approval (Measures for the Administration of Futures Practitioners). - Supervision layers for industry associations: - Ministry of Civil Affairs supervises structure, finances and internal organization as public organizations. - Board of supervisors for general oversight and checks and balances. - CSRC guides and supervises activities via governance participation, rulemaking involvement, reporting obligations, and on-site inspections. - Coordination examples: - CSRC organized coordinated on-site inspections with SSE, SZE, SAC and AMAC in 2015 and 2016 covering corporate bond issuers, intermediaries, asset-backed securities issuers and credit rating agencies. - Assessors’ oversight recommendations: - For market institutions: consider whether comprehensive baseline inspections would be beneficial (stock exchanges) given recent commencement of CSRC on-site inspections in 2016. - For industry associations: consider whether a formal program of inspections by CSRC supervisory teams is needed; consider replacing CSRC representatives with additional independent members in industry association bodies over time. ### Professional standards, confidentiality and conflicts of interest - Professional standards & confidentiality specifics: - Staff of stock exchanges and CSDC must recuse where they or relatives are interested parties (Article 119 of the Securities Law). - Exchanges, securities companies and CSDC must keep client accounts confidential (Article 44 of the Securities Law). - Measures for the Administration of Stock Exchanges require confidentiality of instruction information, transaction records and clearing documents. - CSRC and related staff prohibited from disclosing trade secrets and required to safeguard state secrets (Article 182 of the Securities Law; Articles 59 and 63 of the Regulations on the Administration of Futures Trading). - SAC, AMAC and CFA require staff to follow professional standards and maintain confidentiality; explicit rules on procedural fairness (right to present evidence, right of appeal) in disciplinary processes. - Exchange staff prohibited from trading in products listed on the exchanges. - Conflicts of interest observations: - Dual roles of SROs (member representation and monitoring/enforcement) create potential conflicts. - Mitigating factors: SROs are non-profit; CSRC supervision and representation in governance and disciplinary structures. ### Enforcement powers and implementation (Principles 10–12) - CSRC inspection and evidence powers: - Inspection powers derive from: - Article 180 of the Securities Law - Article 113 of the Fund Law - Article 47 of the Regulations on the Administration of Futures Trading - Article 31 of the Interim Measures for the Supervision and Administration of Private Investment Funds - Generally, CSRC rules require 5 working days’ notice before on-site inspections, but CSRC may inspect without prior notice; unannounced inspections permitted by law. - Recordkeeping obligations (periods preserved exactly): - For most intermediaries: not less than 20 years (Article 147 of the Securities Law; Article 51 of the Measures for the Supervision and Administration of Futures Companies; Article 19 and 36 of the Fund Law; Article 37 of the Measures for the Administration of Stock Exchanges; Article 162 for securities registration and clearing institutions). - Fund distributors: 15 years (article 32 of the Guidelines on Internal Control of Distributors for Securities Investment Funds). - Private Investment Funds, private fund managers, private fund custodians and private fund distributors: 10 years (article 26 of the Interim Measures on the Administration and Supervision of Private Funds). - Anti-Money Laundering: client identity/transaction information kept at least 5 years after termination (Article 19 of the Law of the People’s Republic of China on Anti-Money Laundering). - CSRC enforcement powers (investigation, freezing, trading restrictions): - Investigation and punishment authority: Articles 179 of the Securities Law and 112 of the Fund Law. - Investigative powers include entering premises, questioning parties, accessing property registrations and communication records, accessing and copying transaction records and financial information, sealing documents, checking and freezing funds/accounts with approval of principal person-in-charge. - Trading restriction powers during investigation: - May restrict trading of securities by party involved up to 15 trading days; if complex, extension of another 15 trading days for cash markets and funds or 30 days for futures markets (statutory provisions). - CSRC Measures for the Implementation of Restrictions on the Purchase and Sales of Securities set detailed procedures (application forms, legal department review, CSRC leadership approval; exchanges/CSD/clearing institutions and banks effect restrictions/freezes). - Administrative measures and sanctions: - Regulatory measures: orders to correct, warnings, interviews, suspensions of regulated activities for a period of time; included in integrity records; used for lower-level normative violations. - Administrative sanctions: confiscation of illegal gains, money penalties (fines), revocation of business license, market entry bans; individual sanctions include fines and bars. - Fines ranges preserved exactly as presented: - Minimum ranges for some violations: 10,000 to 100,000 yuan - Maximum ranges for some violations: 300,000 to 3,000,000 yuan - Responsible individuals within entities: minimum 10,000 to 50,000 yuan; maximum 50,000 to 500,000 yuan (examples cited) - For some misconduct, sanction range established as percentage of funds raised: 1% to 5%. - Administrative sanction procedures: - Circular on Further Enhancing the Administrative Penalty Mechanism: investigation and punishment assigned to different departments; cases referred to Administrative Sanction Committee for judgment. - Administrative Sanction Committee composition: 14 full-time members supported by the Office of the Administrative Sanction Committee. - Circuit review groups established in 2015 in Shanghai and Shenzhen. - Public Internet-based inquiry platform for dishonesty records launched; regulatory measures not included in public database. - Private rights and investor remedies: - Civil compensation provisions: Articles 69, 76, 77 and 79 of the Securities Law; Article 232 of the Securities Law prioritizes civil compensation over fines where property insufficient. - Supreme People’s Court requires an administrative sanction by CSRC as prerequisite to admit civil suit related to fraudulent offers (authorities researching feasibility of eliminating condition). - CSRC and Supreme People’s Court joint Notice (May 2016) implementing a Pilot Program of a Multi-Dimensional Dispute Resolution Mechanism; mediation agreements via notarization/arbitration/judicial system can apply for compulsory enforcement by people’s court. - CSISC (established 2011) can assist small and medium investors in initiating civil lawsuits (Article 15 of the Civil Procedure Law); two cases entered court hearing phase. - No class actions permitted; CSISC “Shareholding for Voting” pilot: purchase of 100 shares to exercise shareholder rights as an educational and governance tool. ### Enforcement resources, outcomes and assessors’ observations - CSRC enforcement staff numbers (as of July 2016): - Total enforcement staff: 640 - Enforcement Bureau: 36 - Enforcement Task Force: 145 - Regional offices: 459 (including 63 in Shanghai Commissioner Office and 60 in Shenzhen Commissioner Office) - Securities Crimes Investigation Bureau (SCIB) located in CSRC offices: 30 in CSRC’s central office and 120 in the three largest regional offices. - Enforcement activity highlights: - 2015 enforcement activity: - Enforcement Bureau accepted 723 valid clues; launched new investigations on 345 cases (increase of 68% from 2014). - CSRC imposed international travel restrictions on 288 suspected wrongdoers. - Froze RMB 3.751 billion of funds involved in cases. - Referred, reviewed, or imposed sanctions with respect to 273 cases. - 2015 thematic enforcement campaigns: 8 rounds; resulted in 120 major cases: - 12 transferred to police - 71 transferred for administrative penalties - 5 for parallel administrative and criminal investigations - 2015 enforcement outputs: - Imposed administrative penalties or pre-notifications to 767 institutions and individuals; associated fines and disgorgements totaling over RMB 5.4 billion (more than 1.5 times combined amount during previous decade). - Concluded 196 cases, imposed 177 administrative penalties, and made 11 market entry bans. - Disgorgements and fines in 2015: RMB 1.1 billion (134 percent year-on-year increase). - 73 hearings held in 2015. - CSRC concluded administrative sanction cases table (preserve years and numbers): - Type of Violation — FY 2013 — FY 2014 — FY 2015 — FY 2016 - Disclosure violation — 23 — 36 — 47 — 44 - Insider trading — 51 — 69 — 64 — 54 - Market manipulation — 8 — 15 — 18 — 24 - Other — 4 — 43 — 67 — 59 - Total — 86 — 163 — 196 — 189 - CSRC Penalties table (preserve values): - Fiscal Year — Administrative Penalties (number) — Market Entry Bans (number) — Disgorgements and Fines (RMB million) - 2013 — 79 — 21 — 728 - 2014 — 158 — 18 — 470 - 2015 — 177 — 11 — 1,100 - 2016 — 221 — 21 — 4,286 - Criminal enforcement process and observations: - CSRC refers cases meeting criteria to SCIB; SCIB conducts informal review; joint meeting between SCIB and CSRC Enforcement Bureau and Administrative Sanctions Committee decides formal referral. - SCIB has broad investigative powers (including telephone tapping). - Referral thresholds example for insider trading cases: illegal proceeds at least RMB 150,000; or transaction size at least RMB 500,000; or evidence of repeated conduct. - Typical time to processing criminal referrals to judgment: 350 to more than 1,000 days. - In 2015-2016 CSRC referred 129 clues to Public Security Authorities: - 89 still under investigation - 12 have had a judicial decision - 7 pending a court decision - Court judgments available during 2015-2016 for 23 securities and futures criminal cases: - Principal offenders from 9 cases sentenced to a combined 37 years in prison - 14 cases sentenced to a term of probation - Assessors’ grading and concerns: - Principle 10 (inspection, investigation, surveillance powers): Assessment — Fully Implemented. - Principle 11 (comprehensive enforcement powers): Assessment — Broadly Implemented. Main challenge relates to KQ 2(b) of the Methodology and deficiencies in the framework for imposition of administrative penalties. - Principle 12 (effective and credible use of powers): Assessment — Partly Implemented. Main challenge relates to effectiveness of enforcement (KQ 9). - Key assessor concerns: - Effectiveness and intensity of enforcement: number and severity of criminal sanctions appear low relative to market size; probation frequent; enforcement deterrence could be strengthened. - Sanction levels for certain misconduct prescribed by law can be low (legacy issues for futures markets). - Need to consider legal framework changes to strengthen CSRC’s ability to compel testimony from third parties, obtain records from telephone companies and internet service providers, and expand freeze-of-assets provisions (especially given enhanced MMoU expectations). - Recommendation to continuously monitor enforcement mix and coordinate with government and prosecutorial authorities to remove obstacles to effective criminal law use in securities markets. ### Cooperation and information sharing (Principles 13–15) - Legal basis for domestic and international information sharing: - Article 185 of the Securities Law and Article 63 of the Regulations on the Administration of Futures Trading: mechanisms for sharing regulatory and supervisory information with domestic financial regulators and support from governmental departments. - Article 179 of the Securities Law and Article 66 of the Regulations on the Administration of Futures Trading: authority to establish arrangements with foreign securities and futures regulators for supervisory cooperation. - Neither statutory scheme requires approval by other bodies to establish mechanisms nor limits the type of information CSRC can share. - Scope of shareable information includes: - Investigation and enforcement matters; licensing and authorization determinations; surveillance; market conditions and events; client identification including beneficial ownership; regulated entities; listed companies and listing applicants; bank and brokerage account records sufficient to reconstruct transactions. - CSRC cooperation practice and mechanisms: - CSRC signatory to IOSCO MMOU since April 2007. - CSRC has signed 63 bilateral MOUs on regulatory cooperation with regulators from 58 countries and regions. - From 1 January 2007 to 30 June 2016: CSRC handled 697 requests for investigation assistance under IOSCO MMOU and bilateral MOUs; 639 responses completed. Hong Kong SFC accounted for 547 requests. - Typical response times reported by CSRC: - Regulatory information: 1-2 months - Assistance requests: 2-3 months - Information for litigation purposes: 4-5 months - Audit working papers: average 6.5 months - Confidentiality and practice: - Legislative confidentiality obligations: Law of the PRC on Guarding State Secrets; Rules on the Scope of State Secrets in the Regulation of Securities and Futures; Article 182 of the Securities Law; Articles 59 and 63 of the Regulations on the Administration of Futures Trading. - CSRC Department of International Affairs (Office of Hong Kong, Macao and Taiwan Affairs) handles liaison for overseas regulator requests. - Request handling workflow: enforcement/investigation requests to Enforcement Bureau and regional offices; regulatory/licensing requests to functional departments; internal approval required (international affairs department for regulatory information; office of the chairman for investigation cases). - If information may be used in judicial proceedings: Enforcement Bureau is involved and Ministry of Justice and Ministry of Foreign Affairs may be consulted. - Assessors’ grading and recommendations: - Principle 13: Assessment — Fully Implemented. IOSCO determination that Chinese legal framework for international cooperation meets IOSCO MMoU requirements. - Principle 14: Assessment — Fully Implemented. CSRC has mechanisms to share public and non-public information and protections for confidentiality; assessors recommend continued efforts to shorten response times and may require additional resources. - Principle 15: Assessment — Fully Implemented. CSRC can provide assistance to foreign regulators (including contemporaneous records, transaction reconstruction, beneficial ownership of legal persons) and can freeze certain assets by administrative order in certain circumstances; assessors reiterate recommendations to strengthen CSRC authority to compel information from third parties and expand freeze powers in line with enhanced MMoU. ### Issuers and disclosure framework (Principle 16) - Public offerings and listings: - Public offerings and listings regulated by Securities Law (Chapters II and III), CSRC departmental rules, measures and standards, and exchange listing rules. - China adopts a merit-based system for public offerings: Article 10 of the Securities Law requires public offerings to be reported to CSRC for examination and approval prior to the offering. - Public offering definitions include: - Offerings to unidentified offerees. - Offerings cumulatively to more than 200 identified offerees. - Offerings prescribed by law or administrative regulation as public offerings. - Article 39: publicly issued shares, corporate bonds and other securities required to be listed on a stock exchange or other authorized trading venue. - Exchanges with listing venues: SSE and SZE. - Bonds: - “Big public offering” (to general public including retail investors): must be “AAA’ rated. - “Small public offerings” (to qualified investors only): need to be rated but no minimum rating required; both regimes are considered public offerings under Chinese framework and observe same disclosure requirements. - In practice most issuers choose “small public offering”; retail investor proportion in corporate bond market: less than 1% (market predominantly institutional). - Disclosure requirements: - Issuers of publicly offered shares, convertible bonds, and corporate bonds subject to: - Prospectus at offering - Annual and semi-annual reporting - Material events disclosure - Equity issuers also required to submit quarterly reports. - Prospectus obligations: - Articles 12 and 14 of the Securities Law: application for CSRC approval must be submitted with stipulated application documents including prospectus. - Article 85 of the Companies Law: promoters making a public offering to establish a joint stock limited company must publish a prospectus. - Article 134 of the Companies Law: company making a public offering of new shares must publish a prospectus and financial reports. *Italic: IMF staff report text as provided in the source content unit.* ### Chapter 2 of the Securities Issuance Measures for GEB and Articles 17 and 18 of the Corporate Bonds Measures. ### Chapter 2 of the Securities Issuance Measures for GEB and Articles 17 and 18 of the Corporate Bonds Measures. ### Prospectus requirements for IPOs, secondary offerings, and corporate bonds - IPO Measures and GEB IPO Measures require issuers to publish a prospectus prepared in accordance with requirements set by the CSRC. - Prospectus must conform, at a minimum, with disclosure standards issued by the CSRC (including Disclosure Standards No. 1 – Prospectus and Disclosure Standards No. 28 – Prospectus of GEB-Listed Companies). - Required prospectus content includes, inter alia: information about the offering, risk factors, information about the issuer, its business and its management, its competitors and related party transactions, its financial statements, management discussion and analysis, and the intended use of the proceeds from the offering. - Disclosure requirement: "information that would have a material influence on an investor’s investment decision must be disclosed." - Prospectus effectiveness and financial statement age: - The prospectus is effective for six months from the date on which it was last signed by the issuer’s directors, supervisors and senior management personnel. - Financial statements disclosed in a prospectus must not be more than six months old as at the date of issuance of the prospectus. - Under special circumstances the issuer may apply for an extension of up to one month. - For secondary public offerings by listed companies, the Securities Issuance Measures and the Securities Issuance Measures for GEB require publication of a prospectus on the same terms. - Corporate Bonds Measures and Companies Law require corporate bond issuers to publish a prospectus in accordance with stipulated disclosure standards (including Disclosure Standards No. 23 – Prospectus for Public Offerings of Corporate Bonds). - Corporate bond prospectus required content includes, inter alia: information about the offering and the issuer, risk factors, credit rating of the bond, financial statements, the intended use of the proceeds and information about the bond trustee. - Prospectus effectiveness for corporate bonds: - The prospectus is effective for six months from the date on which it was last signed by the issuer’s directors, supervisors and senior management personnel. - Financial statements disclosed in a prospectus must not be more than six months old as at the date of issuance of the prospectus. - Under special circumstances the issuer may apply for an extension of up to one month. ### Distribution and publication of prospectuses - Pre-review disclosure: - Under Article 21 of the Securities Law and Article 13 of the Information Disclosure Measures, after CSRC has accepted an application for approval of a public offering of shares but before review by the Public Offering Review Committee, the issuer must disclose its draft prospectus on the CSRC’s official website. - IPO Measures and GEB IPO Measures allow the issuer to also publish the draft prospectus on its company website no earlier than publication on the CSRC’s website. - Post-approval publication: - Article 25 and Article 64 of the Securities Law require the issuer to publish the relevant prospectus before making the public offering and make documents available for public reference at a designated place. - IPO Measures require, for stock exchange listings, publication of an extract in at least one CSRC-designated newspaper or magazine and posting the full prospectus on a CSRC-designated website; prospectus must be available for public perusal at issuer office, exchange office, sponsor and underwriters. - GEB IPO Measures require publishing the prospectus on a CSRC-designated website and simultaneously publishing a notification in a CSRC-designated newspaper or magazine informing the public of the website address; issuer must publish on its own website no earlier than CSRC website and print media. - Securities Issuance Measures and Securities Issuance Measures for GEB require listed companies to publish prospectus on a CSRC-designated website and make available at CSRC-designated venues; extract in print required for stock exchange listings. - Corporate Bonds Measures require issuers to publish all required information (including prospectuses) on the website of the venue where bonds will be traded and in at least one CSRC-designated newspaper or magazine; publication must occur before the offering. ### Advertising and promotion restrictions - Between acceptance of an application and CSRC approval, issuer and any connected party are prohibited from promoting the public offering through advertising, presentations or other means. - When promotion is permitted, neither the issuer nor connected parties may exaggerate merits, use fraudulent advertising, or disclose information beyond that already made public by the prospectus. ### Periodic reporting requirements - Legal basis: Chapter III Section 3 of the Securities Law, CSRC departmental rules, measures and standards, and listing rules of the exchanges. - Annual reports: - Under Article 66 of the Securities Law, listed companies and companies whose bonds are listed must publish an annual report within four months following the end of each financial year. - Information required (pursuant to the Information Disclosure Measures): - (1) Information on the fundamentals of the company; - (2) Major accounting data and financial indicators; - (3) Information on the issuance of and changes to the shares and bonds of the company, including the total value of shares and bonds, the total number of shareholders and the number of shares held by each of the ten largest shareholders as at the end of the reporting period; - (4) Information regarding the persons who hold 5% or more of the shares of the company, the company’s controlling shareholders and de facto controllers; - (5) Information on the engagement or employment status of directors, supervisors and senior managers, changes to their shareholdings and their annual compensation; - (6) Board of directors’ report; - (7) Management’s discussions and analyses; - (8) Information on material events during the reporting period and their impact on the company; - (9) Full text of the financial statements and audit report; and - (10) Other information stipulated by the CSRC. - Annual report must disclose all information that would have a major influence on investors’ investment decisions. - Issuers of corporate bonds listed on the two stock exchanges must publish annual reports within four months following the end of each financial year; required content includes audited financial statements and detailed bond-related information (use of proceeds, follow-up credit rating, credit enhancements, repayment and interest payment situation, execution of guarantees, default risk, bond holders’ meetings, conflicts of interest faced by trustee and mitigation measures, major litigation impacting timely payment, and other legally required information). - Semi-annual reports: - Article 65 of the Securities Law requires publication within two months following the end of the first half of the financial year. - Corporate Bonds Measures require issuers of public bonds to issue semi-annual reports until maturity of the bonds. - Semi-annual reports must include financial statements for the relevant period (need not be audited). - Listing rules of the stock exchanges require semi-annual reports within two months following the end of the first half of the financial year. - Quarterly reports: - Required to be published within one month following the end of the third and ninth months of the financial year. - Quarterly reports must include key accounting data and financial indicators for the relevant period (need not be audited). - Corporate bond issuers that are not listed companies are not required to publish quarterly reports. ### Disclosure of material events and timelines - Article 67 of the Securities Law requires immediate ad hoc reporting and public disclosure of major events that may have a considerable impact on the share price, explaining causes, current status and possible legal consequences; Information Disclosure Measures provides an extensive but non-exclusive list and disclosure timeframes. - Article 45 of the Corporate Bonds Measures requires timely disclosure of major events that may impact the solvency of the issuer or the price of bonds before maturity and provides a non-exhaustive list of such events. - Stock exchange listing rules require timely disclosure of major events impacting solvency or bond price and any information with major impact on investment decisions. - Where rules refer to "timely", timely is defined as within two trading days. ### Disclosure for shareholder voting decisions - Article 102 of the Companies Law: a shareholders’ meeting must not adopt any resolution not explicitly stated in the notice. - Shanghai and Shenzhen Listing Rules require notice of general meeting to disclose full details of all proposals and to disclose on the exchange’s website or designated website other materials essential for shareholders to make reasonable judgments. ### Responsibility for information disclosure — criminal, administrative, civil liabilities and sanctions - Criminal liabilities: - Article 160 of the Criminal Law: issuing shares or bonds by concealing important facts or falsifying major information in prospectus etc., where the amount involved is huge and consequences are serious, or other serious circumstances, is punishable by fixed-term imprisonment of not more than five years or criminal detention and also, or only, a fine not less than 1% but not more than 5% of the funds illegally raised. - Legal persons committing that crime shall be fined; persons directly in charge and other persons directly responsible shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention. - Article 161 of the Criminal Law: submitting false financial and accounting reports or reports concealing important facts causing serious harm leads to fixed-term imprisonment of not more than three years or criminal detention and also, or only, a fine not less than RMB 20,000 but not more than RMB 200,000 for persons directly in charge and other directly responsible persons. - Administrative penalties: - Article 63 of the Securities Law requires disclosure to be truthful, accurate and complete and not contain false records, misleading statements or major omissions. - Information Disclosure Measures and Corporate Bonds Measures require directors, supervisors and senior management personnel to ensure disclosure is truthful, accurate, complete, timely and fair. - Article 193 of the Securities Law: issuers or other parties failing to comply or disclosing false/misleading reports are liable to a warning and a fine between RMB 300,000 and RMB 600,000 by the CSRC; management or directly responsible personnel liable to a warning and a fine between RMB 30,000 and RMB 300,000. Where contravention arises from instructions by a controlling shareholder or de facto controller, that controlling shareholder or de facto controller is also liable for the same penalties. - Article 59 of the Information Disclosure Measures: CSRC may issue warnings, put non-compliance on public records and declare the individual unsuitable to serve in position; similar powers under Corporate Bonds Measures. - Sponsorship Measures: sponsors submitting sponsorship-related documents containing false records, misleading statements or major omissions, or abetting such submission, may have sponsorship qualifications suspended or revoked; implicated individual representatives may have representative qualifications suspended or revoked. - CSRC may terminate review and ban applicants from submitting new public offering applications within 36 months where application documents contain false records, misleading statements or major omissions. - Professionals (auditors, lawyers, valuation agents) issuing reports/opinions containing false records, misleading statements or major omissions are banned from submitting any document to CSRC for public offering applications within 36 months while their firms are banned for 12 months. - SSE and SZSE may impose disciplinary measures including public censure and identifying persons as not suitable to serve as director, supervisor or senior manager. - Civil liabilities: - Articles 69, 76, 77 and 79 of the Securities Law: where false statement, insider trading, manipulation or fraud causes losses to clients, the wrongdoer shall be liable for compensation in accordance with law. - Article 232 of the Securities Law: persons liable for both civil compensation and fines whose property is insufficient to cover both shall first bear civil compensation. - Note: there is not an active culture of exercising private rights of action and courts are yet to develop sufficient expertise in securities matters; CSRC has implemented initiatives to empower investors (described in Principle 11). ### Derogations, suspension of trading, and insider trading - Derogations for confidentiality/trade secrets: - Disclosure standards issued by CSRC provide that where sufficient evidence shows disclosure may involve state secrets, trade secrets, violate confidentiality laws/regulations or cause severe damage to issuer’s interests, issuer can apply to CSRC for an exemption. - Article 5 of Disclosure Standards No. 2 – Annual Report: listed company need not disclose information required by the Standards due to being a trade secret or other reasons; current framework does not require prior CSRC or exchange approval, but company must provide specific reasons; ex-post review by exchanges may demand supplementary disclosure or take self-regulatory measures. - Suspension of trading: - Stock exchanges decide to suspend or resume trading where there appears to be inadequate disclosure. - If undisclosed information leaks or is disclosed by media and may greatly impact share price, exchange may suspend trading and resume once disclosure is made by the company. - Exchanges have similar power to suspend trading of listed corporate and enterprise bonds. - Insider trading restrictions and penalties: - Article 73 of the Securities Law: persons with inside information are prohibited from trading the relevant securities or tipping others. - Article 202 of the Securities Law: persons who trade while possessing inside information are liable to orders to divest, confiscation of gains and a fine of at least the amount of the gain or up to five times the gain. ### Cross-border matters - No public offering or listing of shares by a foreign issuer in China has occurred as it is currently not allowed. - In 2015, the CSRC launched a pilot program to allow foreign issuers to offer RMB-denominated bonds in China ("panda bonds"). - Foreign issuers wishing to make an offering of bonds are subject to the same requirements as domestic issuers: required to apply for CSRC approval and publish prospectuses in accordance with the Securities Law and applicable CSRC disclosure standards for corporate bond offerings. - By the end of 2016, foreign issuers had made 46 offerings of panda bonds, raising RMB *Source: Chapter 2 of the Securities Issuance Measures for GEB and Articles 17 and 18 of the Corporate Bonds Measures.* ### 83.6 billion in aggregate. ### cr17404 - 83.6 billion in aggregate. ### Regulatory practices — Prospectuses review (Shares) - Approval of shares for public offering takes place at the CSRC central office. - The sponsor submits the application for approval of public offering to the Department of Public Offering Supervision, along with the draft prospectuses and related documents for IPOs and secondary offerings. - The Department has about 100 staff, with 80 handling applications. - Staff review for compliance with the criteria and requirements set out under the Securities Law and the relevant Measures promulgated by the CSRC for: - approval of the public offering, and - the prospectus for completeness, sufficiency and timeliness of the information contained therein. - Internal meeting to discuss the application; if staff consider the application meets all requirements, it is submitted to: - the Public Offering Review Committee for the Main Board, or - the GEB Offering Review Committee for a proposed listing on the GEB. - Public Offering Review Committees: - Established under Article 22 of the Securities Law and Article 2 of the Measures for the CSRC Offering Review Committee. - Comprise professionals from within the CSRC and relevant external experts appointed by the CSRC. - Main Board Committee: 25 members (5 internal professionals and 20 external experts); some may serve as full-time members. - GEB Offering Review Committee: 35 members (5 internal professionals and 30 external experts); some may serve as full-time members. - 7 members are drawn from the relevant Committee to deliberate on each application. - Role: examine the application, cast votes, and provide examination opinions to the CSRC (under Article 22 of the Securities Law). - CSRC makes the final decision on whether to approve the application; CSRC staff informed assessors that in practice the CSRC has followed the recommendations of the Committee in all applications to date. - Conflict-of-interest and recusal mechanisms provided (article 23 of the Securities Law) and liability for breaches (article 228 of the Securities Law); Measures include possibility for a company to ask for recusal of a member. - Listing step: after issuer completes public offering, the relevant stock exchange reviews compliance with quantitative listing requirements (e.g., market capitalization and shareholders’ spread) under its listing rules before listing the issuer. - CSRC staff indicated outcome statistics: - "success" rate of about 70 percent, - 20 percent withdraw their application, - about 10 percent are rejected. ### Corporate bonds (CSRC process) - Corporate bonds public offering approvals handled by CSRC’s Department of Corporate Bonds. - The Department has about 37 staff, with 7 responsible for reading applications. - Procedures similar to equities, except: - Applications for corporate bonds offerings are not reviewed by the Public Offering Review Committees. - CSRC makes the final decision based on CSRC staff review. ### Periodic reports reviews (Exchanges) - Both stock exchanges have programs to review annual and other periodic reports issued by listed companies to ensure accurate, complete and timely information and to support CSRC’s accounting standards compliance reviews. - All annual reports are reviewed; selected listed companies are subject to more intensive examination (combination of risk-based approach and random sampling). - SSE (Shanghai Stock Exchange): - About one-third of main board listed companies selected for intensive review on an annual basis. - SSE has about 72 staff responsible for reviewing periodic reports. - SZSE (Shenzhen Stock Exchange): - About 20 percent of mainboard and SME board-listed companies and 50 percent of the GEB-listed companies selected for intensive review. - SZSE has about 150 staff dedicated to this function. - Selection uses a risk-oriented approach considering information disclosure track record, internal governance, and financial performance. - When deficiencies identified: - Exchanges issue query letters; letters and company responses are public. - Where breaches of listing rules occur, exchanges may impose disciplinary measures or initiate disciplinary actions under listing rules. - Exchanges refer potential legal/regulatory violations uncovered in reviews to CSRC regional offices for further investigation or on-site inspection. - Table: Exchanges Reviews (as provided) - 2013: Number of reports reviewed N.A; Number of supervisory letters issued N.A; Disciplinary actions N.A - 2014: Number of reports reviewed 10208; Number of supervisory letters issued 1227; Disciplinary actions 27 - 2015: Number of reports reviewed 10957; Number of supervisory letters issued 845; Disciplinary actions 30 - Source: CSRC. - CSRC central office program of annual report review: - Focuses on compliance with accounting standards and audit quality. - Uses combination of risk-based and random sampling. - Overall covers about 20-30 percent of issuers on an annual basis. - CSRC regional offices may conduct reviews depending on resources; two large regional offices review annual reports of all listed companies in their jurisdiction; others focus resources on on-site inspections. ### Material events disclosure review - Both exchanges carry out ex-post reviews of material events disclosures. - Where issues exist, exchanges query or seek clarification and may require follow-up disclosure. - Exchanges monitor share price movements, media and other sources (including complaints); significant share price movement or indications of undisclosed material information prompt queries and required disclosures. - Both the SSE and SZSE have discontinued ex-ante reviews and conduct ex-post supervision promptly following disclosures and inquiries when necessary. ### On-site inspections (CSRC regional offices) - On-site inspections conducted by CSRC regional offices where listed companies are located; can be initiated by CSRC central office or regional offices. - Inspections may be thematic or targeted at specific companies. - Newly-listed companies are inspected for corporate governance implementation and internal control mechanisms. - Table: CSRC On-site Inspections (as provided) - 2013: Listed companies 566; Bond issuers N.A - 2014: Listed companies 666; Bond issuers N.A - 2015: Listed companies 630; Bond issuers 105 - Source: CSRC. ### Enforcement and observed outcomes - Market participants indicated information disclosure quality has improved due to more rigorous supervisory and enforcement measures by CSRC and exchanges. - Enforcement stepped up with market entry bans and higher administrative fines for disclosure violations. - Three high-profile cases (2013 to 2016) of fabricated financial data to obtain IPO approval: - First two companies sanctioned with market entry bans and fines. - Third company fined and de-listed under newly introduced rules. - Responsible persons (sponsors, underwriters, intermediaries) sanctioned with market entry bans and/or fines. - Major shareholders, sponsors and/or underwriters set up funds to compensate affected investors after CSRC urged them to do so. - Table: Disclosure violations (administrative sanctions and measures) - 2012: Administrative sanctions 32; Administrative measures 108 - 2013: Administrative sanctions 23; Administrative measures 204 - 2014: Administrative sanctions 36; Administrative measures 164 - 2015: Administrative sanctions 75; Administrative measures 221 - 2016: Administrative sanctions 69; Administrative measures 256 - Source: CSRC. ### NDRC framework — Enterprise bonds and NDRC practice - Public offering of enterprise bonds regulated by NDRC under the Regulations on Administration of Enterprise Bonds (the ‘Enterprise Bonds Regulations’). - Enterprise Bonds can be traded in the interbank market and/or exchanges; if on exchanges, governed by exchange listing rules. - Issuers of publicly offered enterprise bonds must satisfy criteria in: - Article 12 of the Enterprise Bonds Regulations, - Article 3 of the NDRC Notice on Further Improving and Enhancing Enterprise Bonds Supervision (NDRC Caijin [2004) No. 1134), - and must obtain prior approval of the NDRC. - Where issuer is a company, Securities Law applies, including Article 16 criteria for public offering of bonds by companies. - Under Articles 13–15 of the Enterprise Bonds Measures and the NDRC General Office's Opinion on Simplifying Application Procedures, Enhancing Risk Prevention and Reforming Supervisory Fashion (NDRC General Office Caijin [2015] No. 3127), issuer must prepare a prospectus and submit it with the approval application to the NDRC and publish it after approval. - Disclosure Guidelines for Offering of Enterprise Bonds require prospectus to include: - information about the offering and the issuer, - risks and measures to counter risks, - credit rating of the bond, - financial statements, - intended use of proceeds (including overview of projects, approval/review/filing status, market information and profit forecast, funding structure and execution, plans and management systems for use of proceeds). - NDRC Notice on the Issuing Amount and Approval of First Batch Enterprise Bonds in 2007 (NDRC Caijin [2007] No. 602) requires disclosure of all information that would have major impact on investor decision. - Financial statements in prospectus must be audited and cover the latest three financial years and the most recent accounting period. - Before offering, prospectus must be published on websites of the NDRC, the issuer, the underwriter and the bond registration and custody organization. - Issuers of enterprise bonds listed on SSE or SZSE must disclose major events and submit periodic reports similar to other listed bond issuers. - Corporate bonds and debt financing instruments must comply with disclosure requirements of exchange market and interbank market and are subject to monitoring by exchanges and/or NAFMII depending on trading venue. - NDRC practice: - Applications handled by central NDRC. - NDRC has about 75 staff, with 70 responsible for technical review of proposed projects funded via enterprise bond issues. - NDRC commissions NAFMII and CCDC to conduct technical evaluation of issuance conditions, issuer solvency, completeness of declaration materials and adequacy of information disclosure. - NDRC responsible for final approval based on its review and assessments by NAFMII and CCDC. - NDRC conducts annual on-site inspections of enterprise bond issuers. ### Assessment — Broadly Implemented (comments and recommendations) - Overall findings supporting the grade: - System exists to monitor issuers' compliance with disclosure obligations. - CSRC reviews all prospectuses. - Exchanges have developed risk-based programs to review periodic and ad-hoc reports; coverage is significant and includes supervisory letters as primary tool. - CSRC central office program focuses on financial disclosure and audit quality and covers about 20-30 percent of issuers annually using risk-based and random sampling. - On-site inspections allow in-depth review of internal controls and corporate governance and to check specific issues. - Remaining concerns and recommendations: - Quality of financial disclosure by listed companies remains a concern. - Consider whether CSRC should have a more intensive program for review of periodic reports and financial information given current market structure and auditors’ work comfort. - Possible approach: place all issuers on a schedule for periodic report review and use risk-based approach to determine cycle and/or level of review. - Strengthen program for auditors’ supervision (see Principle 19) given their role in attesting to reliability of issuers’ financial information; address resource constraints. - Strengthen enforcement measures to affect behaviour of listed companies and ensure lasting improvements in disclosure quality; continue and reinforce stronger enforcement stance. - Strengthen criminal enforcement and encourage authorities to: - reach out to criminal enforcement authorities to prioritize securities offenses, and - review legal framework for administrative and criminal enforcement (noting these two issues are outside CSRC control but encouraged). - Other issues highlighted (not considered in the grade): - Deadline for submission of annual reports is long compared to other large jurisdictions; assessors encourage CSRC to consider shortening the deadline at least for larger companies. - Multilayered equity market system: regime applicable to issuers that raise capital via NEEQ or regional platforms not included in assessment; authorities should keep holistic view of capital raising to ensure investor confidence and balance disclosure, corporate governance, and enforcement. - Bond markets: assessment excludes interbank wholesale market; disclosure requirements across regimes aim at true, accurate and complete disclosure and are roughly aligned (prospectus, semi-annual reports, annual audited report, material events). - Recommendation: eliminate unjustified differences between regimes, enhance coordination and cooperation including enforcement; implement harmonized regime for issuance of bonds with differentiation based on investor type. - For offers to retail investors CSRC regime could be model; for offers to qualified investors a streamlined regime (e.g., offering memorandum and limited regulatory review) may be appropriate. - Coordination mechanisms recommended to ensure consistent administration and enforcement; coordination by CSRC appears optimal. - Merit-based regime for public offerings: - Merit-based ex-ante vetting may be prudent for predominantly retail investor markets and is not incompatible with IOSCO Principles; disadvantages include moral hazard and reputational risk and high resource intensity. - CSRC backlog noted: about 600 applications for initial public offerings. - Assessors welcome CSRC initiatives to strengthen role of disclosure by: - ensuring issuers and gatekeepers comply via enhanced supervision and enforcement, - educating investors and enhancing private right of action, - fostering growth of institutional investors under enhanced supervision. - These initiatives could support a move toward a regime relying more on disclosure; similar approach suggested for NDRC. ### Principle 17 — Holders of securities should be treated in a fair and equitable manner (Description and key provisions) - Rights and equitable treatment of shareholders: - Election of directors and supervisors: - Shareholders of a joint stock limited company elect and change directors and supervisors (other than employee representatives) pursuant to Articles 37 and 99 of the Company Law. - Shareholders determine remuneration of directors and supervisors. - Corporate changes — voting thresholds: - Under Article 103 Company Law: a shareholder has one vote per share held. - Two-thirds majority of votes held by shareholders present at shareholders’ general meeting required for: - Alterations to articles of association, - Changes to registered capital, - Merger, division, dissolution, or change in corporate form. - Article 121 Company Law: two-thirds majority vote required for: - Major asset purchases or sales within one year exceeding 30% of the company’s total assets; - Guarantees granted within one year exceeding 30% of the company’s total assets. - Listing rules require shareholder approval for: - Large transactions exceeding specified percentages of total assets, net assets, operating income, net profit and specified absolute amounts; - Related-party transaction exceeding RMB 30 million and 5 % of absolute value of audited net assets where related-party shareholders are not allowed to vote; - Change in use of proceeds raised by company; - Repurchase of shares where two-thirds majority vote required under Article 45 of the Rules for the Shareholders' Meetings of Listed Companies; - Merger by absorption where a two-thirds majority vote required. - Preferred shares (Guidelines of the State Council on Launching the Pilot Program for Preferred Shares): - Holders of preferred shares have right to attend and vote at shareholders’ general meeting considering: - Alterations to articles concerning preferred shares; - Single or cumulative reduction of registered capital by more than 10%; - Merger, division, dissolution or change in corporate form; - Issuance of preferred shares; - Other matters specified in articles of association. - Resolutions on above matters require two-thirds majority of votes of all ordinary shareholders and two-thirds majority of votes of preferred shareholders. - Notice and materials for general meetings: - Listing rules require notice to disclose full details of all proposals and disclosure of other materials essential for shareholders to make reasonable judgments. - General meetings and proxy voting: - Article 102 Company Law: 20 days’ notice for annual general meeting; 15 days’ notice for interim general meeting. - Article 20 Rules for Shareholders’ General Meetings: meetings should take place physically; web-conference or other safe, economical and convenient means should also be provided and attendance by any of these means counts as present. - Interim general meeting required within two months of occurrence of specified events (directors below minimum or below two-thirds of number in articles; loss equivalent to one third or more of paid-up capital; meeting requested by shareholders holding at least 10%; meeting deemed necessary by board; meeting requested by board of supervisors). - Article 106 Company Law: shareholders may appoint proxies to attend and vote. - Article 9 Code of Corporate Governance: proxy voting and in-person voting carry same legal effect. - Article 8 Code of Corporate Governance: companies should use all means (including modern information technologies) to increase shareholder attendance; arrange time and venues to maximize attendance. - Article 10 Code of Corporate Governance: board, independent directors and qualified shareholders may solicit votes for general meetings, but cannot pay shareholders for votes and must disclose sufficient relevant information when soliciting. - Ownership registration and transfer of shares: - Article 130 Company Law: where registered shares issued, company must keep a register of shareholders. - Articles 96 and 97 Company Law: register kept at company premises and shareholders may inspect the register. - Measures for the Administration of Securities Registration and Clearing (CSRC 2006) established centralized share registration system for listed companies; SD&C preserves complete files of shareholders of listed companies. - Shareholders of listed companies can transfer their shares freely with specified exceptions: - Article 141 Company Law: - Shares held by originators cannot be transferred within one year from incorporation. - Shares issued prior to initial public offering cannot be transferred within one year from date publicly offered shares are listed. - A director, supervisor or senior manager may not transfer any share within one year from listing date, nor transfer more than 25% of his/her shares in the company in each year thereafter; not allowed to transfer any of their shares within six months after they leave office. - Article 5 Measures for Administration of Strategic Investment in Listed Companies by Foreign Investors: foreign investor in A shares must not transfer A shares within three years of acquisition. - Article 98 Securities Law: in takeover deals, stocks held by acquirer in acquired company not allowed to be transferred within 12 months after conclusion of takeover. - Article 46 Measures for the Administration of Material Asset Reorganizations of Listed Companies and Section 1: shares obtained through asset purchases by designated parties not allowed to transfer within 12 months after the (text truncated in source). *Source: cr17404 - 83.6 billion in aggregate.* ### conclusion of share offering. Such shares are not allowed to transfer within 36 ### conclusion of share offering. Such shares are not allowed to transfer within 36 ### Restricted transfers after share offerings - Such shares are not allowed to transfer within 36 months under any of the following circumstances: - where the designated parties are controlling shareholders, actual controllers or controlled affiliates of the listed company; - where the designated parties obtain actual controllership by subscribing the shares on offer; or - where the designated parties purchase the shares with the assets which they have owned for no more than 12 months on an ongoing basis. - Section 2: If it is such a deal as that under the Section 1 of Article 13, the original controlling shareholders, the original actual controllers and the controlled affiliates, as well the designated parties who either directly or indirectly obtain shares of a listed company from the aforementioned parties, shall publicly promise not to transfer the shares within 36 months after the conclusion of the transaction. - Designated parties other than the acquirers and acquirers’ affiliates should make a public promise not to transfer the shares of a listed company acquired with assets within 24 months after the completion of share offering. - Article 38 of the Measures for the Administration of Issuance of Securities by Listed Companies: Shares issued privately by a listed company cannot be transferred within 12 months from the end of the issuance. The shares subscribed by the controlling shareholders, de facto controllers or any enterprise controlled by the controlling shareholders or de facto controllers of the company cannot be transferred for 36 months. ### Dividends and other distributions - Article 4 of the Company Law: shareholders of a company shall enjoy the right to benefit from the assets of the company pursuant to law. - Article 81(9) of the Company Law: the bylaws of a company must specify the method of profit distribution of the company. - Profit distribution plans: - Must be approved by shareholders’ meeting in accordance with Article 37(6). - It is the responsibility of the company’s board of directors under Article 46(5) to work out the company’s profit distribution plans. - Article 186 of the Company Law: upon dissolution, after paying liquidation expenses, employees’ salaries, social insurance premiums, statutory compensations and taxes, and clearing debts, the company must distribute its remaining assets among its shareholders in proportion to their shareholdings. - In practice, companies may issue preferred shares and common shares; remaining assets may be distributed among common shareholders and preferred shareholders. ### Takeover bids and other changes of control transactions - Governance: - Takeovers and change of control transactions are governed by the Securities Law and the Measures for the Administration of the Takeover of Listed Companies (the “Takeover Measures”) issued by the CSRC. - Mandatory tender offers: - Article 88 of the Securities Law: if an investor, through securities trading on a stock exchange, has acquired and holds 30% of the outstanding shares either individually or collectively with other persons by virtue of an agreement or other arrangement, he must issue a tender offer to all shareholders to acquire all or a portion of the company’s shares. - Article 96 of the Securities Law: a similar requirement applies to an investor who has acquired and holds 30% of the shares through negotiated acquisitions. - Article 56 of the Takeover Measures: applies to an investor (not a direct shareholder) who indirectly acquires more than 30% by virtue of investment relations, agreements or other arrangements; such an investor must extend a general takeover offer to all shareholders for all the shares or reduce his shareholding below 30% within 30 days. If reduced below 30%, any subsequent acquisition must be made through a tender offer. - Article 35 of the Takeover Measures: the offer price for shares in a tender offer must not be lower than the highest price at which the offeror had acquired the same class of shares in the target company within the six-month period prior to the indicative notice of the tender offer. - Article 25 of the Takeover Measures: a tender offer must be for at least 5% of the issued shares of the company. - Exemptions from tender offer obligation (Articles 62 and 63 of the Takeover Measures) include: - Where a listed company is under serious financial stress, a reorganization proposal from an acquirer to save the company has been approved by the Shareholders’ General Meeting, and the acquirer has promised not to transfer the shares within 3 years; - Where investors purchase new shares of a listed company, upon approval of the non-affiliated shareholders in Shareholders’ General Meeting, and the investors’ holding exceeds more than 30% of the outstanding shares, and the investors promise not to transfer the newly purchased shares within 3 years, and the General Meetings exempt the investors from making a tender offer; - Where the investors’ ownership exceeds 30% as a result of equity reduction by the company purchasing shares back from certain shareholders with a set price approved by the Shareholders’ General Meeting. - Management buyouts (Article 51 of the Takeover Measures): - Require approval of the company’s board of directors and shareholders. - Board resolution must be adopted by a majority of the non-interested directors with at least a two-thirds majority of the independent directors (who must comprise at least half the directors on the board). - If approved by the board, the matter must be submitted to a general shareholders’ meeting for approval. - Independent directors must engage an independent financial adviser and present their opinion and the adviser’s opinion to shareholders. - Shareholders’ approval requires a simple majority of the votes held by non-interested shareholders present at the meeting. - No assets of the company itself can be used to fund the buyout. ### Disclosure requirements for mandatory tender offers - Procedural steps: - Offeror must submit a tender offer report to the exchange and inform the target company. - Exchange conducts a “formality” review of the report and the offeror must publicly issue an indicative notice summarizing the tender offer report. - After announcement, the exchange conducts ex-post monitoring and may make inquiries to the company if issues are spotted. - Tender offer report must include inter alia: - Information about the offeror and whether it intends to further increase his shareholding within the 12 months following the acquisition; - The terms of the offer, including the offer price, conditions of the offer and the offer time limit; - An analysis of the acquisition’s impact on the target company, including whether the offeror has made arrangements to avoid any potential competition between the offeror and the target company and to ensure the independence of the target company; - Plans on adjustments to be made in the ensuing 12 months to the target company’s assets, business, personnel, organizational structure and articles of association. - Full tender offers: the offeror must disclose the risk of the target company being de-listed and follow-up arrangements for remaining shareholders to sell their shares in the event of a de-listing. ### Equal and fair opportunity to participate in tender offers - Article 90 of the Securities Law and Article 37 of the Takeover Measures: a tender offer must remain open for between 30 and 60 days; the offeror may not withdraw its offer during that time. - Article 92 of the Securities Law and Article 26 of the Takeover Measures: terms and conditions of a takeover bid must apply equally to all shareholders; shareholders holding shares of the same type must be treated equally. - Article 43 of the Takeover Measures: where, in a partial tender offer, pre-bid acceptances exceed the scheduled purchase, the offeror must purchase from all accepting shareholders on a pro-rata basis. - Article 97 of the Securities Law: where after the takeover bid the shareholding spread no longer conforms to listing requirements, the stock exchange shall terminate the company’s listing. Remaining shareholders have the right to sell their shares to the offeror on terms identical to those under the tender offer. - Takeover Measures duties on directors: Article 32 requires target company directors to obtain professional advice of an independent financial advisor and make a recommendation to shareholders on whether to accept the offer. ### Holding the company and its directors responsible in case of violations of law - Duties and prohibited conduct: - Article 147 of the Company Law: directors, supervisors and senior managers owe duties of loyalty and diligence, must observe law, administrative regulations and the company’s articles of association, and are prohibited from accepting bribes or other illegal payments and from appropriating the company’s assets. - Article 148: further prohibited conduct includes misappropriation of company funds, providing unauthorized loans or guarantees out of company’s funds, self-dealing, unauthorized disclosure of company secrets and any behavior that is disloyal to the company. - Shareholder remedies: - Article 151: shareholders can take derivative actions against errant directors and senior managers. If a director or senior manager violates law, administrative regulations or the company’s articles and causes a loss, and the board or supervisors fail to take legal proceedings after request from shareholders who collectively hold more than 1% of the company’s shares, those shareholders have the right to commence legal proceedings at a people’s court in their own names. - Article 152: shareholders have a right of action if a director or senior manager violates law, administrative regulations or the company’s articles and thereby causes harm to the interests of the shareholders. - Civil liability for disclosure violations: - Article 69 of the Securities Law: if there are any false records, misleading statements or major omission in a prospectus, bond prospectus, periodic report, ad hoc report or any other information disclosure material, the issuer or listed company are jointly liable to compensate any person who suffers a loss as a result. A director, supervisor, or senior manager of the issuer or listed company, as well as the sponsor or underwriter, is also jointly liable to compensate unless he is able to prove that he was not at fault. If a controlling shareholder or de facto controller is at fault, he and the issuer or listed company are jointly liable for compensation. ### Company insolvency and bankruptcy - Enterprise Bankruptcy Law: - Chapter VIII: in appropriate cases, an insolvent company may be allowed by the court to restructure while continuing its business operations under an insolvency administrator. - Chapter X: where restructuring is not applicable, an insolvent company may be liquidated under Chapter X provisions. - Upon the court declaring the company bankrupt, the company must cease operations and have its assets managed by a liquidation administrator with a view to paying off creditors and distributing remaining assets to investors. ### Disclosure of interests in shares of listed companies — substantial holdings - Prospectus requirements: required to contain full disclosure of the originators, shareholders holding 5% or more of the shares of the company, de facto controllers and controlling shareholders, as well as related parties. - Article 86 of the Securities Law: - When an investor’s shareholding in a listed company reaches 5 %, the investor is required to lodge a report with the CSRC and the relevant stock exchange, inform the listed company and make a public announcement within 3 days. - For shareholders holding 5% or more, every 5% increase or decrease in the shareholding must be reported and announced within three days. - For the purposes of Article 86, the shareholding of an investor includes the shareholding of persons acting in concert with him. *PEOPLE’S REPUBLIC OF CHINA — content unit: conclusion of share offering. Such shares are not allowed to transfer within 36* ### Chapter II of the Takeover Measures, including provisions setting out the information to be ### Chapter II of the Takeover Measures, including provisions setting out the information to be included in the disclosure report ### Shareholder disclosure requirements - Article 66 of the Securities Law requires the top 10 shareholders of a listed company to be disclosed in the company’s annual report. - Article 21 of the Information Disclosure Measures requires disclosure in the annual report of all shareholders who each hold 5 percent or more of the shares of the company, controlling shareholders and de facto controllers. ### Holdings by directors and senior management - Prospectuses for public offerings must include information on shareholdings of directors, supervisors and senior managers (see disclosure standards references in source). - Companies must disclose status and changes in shareholdings of directors, supervisors and senior managers in the annual report. - Under Article 11 of the Rules on the Management of Shares Held by the Directors, Supervisors and Senior Management Officers of Listed Companies and the Changes Thereof: - A director, supervisor or senior manager must notify the listed company, and the company must announce on the stock exchange web site, any change in their holdings within two trading days of the occurrence of the change. ### Disclosure of intention to reduce shareholding - Article 8 of the Rules on Share Sales by Substantial Shareholders, Directors, Supervisors and Senior Managements of Listed Companies: - Substantial shareholders (who control or own more than 5% of the equity) planning to reduce holdings through auction on stock exchanges must disclose intended sales 15 trading days prior to their first sale. - Required disclosure items include: number of stocks to sell, origin of these stocks, time of sale, methods of selling, pricing range, and reasons for sale, etc. - CSRC revision on 27 May 2017 (CSRC Announcement [2017] No.9) expanded the ex-ante disclosure requirement to include directors, supervisors and senior managements. - Post-sale disclosure: sales by directors, supervisors and executives must be disclosed within 2 trading days after sale, per Article 11 of Administration Rules for Equity and Equity Changes of Directors, Supervisors and Senior Managements in the Listed Companies. - Disclosure form: ad hoc reports per exchange formatting guidelines (SSE and SZSE formats) submitted to the exchange and publicly available. ### Legal infrastructure to enforce compliance - Article 193 of the Securities Law: CSRC may impose administrative penalties including a rectification order, a warning or a fine between RMB 30,000 and RMB 600,000 for failure to disclose or for false/misleading/omitting major information. - Exchanges perform routine reviews of periodic reports and ad hoc disclosures; they alert the CSRC on discovered violations for follow-up investigation and regulatory action. ### Assessment of takeover and disclosure regime - Implementation status: Fully Implemented. - Assessors’ observations and recommendations: - Legal framework provides adequate treatment of shareholders and responsibilities of company officers and directors; CSRC initiatives empower investors and shareholders. - Liability provisions apply to directors and senior managers, and not to supervisors; CSRC explained this reflects different duties between supervisors and directors/senior executives. - Minimum notice period for convening an interim shareholders meeting is 15 days even when two-thirds majority matters are tabled; assessors note this may be short compared with other major markets and emphasize the role of online voting and online access to necessary information. - Assessors recommend CSRC reviews appropriateness of the substantial shareholding notification threshold (where only changes of 5 percent need to be reported) to align with standards in other major markets; CSRC informed assessors that relevant rules are under review. ### Principle 18 — Accounting standards used by issuers - Requirement for financial statements for public offering and listing: - Issuer must submit audited financial statements for the latest three years or since incorporation (Articles cited: IPO Measures, GEB IPO Measures; disclosure standards references). - Prospectuses for public offerings must include issuer’s financial statements and related audit reports for the latest three financial years and for the current accounting period (multiple Disclosure Standards articles cited). - Periodic reporting deadlines: - Annual report with financial statements must be published within 4 months of the end of the financial year (Article 66 of the Securities Law). - Semi-annual reports: within two months from the end of the first half of the financial year (must include financial statements for the half-year). - Quarterly reports: within one month from the end of first and third quarters (must include key accounting data and financial indicators; these need not be audited). - Companies with corporate bonds listed must publish semi-annual reports but not quarterly reports. - Required accounting standards: - Article [25] of the Accounting Law: all companies and enterprises must prepare and present financial statements in compliance with the unified accounting system which includes the ASBE. - Foreign issuer filings (none to date) would have to use ASBE or MoF-recognized equivalent standards. - Standards setting and convergence: - MoF is responsible for administering national accounting work and promulgating the unified accounting system (Accounting Law Articles 7 and 8). - China Accounting Standards Committee (CASC) composition: [22] members and [160] consultants. - ASBE convergence roadmap: MoF released a roadmap in April 2010; after issuance of new/amended standards in 2014, IFRS Foundation and MoF issued a Joint Statement in November 2015 noting ASBE had substantially converged with IFRS. - Contents of financial statements per ASBE and CSRC rules: - Required statements: balance sheets, income statements, cash flow statements, statements on changes to owners’ equity and notes. - Notes must cover: basic information about the company; basis of preparation; significant accounting policies and accounting estimates, taxes, combinations, notes to financial items; changes in scope of consolidation; interests in other entities; risks associated with financial instruments; disclosure of fair value of assets, related parties and related party transactions, share-based payments, contingencies, subsequent events, other material events; notes to significant items in the parent company financial statements. - ASBE No. 28 requires retrospective treatment for changes in accounting policies and corrections of errors to enable comparability. - Monitoring and enforcing compliance with accounting standards: - CSRC Department of Accounting staff: about 30 staff members (about 15 staff engaged in monitoring listed companies’ annual reports and about 15 staff engaged in auditors’ supervision). - CSRC regional support: personnel at 38 CSRC regional offices support the Department. - Department reviews about 20-30% of the annual reports issued by listed companies each year (complete review); problematic cases are referred to regional offices for on-site inspection. - CSRC Review counts (Table data): - 2013: 415 listed companies (reviews of financial statements) - 2014: 520 listed companies - 2015: 563 listed companies - Sampling approach for annual report reviews: - Risk-oriented sampling focuses on companies with high-risk profiles (e.g., net profit changes of 50% or more; non-standard audit opinions; Special Treatment (ST) shares; media scrutiny; material asset reorganizations; emerging industries; sectors under current CSRC scrutiny). - Random sampling: a number of companies without high-risk profiles are chosen at random; Department may review any company when specific issues arise. - Exchanges’ review program complements CSRC reviews for disclosure and accounting compliance. - Enforcement framework and penalties: - Article 26 of the Accounting Law prohibits acts violating unified accounting standards; Chapter VI of the Accounting Law sets legal liabilities. - Article 33 of the Accounting Law assigns MoF and securities/insurance regulators responsibility for supervision and inspection of accounting material. - CSRC rules require rectification of accounting defects; failure may result in suspension of listing (Articles cited in Rules No. 14 and No. 19). - Article 63 of the Securities Law requires disclosed information to be truthful, accurate, complete and not misleading or omit major information. - Article 193 of the Securities Law: CSRC may issue rectification orders, warnings and fines ranging from RMB 300,000 to RMB 600,000 on issuers or listed companies, and RMB 30,000 to RMB 300,000 on persons-in-charge or directly responsible persons; controlling shareholders or de facto controllers instigating irregularities are subject to the same punishment; potential criminal violations referred for prosecution (Articles 160 or 161 of the Criminal Law). - Practice and assessment: - CSRC reports majority of reports compliant with accounting principles; a small percentage show significant problems leading to restatements and administrative sanctions. - Administrative sanctions: six listed companies in 2015 and 12 in 2016 were subject to administrative sanctions for accounting treatment violations. - Assessment status: Fully Implemented. - Assessors recommend CSRC keep review program coverage under review; concerns persist about deterrent effect and rigor of enforcement (considered under Principles 12 and 16). ### Principle 19 — Auditors oversight and regulatory framework - Regulatory framework and qualifications: - All CPAs and audit firms are regulated under the CPA Law. - Article 5 of the CPA Law: MoF and provincial-level financial bureaus supervise CPAs, public accounting firms and institutes of certified public accountants. - CPA qualification requirements (Article 9 of CPA Law): pass unified national examination, engaged in auditing practice for more than two years, no criminal record or recent administrative punishment (within five and two years respectively). - Registration: regional institutes of certified public accountants register CPAs (Articles 9, 10, 12); MoF can cancel registrations (Article 11). - Continuing education: CPAs must satisfy Continuing Professional Development System obligations administered by CICPA and regional institutes; regional institutes carry out annual inspections before renewal (Article 37). - Establishment of CPA firms requires MoF or provincial-level financial bureau approval (Article 25). - Additional requirements for audit firms providing securities services: - Audit firms must obtain joint approval from the CSRC and MoF to provide “securities services” (Article 169 of the Securities Law); qualification notice outlines requirements including: - Have been established for more than five years; - Sound quality control and internal management system effectively implemented; good professional ethics and competence; - Have at least 200 CPAs who are 65 or younger, of whom at least 120 have been continuously practicing for the last five years; - Have at least 25 partners, at least half of whom must have practiced in the firm for more than three years; - Have at least RMB 5 million in net assets and revenue in the preceding year of at least RMB 80 million, of which at least RMB 60 million must be derived from auditing services. - Firms must satisfy qualification requirements on a continuous basis after approval. - Quantitative facts on approved firms and staffing: - Of more than 7000 CPAs registered nationwide, only 40 have been approved to provide securities services. - As of December 31, 2015, these 40 audit firms had on average 642 CPAs and 2,308 staff members. - All audit firms nationwide had on average about 14 CPAs and 41 staff members. - CSRC supervision of audit firms: - CSRC oversight of approved audit firms is independent of CICPA self-regulation (Articles 179 and 180 of the Securities Law). - CSRC Department of Accounting responsibilities include drafting policy, review/approval of securities services qualifications, supervisory information systems, oversight of annual report audits, on-site inspections, imposition of regulatory measures, coordination with regional offices and exchanges, and international cooperation. - Department staffing: about 30 staff with roughly 10 engaged in supervision of audit firms; regional offices have over 200 staff engaging in audit firm supervision. - Oversight activities: - Two regular review types: oversight of annual report audits and on-site inspection of audit firms. - Oversight of annual report audits is risk-oriented during annual report season; for high-risk issuers CSRC engages with auditors ahead of the audit; ex-post reviews assess audit quality. - CSRC aims to ensure audit firms and CPAs: - Perform duties diligently and comply with laws, regulations and the CSA; - Adhere to risk-based audit philosophy; - Improve audit procedures and adopt rational audit methods and techniques; - Fully understand the listed company and its business environment; - Prudently assess risks from potential material misstatement and fraud; - Fully implement control testing and substantive procedures; - Obtain sufficient and appropriate audit evidence to arrive at a reasonable audit (text truncated in source). - Assessment status for auditor oversight: (See Principle 18 and practice sections for enforcement and review program assessments referenced above.) *Source: Chapter II of the Takeover Measures and associated sections in the provided IMF content unit.* ### conclusion. ### conclusion ### Objective and scope of the review - Overall objective: improve the quality of financial information disclosed by public issuers. - Review scope: - Review of the audit work involves reviewing the overall audit strategy, specific audit plans and audit summary for the audit of the public issuer as well as the issuer’s financial reports comprising its financial statements and the audit report. - May involve CSRC regional offices conducting on-site supervision where appropriate, checking: - whether the audit firm has allotted sufficiently competent persons and sufficient time to conduct the audit in accordance with its specific audit plan; - whether the audit firm has conducted the audit in accordance with the audit priorities stated in the audit plan and any matters highlighted by the relevant CSRC regional office; - whether there was any material disagreement between the audit firm and the client on audited items, how any disagreement was resolved, and whether the audit firm found any defects in internal control and the audit firm’s assessment thereof. ### On-site inspections of audit firms - Legal and guidance framework: - Guided by the CSRC’s Rules for Inspection on the Securities and Futures Business of Accounting Firms and Asset Appraisal Agencies (2015 Revision) (the “Inspection Rules”) and Guidelines for Inspection on the Securities Services of Accounting Firms. - Inspection Rules provide for the division of supervisory responsibilities, scope of inspection, organization and implementation, and investigation and processing. - Carried out by CSRC regional offices; inspections can be comprehensive or targeted. - Comprehensive inspections: - Thorough inspection of internal governance, quality control system and quality practices of the audit firm. - Standards for assessment include regulatory requirements, the CSA and the CPA Code. - Choice of firms for comprehensive inspections each year follows either: - (a) dual-random model: target auditors randomly selected from auditors who have not been subject to a comprehensive inspection in the preceding three years; or - (b) issue- or risk-driven model: focus on auditors fitting any of the following descriptions: - being frequently named in complaints by internal departments or regional offices of CSRC or exchanges in regard to the quality of its practice; - being frequently questioned by the media or named in a complaint or whistleblowing report in regard to its engagements; - being subject to numerous administrative sanctions, administrative regulatory measures, or self-regulatory measures in recent years; - being found, during inspections, to have poor implementation of regulatory rules or, due to many engagements having long been signed by a small number of practitioners, a perfunctory quality control process; - charging service fees at rates far below the industry norm; - being found, during inspections, to have undertaken a large number of new engagements related to securities in recent years, most of which are of the high-risk variety; - being involved in multiple mergers or divisions, major changes with shareholders or partners, or frequent changes of engagement team. - Inspection frequency principle: an inspection of the internal governance and quality control system of an audit firm must be conducted by the CSRC at least once every three years. - In practice: CSRC headquarters selects firms for comprehensive inspection; each regional office selects a certain number of firms at random from those that have not been subject to comprehensive inspection in the last three years. - Targeted inspections: - Conducted where circumstances listed in Article 8 of Inspection Rules arise; may inspect relevant items and, if necessary, internal governance and quality control system. - Circumstances warranting targeted inspection include: - merger or division involving the firm; - material change of shareholders, partners or senior management of the firm; - frequent change of CPAs in the firm; - a significant issue concerning the firm discovered in the course of ongoing supervision; - the firm is involved in a complaint or a report by a whistle-blower; - the firm is challenged by any major public media; - the firm provides securities or futures related services for the first time; - the firm is engaged by a securities and futures institution to replace an existing auditor without justification; - the firm charges fees outside normal ranges; - the number of clients or the scale of the business of the firm does not match the practice or risk-bearing capacity of the firm; - the firm has failed to file its business for record as required; - other matters requiring an inspection. - Coordination: CSRC staff coordinate with the MoF at the planning stage. - Coverage and activity (2015): - In 2015, CSRC conducted inspections (either comprehensive or targeted) on 32 audit firms (representing 80% of all the audit firms authorized to provide securities services), and spot-checks on 225 audit engagements (representing 8% of the total number of listed companies in China). - The CSRC has conducted either a comprehensive or targeted inspection of every audit firm under its supervision at least once in the last three years. - Table: CSRC On-site inspections on audit firms (by year and type) - 2013: Comprehensive 3; Targeted 116 - 2014: Comprehensive 2; Targeted 132 - 2015: Comprehensive 7; Targeted 139 ### Enforcement actions and sanctions - Regulatory measures available against audit firms and their employees include: - rectification orders; - disciplinary interviews; - warning letters; - determinations as unsuitable person; - orders to make public statement; - orders to attend training; - orders to submit regular reports; - temporary non-acceptance of documents relating to administrative licensing; - orders to suspend the provision of securities services; - revocation of authorization for the provision of securities services. - Administrative penalties under Article 223 of the Securities Law: - Any securities service provider (including an audit firms who fails to act with diligence and care, resulting in any misrepresentation, misleading statement or material omission in documents prepared or issued by it) shall be ordered to make corrections, have its securities service license suspended or revoked, and be subject to a fine of no less than one time and no more than five times its business revenue. - Its manager in charge directly responsible and other persons directly responsible shall be given a warning, have his or her practice qualification revoked, and be subject to a fine of no less than RMB 30,000 and no more than RMB 100,000. - Market access bans: - Pursuant to the Provisions on Banning Access to the Securities Market, any persons who have violated laws may be subject to a 3 to 5 year, 5 to 10 year or lifetime market bar, depending on the severity of the violation. - Criminal referral: - Where the violation is potentially criminal, CSRC would refer the case to the competent judicial authority for prosecution. - Enforcement activity (table summary): - Regulatory measures (2013): 15 audit firms; 39 CPAs - Regulatory measures (2014): 11 audit firms; 73 CPAs - Regulatory measures (2015): 21 audit firms; 97 CPAs - Regulatory measures (2016): 19 audit firms; 88 CPAs - Administrative sanctions (2013): 4 audit firms - Administrative sanctions (2014): 4 audit firms - Administrative sanctions (2015): 2 audit firms - Administrative sanctions (2016): 5 audit firms ### Cooperation mechanisms with CICPA - CSRC’s Department of Accounting has a routine supervisory cooperation mechanism with the CICPA. - Joint activities and information exchange: - Regularly organize joint training seminars for audit firms with securities service licenses; - Share information on respective inspection plans and follow-up actions on inspection findings; - Exchange ideas on the formulation and implementation of auditing standards; - Hold ad hoc discussions on important issues. ### Assessment and recommended considerations - KQ4 requires existence of a process to perform regular reviews of audit procedures and practices. - Assessors’ observations: - Acknowledge increased attention CSRC places on auditors’ work given their gatekeeper role. - Note CSRC’s willingness to impose enforcement measures on audit firms, as demonstrated by the data. - Note difficulty achieving comprehensive inspections every three years in practice due to resource limitations; reliance on targeted inspections to increase coverage. - Suggest targeted-inspection-heavy approach needs strengthening given auditors’ role as gatekeepers. - Recommend a more comprehensive program for audit firms to balance monitoring of issuers’ financial disclosure. - Encourage authorities to consider creation of a specialized oversight body for the audit profession to ensure dedicated resources for auditor oversight and allow CSRC to redistribute internal resources. ### Principle 20 — Auditor independence - Principle statement: Auditors should be independent of the issuing entity that they audit. - Applicable standards and responsibilities: - Under Article 35 of the CPA Law, the CICPA is responsible for formulating professional standards and rules for CPAs and for implementing them after obtaining approval from the MoF. - Independence standards set out in the China Code of Professional Ethics for Certified Public Accountants (“CPA Code of Ethics”) issued by the China Ethics Standards Board for CPAs under the CICPA. - CPA Code of Ethics parallels the International Code of Ethics For Accountants issued by the International Ethics Standards Board for Accountants and deals with all aspects required by this Principle. - Fundamental independence provisions: - Article 10 of Chapter III of the CPA Code of Ethics No. 1: when providing audit and review services and other assurance services, a certified public accountant shall maintain his or her independence in substance and in form and his or her objectivity may not be impaired by his or her having any interest in the recipient of such services. - Conceptual framework for independence (CPA Code of Ethics No. 4): - Article 5 of Chapter II defines “independence” as comprising independence of mind and independence in appearance. - Articles 6 to 8 set out a three-step framework: - Identify threats to independence; - Evaluate the significance of the threats identified; and - Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level. - If appropriate safeguards are not available or cannot eliminate threats or reduce them to an acceptable level, CPA must eliminate the circumstances giving rise to the threats or decline or terminate the audit engagement; professional judgment required when applying framework. - Specific situations and relationships covered (Chapters III to XVII of CPA Code No. 4): - Economic interests; - Loans and guarantees; - Business relationships; - Family and personal relationships; - Employment relationships with audit clients; - Temporary staff assignments; - Members of an audit engagement team who have recently served as a director, senior executive or special employee of an audit client; - Concurrent capacity as a director or senior executive of an audit client; - Long-term business relationships with audit clients; - Provision of non-assurance services to audit clients; - Fees; - Compensation and evaluation criteria; - Gifts and Hospitality; - Actual or threatened litigation; - Reports that include restriction on use and distribution. - Article 4 of CPA Code of Ethics No. 4: CPAs expected to be vigilant in identifying threats to independence and to apply the conceptual framework to deal with any threat to independence, whether or not the threat arises from the situations described. - Rotation requirements: - Rotation mandated under Article 3 of the Provisions on the Regular Rotation of Reporting Certified Public Accountants for Securities and Futures Auditing Engagements (issued jointly by the CSRC and the MoF) for audit engagements with “relevant entities” (listed companies, companies that make IPOs of securities, organizations that trade in securities and futures, securities and futures exchanges, securities investment funds and their management companies, and securities registration and settlement organizations). - A reporting CPA may not continue to provide auditing services to a relevant entity for more than five years. - CPA Code of Ethics No. 4 provisions on long association: - Chapter XI requires rotation of the key audit partner after five years and a “cooling-off” period of two years before the partner may be re-admitted to the audit engagement team for the client. - Threats related to long association of other partners must be evaluated and, depending on the circumstance, rotation or regular independent quality reviews must be performed. - Non-assurance services: - Chapter XII imposes independence requirements on auditors in relation to provision of non-assurance services to audit clients, including prohibition of some services where it is not possible to mitigate the threat to independence. - Non-assurance services listed include: - assuming management responsibility for an audit client; - preparation of accounting records and financial statements; - valuation services; - taxation services; - internal audit services; - IT system services; - litigation support services; - legal services; - recruiting services; and - corporate finance services. - Threat categories: - Self-interest, self-review, advocacy, familiarity and intimidation are identified in Article 6. *Source: cr17404 - conclusion.* ### Chapter II of the CPA Code of Ethics No. 2 – Conceptual Framework for Professional Ethics as ### Chapter II of the CPA Code of Ethics No. 2 – Conceptual Framework for Professional Ethics as ### Conceptual framework and related CPA codes - The Chapter defines categories of threats to compliance with the fundamental principles of professional ethics and provides examples of circumstances giving rise to each category and safeguards to respond to them. - CPA Code of Ethics No. 4 explains how those categories of threats may arise from situations and relationships described therein and how they should be addressed. ### Appointment and removal of auditors - Corporate and listing rules: - The Code of Corporate Governance for Listed Company (CSRC) assigns the audit committee responsibility for recommending appointment or replacement of external auditors and overseeing interaction between internal and external auditors (Article 54 of the Code). - Article 169 of the Company Law: auditors may be appointed or dismissed by shareholders in a general meeting or by the board pursuant to articles of association. - For listed companies, Article 159 of the Guidelines for the Articles of Association of Listed Companies (CSRC) requires appointment of an audit firm to be decided by shareholders in a general meeting; directors shall not appoint any audit firm without shareholders’ approval. - Timely disclosure requirements: - Listed companies must report and disclose appointment or dismissal of auditors in a timely manner; pursuant to Information Disclosure Measures this disclosure needs to take place within two trading days. - Under CSRC rules, the company must provide specific reasons for replacing an audit firm together with publication of the relevant shareholders’ resolution that approved the replacement. - Public issuers of corporate bonds must disclose dismissal and replacement of their auditors in periodic reports; exchanges’ Guidelines require prompt disclosure as a material event. ### Ensuring compliance with independence requirements - Firm policies and procedures (CPA Code of Ethics No. 4; Quality Standards): - Article 9 of CPA Code of Ethics No. 4 requires audit firms to establish policies and procedures per Quality Control Standards No. 5101. - Quality Standards require policies and procedures to ensure independence of the firm and its personnel (including engaged experts). - Required firm capabilities include the ability to: - Communicate independence requirements to personnel; - Identify and evaluate circumstances and relationships creating threats to independence and apply safeguards, or withdraw from engagements; - Require engagement partner to provide information to evaluate overall impact on independence; - Require personnel to promptly notify the firm of threats to independence; - Collect and communicate relevant information so the firm and personnel can determine independence, maintain/update independence records, and take appropriate action. - Firms should provide independence training to all personnel required to be independent and obtain written confirmation of compliance from such personnel. - CSRC monitoring and enforcement: - CSRC maintains an ongoing supervisory program of oversight of annual report audits and on-site inspections of audit firms to monitor compliance including independence requirements. - CSRC may impose regulatory measures and administrative penalties on firms or employees found in breach and can refer suspected criminal violations to judicial authorities. - Assessment: Fully Implemented. - Comment: Issues concerning the intensity of the supervisory program over auditors have been considered under Principle 19. ### Audit standards and convergence with ISA (Principle 21) - Legal obligations: - Article 165 of the Company Law requires companies to prepare financial reports annually and have them audited by a certified public accountant. - Article 21 of the CPA Law requires public accountants to issue reports in accordance with applicable standards and rules, including the Standards of Practice for Chinese Certified Public Accountants (CSA). - Standards setting: - Article 35 of the CPA Law charges CICPA with establishing professional standards for CPAs, reported to and implemented with MoF approval. - CSA developed by CASB within CICPA; CASB membership includes regulators and experts; majority are non-practicing CPAs from relevant regulators. - Convergence and features: - CSA first issued January 2007 and revised November 2010; revision achieved full convergence with the clarified ISA issued February 2009 as announced jointly by IAASB and CASB in November 2010. - CSA include two additional standards on verification of capital contribution and communication between predecessor and successor CPAs to reflect unique Chinese circumstances. - Arrangement affirms equivalence and mutual recognition of CSA and Hong Kong Auditing Standards; as of February 2015, financial statements of 45 out of 204 Hong-Kong listed mainland companies were audited in accordance with CSA. - Firm quality control requirements: - Quality Standards require audit firms to establish a quality control system addressing: - Leadership responsibilities for engagement quality; - Standard of professional ethics; - Acceptance and continuance of client relationships and engagements; - Human resources; - Engagement performance; - Engagement working papers; - Monitoring and control. - Firms must document and communicate policies and procedures to personnel. - CSRC monitoring and enforcement: - Ongoing supervisory program of off-site monitoring and on-site inspections; regulatory measures and administrative penalties; referral to judicial authorities where appropriate. - Assessment: Fully Implemented. - Comment: Intensity of supervisory program over auditors considered under Principle 19. ### Oversight of Credit Rating Agencies (Principle 22) - Use of ratings: credit rating mandatory for publicly-offered corporate and enterprise bonds (see Principle 16 references). - Regulatory framework and PBoC role: - PBoC is lead regulator for CRAs per SC decisions; firms providing credit rating services must fulfill record filing procedures regulated by the PBoC. - Basic CRA requirements set in Credit Rating Supervisory Guidelines (2006). - CRAs apply to PBoC branches in their district for record filing; branches verify via off-site review and on-site inspections and report to PBoC headquarters. - Record filing materials include business license, institutional credit code, shareholder info, location, procedures and methodologies, internal control mechanism, business qualification, certification of operating capability. - Ongoing submissions to PBoC branches include rating business data, default data, monthly and annual reports, financial statements, reports on major events. - 2016: PBoC Headquarters carried out off-site verification nationwide; 2015: 65 CRA (including branches) on-site inspections by 23 PBoC branches. - Licensing by securities/market authorities: - Firms conducting bond credit rating must obtain license/recognition from regulatory authority for the market: CSRC (listed corporate bonds), NDRC (enterprise bonds), PBoC with NAFMII (Inter-bank Bond Market). - CSRC, NDRC and PBoC/NAFMII have licensed 7, 6 and 6 CRAs respectively: - Of these, 3 CRAs are licensed by all three authorities; - 2 are licensed by both NDRC and NAFMII; - 1 is licensed by both CSRC and NDRC. - 2016: PBoC, CSRC and NDRC jointly drafted the Provisional Regulation for the Credit Rating Industry; draft sent for public comments. - CSRC licensing requirements (Credit Rating Measures): - Scope of “securities rating business” includes bonds/ABS approved by CSRC, bonds/ABS traded on stock exchange (excluding treasury bonds), issuers/listed/unlisted public companies/securities companies/fund managers, and other objects stipulated by CSRC. - Article 7 licensing criteria include: - Chinese legal person, paid-in capital and net asset not less than 20 million yuan; - At least three senior managers meeting requirements and at least 20 rating professionals with securities business qualification; at least ten rating professionals with at least three years’ credit rating experience; at least three rating professionals must be CPAs qualified in China; - Sound internal control and management system; - Sound business rules (rating grades, criteria, procedures, rating committee, publication system, tracking, confidentiality, archival management); - No criminal punishment in latest five years and no administrative punishment for illegal business in latest three years; not under investigation for suspected illegal operations or crime; - No bad credit record at administrative departments or self-disciplinary organizations or commercial banks; - Other CSRC-prescribed conditions. - Senior manager fit and proper requirements (Article 8): pass senior manager qualification exam and obtain securities business qualification; have relevant professional knowledge and management abilities. - Governance, methodology and conflicts: - Credit Rating Measures, Code of Practice and Detailed Rules (SAC) set governance, methodology, rating committee, follow-up ratings, record keeping (archives retained for at least ten years or five years after expiry of rating contract, whichever is longer). - Resources: agencies must have at least 20 rating professionals (at least ten with three or more years’ experience and at least three CPAs qualified in China). - Conflicts of interest system mandatory (Article 42 Code of Practice); prohibited business relationships listed in Article 12 of Credit Rating Measures (e.g., common de facto controller, cross-holdings of 5% or more, trading in rated securities within six months, etc.). - Recusal rules (Article 13) include personal/lineal relative holdings of 5% or more, director/supervisor/senior manager roles, significant personal holdings or transactions of RMB 500,000 or more, and other CSRC-affirmed circumstances. - Disclosure of actual and potential conflicts and management measures required (Article 63 Detailed Rules). - Contingency fees prohibited; rating process must commence only after fees paid in full (Article 36 Code of Practice). - Reporting, inspections and enforcement: - Licensing application materials enumerated (Article 9 Credit Rating Measures). - Ongoing reporting: annual report within four months of year-end; quarterly reports within ten days of end of quarter; interim reports for significant events. - Inspections: CSRC regional offices perform off-site/on-site inspections; routine on-site inspections on all CRAs at least once a year in practice; 2015 on-site inspections by six teams across seven CRAs; about 20-30 engagements reviewed per CRA. - Enforcement: Articles 198, 200, 202, 223, 225, 226 of the Securities Law and Articles 35-41 of Credit Rating Measures provide measures; regional offices may issue warning letters, supervisory interviews, rectification orders, reject rating reports, impose market bars and fines; 2014 and 2015 on-site inspections led CSRC to impose 7 and 12 regulatory measures respectively (rectification orders, warning letters, regulatory interviews); records made against integrity record. - Assessment: Fully Implemented. - Comments: - Assessment focused on CSRC regime given overlaps among authorities. - Governance rules modeled on IOSCO Code of Conduct Fundamentals (2008); CSRC has intensive oversight program. - Supervision of CRAs is challenging due to lack of internationally accepted standards for rating methodologies. - Authorities should finalize and implement draft Provisional Regulation for the Credit Rating Industry. ### Other entities offering analytical or evaluative services (Principle 23) - Background and market scope: - About 183 companies authorized to provide investment consultancy services; 84 specialized exclusively to securities investment consultancy; about 100 companies release research reports. - As of end of Jun 2017, 110 futures companies licensed to conduct investment consultancy service. - Licensing and scope (Investment Consultancy Measures): - “Securities and futures investment consultancy services” includes paid consultancy via commission, lectures/seminars, published articles, telecoms, and other CSRC-determined means. - Firms and individuals providing such services must be authorized by the CSRC; individuals may only provide services as employees of an authorized firm. - To obtain a business license a firm must meet criteria including: - More than five full-time qualified employees for securities-only or futures-only consultancy; more than 10 for both; - At least one senior manager qualified for the consultancy business; - Registered capital more than RMB1 million; - Fixed office and necessary communications facilities; - Sound internal management system; other CSRC criteria. - Futures companies seeking futures consultancy services must meet higher capital and personnel thresholds (e.g., registered capital not less than RMB 100 million; net capital not less than RMB 80 million; specific experience requirements). - Individual consultants must satisfy criteria such as PRC citizenship, full capacity for civil conduct, good integrity, no criminal or major administrative penalties, educational qualification at college level or above, more than two years’ experience in securities or futures business, pass CSRC qualification examinations. - Regulation of securities analysts and research: - Firms and analysts must comply with Investment Consultancy Measures, Research Reports Provisions, SAC Professional Standards, and Analysts Code. - Prohibitions and controls: - Analysts prohibited from buying shares/securities and futures for themselves (Article 24(4) Investment Consultancy Measures). - Firms must prevent analysts from seeking improper interests, leaking report contents prior to release, and must prohibit analysts from serving in positions that impair independence (e.g., independent directors). - Firms must implement Chinese walls; prohibit analysts from concurrently engaging in businesses with conflicts (e.g., proprietary trading). - Compensation and performance evaluation schemes must not adversely affect independence; evaluation should consider research quality, client feedback and workload (Article 21 SAC Professional Standards). - Disclosure obligations for holdings and conflicts (e.g., holdings >1% must be disclosed in reports). - Futures analysts: - Futures consultancy regulated by Investment Consultancy Measures and Futures Consultancy Measures; obligations for management systems, information barriers, job independence and analysts’ responsibility for report content. - Supervision and enforcement: - Research analysis supervision is subsumed under CSRC supervision of securities and futures firms; on-site inspections include research analysis topics. - Assessment: Fully Implemented with comments: - Futures rules are higher-level and less specific than securities rules; authorities should monitor quality and consider more detailed rules if appropriate. - Additional guidance on disclosure of specific conflict situations would promote consistency (examples listed in source). - Monitor analyst compensation for potential misalignment of incentives. ### Principles for Collective Investment Schemes — regime overview (Principles 24–28) H3: Principle 24 — eligibility, governance, organization and operational conduct (Mutual Funds and WMPs) - Regime for mutual funds (CSRC): - Public vs private threshold: 200 investors; private funds minimum RMB1 million investment. - Two kinds of managers: fund management companies authorized under the Fund Law and other organizations licensed to manage public funds (securities companies, futures companies, insurance asset management companies). - Pilot program: banks allowed to establish fund management companies. - Market statistics (end of June 2016 unless stated otherwise): - 117 mutual fund managers; - 3,115 mutual funds; - AUM RMB 7.95 trillion managed by mutual funds; - Total AUM of fund management companies and subsidiaries for specific clients RMB 15.3 trillion; - Approximately 238 million mutual fund investors; - Individual investors account for 99.96 per cent of all investors, and 46 per cent of net value. - Distribution network (as of June 2016): - 366 entities authorized to distribute funds: 131 commercial banks, 99 securities companies, 18 futures companies, 9 insurance institutions, 6 securities investment advisory agencies and 103 independent fund distributors. - Licensing and eligibility: - Fund managers must meet requirements on shareholders, articles of association, proposed senior managers and personnel (at least 15 proposed senior managers and business personnel licensed), premises, security facilities, organizational structure, internal control systems. - Minimum registered and paid up capital for fund management company no less than RMB 100 million (Article 13 Fund Law). - Insurance asset management company applying must have net assets no less than RMB 500 million and at least RMB 20 billion of assets under management. - Authorization process: two-stage CSRC review — written materials then on-site inspection; fund registration processes vary (simplified vs normal) depending on fund type. - Record-keeping and reporting: - Fund managers and custodians must keep records, books, statements (Articles 19 and 36 Fund Law). - Periodic reports: annual, semi-annual and quarterly; 28 types of events requiring ad hoc disclosure; emergency response reporting within specified timelines. - Changes requiring CSRC approval include change of any shareholder holding 5 per cent or more, changes affecting governance, amendments to material provisions of articles, and other major matters. - Conduct of business: - Primacy of investor interests: Article 19 Fund Law duties; Article 10 Interim Provisions requires honesty, good faith, prudence and due diligence. - Prohibitions on fund assets: Article 73 lists prohibited uses (underwriting, loans/guarantees in violation, investments with unlimited liability, buying/selling units of other funds unless CSRC permits, capital contribution to manager/custodian, insider trading, manipulation). - Best execution, trading seats and conflict management: rules for dedicated rented trading seats; trading commissions through trading seats must not exceed 30 per cent of total commission of securities trading by the fund in the year; fund custodian must oversee investment operations; reporting obligations to CSRC. - Churning: commissions allocation limits (not exceed 30 per cent to one broker) and disclosure requirements. - Related party transaction rules: Article 73 Fund Law and Articles 33 and 23 of Measures set out strict approval, disclosure and independent director requirements. - Delegation: allowed but with restrictions; manager remains liable; certain delegations disclosed in prospectus. - Ongoing monitoring and inspections: - CSRC central office and regional offices conduct off-site reviews and on-site inspections; central office has 55 approved staff supplemented by regional staff; thematic national inspections; in 2014 CSRC regional offices completed 357 on-site inspections; in 2015 combined 389 on-site inspections. - On average each regulated fund management entity subject to one inspection per year. - Enforcement examples (2016): more than 70 enforcement actions on fund managers and senior executives including 5 administrative penalties; in 2016 5 fund managers were barred from market access; significant fines: RMB 1.6 billion fine in 2014 on a fund manager; RMB 28 million fine and RMB 28 million disgorgement in 2016 against a fund manager. - International cooperation: MOUs required for foreign shareholders of fund managers and QDII arrangements; mutual recognition arrangements with Hong Kong include criteria for mutual recognition of funds. - Regime for WMPs (CBRC): - Market scale (end of June 2016): - 454 banking institutions offering WMPs; - 68,961 products; - Total value RMB 26.28 trillion. - Product types: - Principal-guaranteed products on bank balance sheet; at June 2016, 23.2 per cent of total value of WMPs was in principal-guaranteed products (including 8.5 percent in products that guarantee both principal and return). - Non-guaranteed products: “targeted” (individual portfolio) and collective products (pool for multiple clients); retail collective WMPs AUM approx RMB 8 trillion. - Asset composition for all WMPs at June 2016: - bonds 40 percent; - cash and deposits 18 per cent; - nonstandard debt assets 17 percent; - money market instruments 16 percent. - Of nonstandard debt assets: one third are investment receivables (repackaged assets); trust loans and entrusted loans another thirty percent. - Marketing and operation: - WMPs distributed only through banks; banks require CBRC authorization to offer WMPs; Sales Rules (CBRC [2011] No. 5) govern marketing. - Banks must conduct due diligence when selling third-party products and must disclose whether WMPs sold are their own or third-party. - Authorization requires demonstration of corporate governance, risk management, staff, IT systems, facilities; CBRC must decide within 3 months after acceptance of application (Licensing Manual). - Eligibility and organizational requirements: - Staff qualification rules (Interim Rules and Notices); banks must have separate WMP department; detailed risk management guidelines apply. - Authorization of WMPs: - Generally not subject to ex-ante approval; banks must register product info 10 days prior to sale; exceptions: guaranteed income/returns or other specified products require CBRC approval. - Required pre-sale filings include feasibility report, internal audit documents, due diligence documents on managers/custodians, legal documents, sales documents and promotional materials. - Record-keeping and regulatory reporting: - Detailed record-keeping obligations (sales process recordings, customer assessments); statistical reporting monthly, quarterly and annual to CBRC (Article 73 Sales Rules). - Quarterly reports provide detailed information for each WMP including portfolio composition and holdings; annual development report due by end of February following fiscal year. - Prompt reporting required for material events (material complaints, misappropriation, serious credit defaults, significant losses). - Conduct of business: - Primacy of investor interests: general obligations of due care and meeting clients’ interests (Article 4 Interim Rules). - Conflicts of interest and segregation: segregation of WMP business from proprietary banking business; restrictions on investing in bank’s own products or assets (Notice CBRC). - Delegation: banks may delegate investment management to approved financial institutions but bank retains responsibility; due diligence required. - Ongoing monitoring and inspections: - All WMPs registered in national banking industry wealth management information registry system enabling real-time monitoring. - CBRC allocates resources based on bank risk profiles; thematic on-site inspections undertaken (2014, 2015, 2016 thematic focuses described). - Since 2013 CBRC carried out 1,272 on-site inspections of wealth management activities, including 618 in 2016. Enforcement results 2013-2015: 201 sanctions with monetary penalties amounting to RMB 56 million; 148 rectification orders; business suspensions in 14 cases; 3 cases referred to judicial authorities; qualifications of 17 executives cancelled. - International cooperation: not needed for WMPs as they are offered only in China. - Assessment summary: - Regime for MFs under CSRC: KQ 8 and 9 require ongoing monitoring and proactive investigative activity — CSRC supervision robust, authorization and registration processes strong; assessors recommend more structured process for thematic identification and consider formal risk rating for fund management companies; ensure enforcement vigor (discussed under Principle 12); continue focus on investor suitability and online distribution (Principle 31). - Regime for WMPs under CBRC: Assessment Broadly Implemented. Key considerations: - High-level framework relies heavily on bank systems and internal controls; smaller banks may lack capacity. - Intensity of on-site inspections likely needs to remain high; CBRC has increased inspections and enforcement actions. H3: Principle 25 — legal form, structure, segregation and protection of client assets - Regime for MFs (CSRC): - Legal form and investors’ rights: - Fund contract specifies rights and obligations; fund assets are trust assets and must be segregated from assets of fund manager or custodian (Articles 5–7 Fund Law). - Disclosure: fund prospectus must summarize fund contract; prospectus, fund contract and relevant docs published three days before offering (Article 56 Fund Law). - Custodian responsibilities: custodians monitored; custodians must be commercial banks or duly established financial institutions; custodian functions include safekeeping, overseeing clearing and settlement, overseeing investment operations, reviewing NAV and subscription/redemption prices (Article 36 Fund Law). - Prohibitions: fund custodian and fund manager must not be same entity nor contribute capital to each other (Article 35 Fund Law); custodians may be part of same financial group in practice. - Winding up: Article 80–82 Fund Law set termination circumstances, liquidation team process, audited liquidation report and distribution pro rata to unit holders. - Regime for WMPs (CBRC): - Legal form and investor rights: - WMPs contractually based; each WMP must be managed separately, assets separately identified and maintain separate books (Notice CBRC [2013] No. 8; Interpretation No. 8 MoF 2015). - Banks must clearly stipulate communication methods in contracts. - Custody and separation: - No specific legal provisions ensuring bankruptcy remoteness; CBRC requires custody of WMPs in compliance with securities investment fund custody provisions; regulations require strict separation and accounting; CBRC drafting provisions on bankruptcy remoteness to address legal uncertainty. - Custodians must be licensed by CBRC and CSRC; 27 such banks currently. - Securities assets of WMPs held by CSDC in the name of the WMP. - Winding up: no specific provisions for pre-maturity liquidation of WMPs; banks must prepare report on WMP upon liquidation/maturity. - Assessment: - Regime for MFs: Partly Implemented — concerns under KQ 8(b) where custodians and managers may be related entities within same group; assessors recommend treating related party custodians as special risk category for supervision. - Regime for WMPs: Partly Implemented — key concerns KQ 8(a)/(b) custody and KQ 8(c) bankruptcy remoteness: - Self-custody permitted in practice if issuing bank is licensed custodian; Methodology requires additional safeguards in self-custody cases — assessors recommend independent custody or equivalent safeguards. - Legal uncertainty on bankruptcy remoteness should be clarified possibly via legal reform. H3: Principle 26 — disclosure necessary to evaluate suitability and value of investor’s interest - Regime for MFs (CSRC): - Mandatory disclosures (Article 76 Fund Law) include prospectus, fund contract, custody agreement, offering info, listing/trading announcements, NAV, subscription/redemption prices, quarterly portfolio reports, financial accounting reports, semi-annual and annual reports, ad hoc reports, shareholders’ meeting resolutions, major personnel changes, legal proceedings, and other CSRC-required info. - CSRC Fund Disclosure Standards and XBRL electronic disclosure platform for centralized access. - Prospectus and fund contract content requirements enumerated (Article 52, 53 Fund Law); Fund Disclosure Standards No. 5 requires full disclosure of material information and risks; prospectus and contract must be published three days before offering. - Periodic reports timing: annual within 90 days of year-end; semi-annual within 16 days; quarterly within 15 days; ad hoc reports within two days for material events. - CSRC powers to refuse registration, suspend acceptance, cancel registration, and impose fines (max RMB 30,000 in certain cases). - Advertising: Measures for Sales Activities ban misleading statements, promise of profitability, misuse of terms like “guaranteed” or “risk-free”; supplementary provisions for promotional materials. - Ongoing developments: CSRC reviewing Measures for Information Disclosure to add “simple and easily available” principle, introduce “product information summary”, and improve update frequency. - Regime for WMPs (CBRC): - Disclosure obligations: pre-sale, during sale and post-sale information must be fully disclosed on bank HQ website; sales documentation must include sales agreement, prospectus, risk disclosure statement, notice of clients' rights and interests. - Sales documentation must disclose risks (risk warning, product type, risk rating, scope of suitable clients, worst-case examples, risk acknowledgement signed by investor), rights and interests, investment portfolio classes/proportions, fees, complaints procedures. For non-standard debt assets, specific disclosure required. - Periodic reports: banks must provide account statements at least monthly and quarterly information on WMPs; upon termination provide detailed investment and proceeds information. - Material event reporting: specified events must be disclosed to clients timely (deviations beyond agreed floating margin, adjustments to scope/fees with early redemption option, illiquid assets material changes disclosed within 5 days). - Advertising rules: prohibitions on TV/radio promotions of specific WMPs; online/telephone sales require client risk evaluation; WMPs risk rating level-4 or higher must be sold face-to-face unless client agrees otherwise; promotional materials must be truthful and avoid exaggeration; limits on past performance claims and the use of estimated returns must include prominent warnings. - Regulator’s power: CBRC reviews disclosure documents entered 10 days prior to offering; can stop offering for non-compliance. - Assessment: - Regime for MFs: Broadly Implemented. Concerns on whether 6-month prospectus update is sufficient when material changes occur; assessors recommend requirement for supplementary or new prospectus when prospectus becomes unreliable; consider summary information document. - Regime for WMPs: Broadly Implemented. Key concerns KQ1 and KQ5: - Disclosure framework for WMPs is high-level; in practice prospectus disclosure can be basic. - Permitting expected returns in promotion, even with warnings, may mislead investors; short-term recommendation: CBRC prohibit use of expected returns in prospectus/marketing. - Medium-term: CBRC to enhance disclosure of key operational aspects and consider stronger material events disclosure framework. H3: Principle 27 — asset valuation, pricing and redemption of units - Regime for MFs (CSRC): - Valuation principles: - Funds must apply ASBE; CSRC issued detailed valuation rules and requires fair value measurement models, internal controls and custodian review. - Where market prices unavailable, Guiding Opinions require valuation policies/models/assumptions/parameters and custodian review; material change (>0.25 percent) when switching methodologies triggers accounting firm audit and report. - Timing: - Open-end funds: valuations each trading day and NAV announced next day. - Closed-end funds: NAV disclosed at least weekly; valuations each trading day. - QDII funds: NAV at least once a week disclosed within two working days; if derivatives exposure then valuation and disclosure each working day. - Independent audit: - Annual financial reports audited; auditors to verify quotations or review valuation procedures and controls. - Custodian role in checking NAV and purchase/redemption prices. - Pricing and redemption: - Purchase/redemption price based on per-unit NAV on day of purchase/redemption after fees (Article 69 Fund Law). - Money market funds (MMFs): - Amortized cost method permitted under conditions; must create shadow price (market value) and monitor deviations. - Shadow pricing triggers: - If shadow NAV is 0.25 per cent below amortized NAV fund manager must adjust negative deviation within five trading days. - If negative deviation reaches 0.5 per cent fund manager must use risk reserve or proprietary funds to compensate and limit deviation to within 0.5 per cent. - If negative deviation exceeds 0.5 per cent for two consecutive trading days, manager must revalue to fair value or take actions (suspend redemptions, terminate contract, liquidate). - Portfolio and liquidity constraints: average day to maturity ≤120 days, average life ≤240 days; at least 5 per cent in liquid assets; at least 10 per cent in securities with 5 day maturity; instruments with constrained liquidity ≤30% of assets; concentration limits (single issuer ≤10%). - Exit fee up to 1 per cent in extreme situations; fund may suspend redemptions if single investor redemption >10% in one day. - Pricing errors and suspension: - Errors: fund manager must promptly correct; if error reaches 0.5 per cent of per unit NAV must publicly announce and report to CSRC; unit holders entitled to claim compensation from manager and custodian; risk reserve (10% of management fees) can be used for compensation. - Suspension/deferral: Article 23 Measures allows redemption of at least 10% of total units on a single high-redemption day and may defer remaining requests; continuous high redemptions allow temporary suspension of acceptance of redemption applications; ad hoc reports within two days required. - Regime for WMPs (CBRC): - Valuation principles: - ASBE must be used for valuing WMP assets and calculating investors’ entitlement on redemption; no exceptions. - CBRC Supervisory Guidelines on Fair Value Valuation of Financial Instruments set internal control and audit requirements; use mark-to-market when market prices available; otherwise mark-to-model or third-party valuation with cross-checks and independent model validation. - Timing and audit: - No specific regulatory timing for WMP asset valuation; internal quarterly internal audit requirement for at least one randomly selected WMP. - External audit via bank annual audits; audit scope includes valuation, internal controls, connected transactions, revenue recognition and classification of WMPs as on- or off-balance-sheet. - Pricing and redemption: - No specific regulatory requirements for how purchase/redemption prices calculated; banks required to set internal rules and disclose timing/frequency of redemptions and redemption price on websites. - On-demand redemption WMPs must be valued using ASBE and not offer stable NAV. - No specific regulatory provisions on pricing errors or redress mechanisms; banks required to have internal measures. - No specific rules on suspension/deferral gates; banks must establish conditions for gates in sales documentation; practice includes gates (e.g., suspend redemptions if exceed 10% in one day). - Assessment: - Regime for MFs: Partly Implemented. MMF stable NAV/amortized cost regime accepted under conditions but assessors recommend CSRC further review and tighten framework given portfolio composition/duration risks and significant market share of MMFs. - Regime for WMPs: Partly Implemented. Key concerns on KQs 5(b), 8, 9 and 11: - Valuation guidance exists but lacks explicit regulatory provisions for subscription/redemption pricing, pricing errors redress, suspension of redemptions — these elements are left to bank contracts, leading to variation and potential investor detriment. - Assessors recommend CBRC establish explicit guidance on these operational aspects. H3: Principle 28 — hedge funds oversight (beginning of description) - The source notes that there is no definition of hedge funds in Chinese securities legislation. (Content truncated at this point in the provided material.) *Source: cr17404 - Chapter II of the CPA Code of Ethics No. 2 – Conceptual Framework for Professional Ethics as* ### Chapter X of the Fund Law and related Measures contain detailed provisions relating to ### cr17404 - Chapter X of the Fund Law and related Measures contain detailed provisions relating to ### Regulation of non-publicly offered (private) funds — framework and scope - Chapter X of the Fund Law and the Interim Measures for the Supervision and Administration of Private Investment Funds (Measures for Private Investment Funds) apply to “non-publicly offered funds” and to private fund managers, unless provisions expressly apply only to public funds and public fund managers. - Before 2014, private equity funds were regulated by the NDRC; in 2014 rules were unified under the Measures for Private Investment Funds and supervision responsibilities assigned to the CSRC. - Permitted investments (Article 94 of the Fund Law and CSRC guidelines) include publicly offered shares of joint-stock companies, bonds, fund shares, and other securities and their derivatives prescribed by the CSRC. - Under Article 91 of the Fund Law and Chapter 3 of the Measures for Private Investment Funds non-publicly offered funds must not raise capital from any entity or individual other than qualified investors and must not be publicized or promoted generally. ### Investor eligibility, investor limits and minimum subscription requirements - Private funds are offered only to qualified investors, and each fund is limited to 200 such investors. - Funds set up as limited partnerships or limited liability companies are limited to 50 such investors each. - Definition of a qualified investor (Article 12 of the Measures for Private Investment Funds): - institutions: net assets of at least RMB 10 million; - individuals: financial assets of at least RMB 3 million, or personal income of at least RMB 500,000 in the 3 preceding years; - has the necessary capacity to identify and bear risks; - will invest at least RMB 1 million in a single private fund. ### Market size and composition (AMAC register, end-December 2016 and June 2016 data) - AMAC statistics as of the end of December 2016: - total private fund managers on register: 17,433; - private funds on record: 46,505; - combined paid-in AUM: RMB 7.89 trillion. - Breakdown by manager and fund type: - 7,781 managers managing 27,015 private securities investment funds with a combined paid-in AUM of RMB 2.77 trillion; - 7,988 managers managing 15,789 private equity funds with a combined paid-in AUM of RMB 4.32 trillion; - 1,218 managers managing 2,143 venture capital funds with a combined paid-in AUM of RMB 0.36 trillion; - 446 fund managers managing 1,558 funds of other types with a combined paid-in AUM of RMB 0.44 trillion. - Largest funds and distribution (based on data as of June 2016): - largest private equity fund AUM: about RMB 137.509 billion; - largest securities fund AUM: RMB 117.119 billion; - of securities funds: equity funds account for more than 51 per cent of the total, bond funds 13 per cent, fund of funds 12.1 per cent, hybrid funds 11.7 per cent; - among registered private funds, 133 have a paid-in AUM of 10 billion RMB or above. ### Registration, filing and recordkeeping requirements - Registration of fund managers (Article 89 and Article 90 of the Fund Law): - managers of private funds must register and provide information to AMAC; - no entity or individual may use the words “fund”, “fund management” or any similar name unless registered. - Information to be submitted to AMAC (Pursuant to Article 7 of the Measures for Private Investment Funds and AMAC measures): - copies of the industrial and commercial registration record and the original and duplicate of business license; - the articles of association or the partnership agreement; - a list of major shareholders or partners; - basic information on senior managers; - other information required by AMAC. - Fund registration at conclusion of offering: fund manager must file with AMAC: - information about main investment areas and type of fund; - the fund contract (articles of association or partnership agreement) and the fund prospectus if provided; - the asset management agreement if management is entrusted to a third party; - the custodian agreement if assets are kept under custody; - any other information required by AMAC. - Recordkeeping: private fund managers must keep records, including records on investment decision-making, transactions and investor suitability management, retained for 10 years (Article 26 of the Measures for Private Investment Funds). ### Internal controls, risk management and legal opinion pre-registration - CSRC Measures for the Supervision of Private Funds require internal controls and risk management; funds must have specialized and professional management. - AMAC’s Guidelines on Internal Control of Managers of Private Investment Funds require institutional arrangements, organizational structures and control measures to identify, assess and manage risks; private fund managers must: - establish sound internal control mechanisms; - define internal control responsibilities; - improve internal control measures; - enhance internal control safeguards; - perform ongoing internal control evaluation and supervision. - Before registration, a fund must obtain an opinion from a law firm verifying compliance with the Guidelines. ### Reporting, disclosure to authorities and investors, and leverage limits - Ongoing reporting to AMAC (Article 25 of the Measures for Private Investment Funds and AMAC rules): - private funds must provide timely reports to AMAC on themselves, their employees, and the funds they manage; - reporting to AMAC: quarterly reports required; in times of market stress, weekly reports may be required; - fund managers must report identity of major investors, material events within 10 days of occurrence, and audited annual financial reports within 4 months of year end; - AMAC publishes names and basic information about registered funds on its website and makes information available to the CSRC. - Disclosure to investors (Article 24 of the Measures for Private Investment Funds and AMAC Measures for the Administration of Information Disclosure by Private Investment Funds): - managers and custodians must disclose investments, assets and liabilities, distribution of investment return, expenses, performance-based compensation, potential conflicts of interest, and other significant information; - standard practice for very limited-offer funds: disclosure as specified in the contract; for larger-offer funds: prospectus usually prepared; - a single private securities investment fund with AUM more than RMB 50 million must disclose NAV to investors within five working days after the end of every month. - Leverage: AMAC rules cap a fund’s maximum leverage ratio at not more than 2:1. - Holdings information: available through the CSDC, which maintains a different account for each fund. ### Custody and asset structure - Fund custody rules: - private securities investment funds are required to have a custodian, except as otherwise provided in the fund contract; - funds that invest in securities are usually set up as a trust and trust-type funds must have assets held in custody; - private equity and venture capital funds using corporate or partnership structures hold assets independently and separate custody is not required if adequate safeguards exist. ### Oversight, enforcement, information sharing and supervisory roles - Roles and powers: - AMAC: ex post registration and filing of private fund managers and funds, responsible for registration, filing and self-regulation; obliged to report breaches to the CSRC; publishes fund information; conducts off-site monitoring and on-site inspections; promulgated rules on leverage. - CSRC: overall regulatory responsibility for private funds (Article 5 of the Measures for Private Investment Funds); conducts statistical monitoring and inspection (Article 31); records integrity information in Integrity Database (Article 32); has broad supervisory powers under the Fund Law including requiring information and on-site inspections; power to take administrative action for violations (Article 33 of the Measures for Private Investment Funds). - Information sharing: the CSRC has access to all information AMAC holds and can share this information with other domestic authorities and foreign regulators under Principles 13-15. - Enforcement outcomes and activity (inspection results summary): - 2014: CSRC on-site inspections of 100 fund products offered by 9 fund managers; - 2015: CSRC inspected 140 private fund managers and distributors and a further 40 for suspected illegal activities; - 2016: CSRC targeted inspections and internet-based risk mapping covered nearly 500 private fund managers; outcomes included administrative regulatory measures against 132 private fund managers, administrative sanctions on 7 managers, formal investigations of 11 managers, referral of over 20 suspected criminal clues to local/public security authorities, and referral of 271 private fund managers who are off radar to AMAC; CSRC publicly named 73 private fund managers subject to penalties during targeted inspections. - AMAC on-site inspections: 10 managers in 2014, 34 in 2015, and 20 in 2016; outcomes included cancellation of registration of 20 fund managers, 3 managers reported to CSRC for administrative action, 2 law firms barred from giving legal opinions relating to funds; AMAC sanctioned more than 900 individuals for violations related to qualifying examinations for fund practitioners. ### Assessors’ evaluation, systemic risk considerations and recommendations - Assessment status: Fully Implemented (for the Private Funds framework as assessed). - Key assessment observations: - Very few funds in China at the time should be categorized as hedge funds (HFs) per IOSCO Methodology; most funds do not use leverage, derivatives or complex strategies typical of HFs and are small scale; potential for systemic risk from HFs appears limited at this stage. - The regulatory framework establishes registration information and reporting obligations that enable AMAC and the CSRC to monitor growth and financial-stability-relevant aspects such as portfolio composition and leverage. Detailed portfolio composition can be accessed through the CSDC. - Assessors recommended that authorities review and shorten the deadlines for material events reporting. - Assessors noted limited resources for on-site monitoring but judged the current supervisory approach (off-site monitoring complemented with limited on-site inspections) reasonable given the limited number of HFs. - Recommendation for CSRC to provide continued guidance for AMAC monitoring of the HF industry; if large, potentially systemically important funds emerge, consider differentiated regulation such as transferring registration of such managers and funds to the CSRC, additional reporting obligations and more intense on-site supervision. - CSRC should closely monitor rapid growth and potential consolidation in private funds and ensure orderly consolidation and compliance with investor qualification requirements. - Assessors noted other CIS offered to non-retail investors (e.g., WMPs) did not appear to meet HF characteristics at the time, but recommended authorities monitor these products as markets evolve. ### Intermediaries regulation — licensing, capital and internal control (Principles 29–31) — highlights - Categories of intermediary licenses issued by CSRC: - Securities companies: 127 approved firms; - Fund management companies: 117 approved firms; - Futures companies: 149 approved firms; - Investment consultancy businesses: 84 firms approved on a stand-alone basis. - Authorization and licensing: - Securities companies and futures companies require CSRC approval to establish and operate (Articles 122, 125 of Securities Law; Articles 15, 17 of Regulations on the Administration of Futures Trading). - Fund management companies require CSRC approval to engage in securities investment fund management business (Article 2 of Measures for the Administration of Securities Investment Fund Management Companies); managers of private funds do not require a CSRC license but must register with AMAC. - Fund management company registered capital requirement: at least RMB 100 million (Article 13 of the Fund Law and Article 6 of the Measures). - Minimum registered capital for securities companies varies by activities: RMB 50 million, RMB 100 million, RMB 500 million depending on business mix (Article 127 of the Securities Law). - Minimum registered capital for futures companies: RMB 30 million (Article 16 of the Regulations on the Administration of Futures Trading). - Integrity, competence and fit-and-proper requirements: - Detailed qualification, integrity and experience requirements for directors and senior managers across securities, fund management and futures companies; shareholder minimum net asset requirements (e.g., RMB 200 million for major shareholders of securities companies). - Requirements for foreign shareholders of futures companies include being a regulated financial institution in a jurisdiction with a MoU with the CSRC and having met foreign regulatory requirements for at least the last 3 years. - Capital, net capital and liquidity regimes: - Securities companies: net capital regime updated in October 2016 to include core net capital, subsidiary net capital, a risk coverage ratio, a capital leverage ratio, and two liquidity ratios; reporting under the new regime began in October 2016. - Minimum registered capital and net capital thresholds for securities companies and corresponding net capital-to-risk ratios and other ratio thresholds are defined exactly in legislation and Measures. - Liquidity requirements include a Liquidity Coverage Ratio and a Net Stable Funding Ratio. - Fund management companies: minimum registered and paid up capital RMB 100 million. - Futures companies: net capital minimums and risk indicators (net capital not less than RMB 15 million and not less than 6 per cent of the total equity of clients; average net capital per branch not less than RMB 3 million; ratio of net capital to net assets not less than 40 per cent; liabilities to net assets ratio not more than 150 per cent) and other requirements. - Reporting, monitoring, early warning and supervisory action: - Securities companies: daily calculation of net capital and risk reserves; monthly monitoring reports via the CSRC’s Comprehensive Intermediaries Supervision Platform; annual audited financial statements within four months of year end; early warning reporting if thresholds breached (report within 3 working days for early-warning thresholds; report within 1 working day if non-compliance with capital rules). - Futures companies: monthly risk surveillance statements within seven workdays after month end; annual risk surveillance within four months; same-day reporting when early-warning thresholds reached. - Fund management companies: monthly financial reports, quarterly compliance audit reports within 15 days of quarter end, annual audited reports within 3 months of year-end (timing varies by specific Measure). - Internal controls and audit: - Firms required to have sound internal control, risk management and governance systems for authorization; annual reports and regulatory risk statements must be audited by a CSRC-licensed auditing firm. - Supervisory powers and sanctions: - CSRC has extensive powers to restrict businesses, suspend activities, revoke licenses, order changes in management, impose restrictions on profit distribution, require divestment and take other remedial actions against intermediaries and individuals for breaches. - Assessment conclusion for intermediary prudential and organizational framework: - Fully Implemented. - Assessors emphasize the need for CSRC to monitor application of revised capital rules as firms move to full-service business models and to consider enhanced reporting frequency where appropriate (encouraged same-day notification when early-warning thresholds are reached, noting current three-day lag for securities companies). *Source: cr17404 - Chapter X of the Fund Law and related Measures contain detailed provisions relating to* ### Chapter IV of these Regulations sets out requirements for risk management and internal ### Chapter IV of these Regulations sets out requirements for risk management and internal ### Risk management and internal control systems — general requirements - The CSRC’s Provisional Code of Corporate Governance for Securities Companies and the Guidelines on Internal Control for Securities Companies establish specific requirements for management (including the responsibilities of board and senior managers), organizational structures and internal control mechanisms. - The board bears ultimate responsibility for internal control systems. - The Guidelines on Internal Control for Securities Companies: - require an independent supervision and inspection department to conduct overall monitoring, inspection and reporting; - require the board of directors to conduct a comprehensive inspection and evaluation of the company’s internal controls at least once a year and document its findings in a special report. - The Trial Provisions for the Compliance Management of Securities Companies: - make a securities company’s board of directors, board of supervisors and senior managers responsible for the effectiveness of compliance management; - require the securities company to organize an internal body or engage an external specialized institution to assess the effectiveness of its compliance management and address any compliance issues; - require the securities company to give the CSRC interim and annual compliance reports on the effectiveness of its compliance management, stating whether any issues have been found and corrected; directors and senior managers must attest these reports. - Under the Securities Law and the Regulations on the Supervision and Administration of Securities Companies, senior management can be subject to administrative liability, and in appropriate cases criminal liability, for a securities company’s non-compliance or misconduct. - The Regulations on the Supervision and Administration of Securities Companies require: - a securities company’s annual report, financial statements and risk control statements to be audited by an accounting firm with qualifications for securities/futures services; - an assessment report on the internal control of the company issued by the auditing firm must be attached to the annual report. ### Fund management companies — governance, controls and reporting - The Fund Law requires a fund manager of public funds to establish a sound internal governance structure and specify the functions and authority of the shareholders’ meeting, board of directors, board of supervisors and senior managers to ensure independence in operations. - Measures for the Administration of Securities Investment Fund Management Companies require: - establishment of a governance structure with a sound organizational framework, a clear division of functions, effective checks and balances of supervision and appropriate incentives and restrictions. - The CSRC’s Guidelines on Internal Control of Securities Investment Fund Management Companies: - make the board of directors ultimately responsible for establishing internal control systems and maintaining their effectiveness; - assign management responsibility for implementation and ensuring staff are informed of requirements. - Under Article 64 of the Measures for the Administration of Fund Management Companies, a fund management company must submit to the CSRC: - an audited annual report of the fund management company; - an annual evaluation report on the internal controls of the fund management company issued by the auditing firm; - quarterly and annual compliance audit reports. ### Futures companies — governance, chief risk officer and reporting - The Measures for the Supervision and Administration of Futures Companies set out rules for corporate governance including division of responsibilities, checks and balances, and risk management. - Firms must segregate functions, create a compliance supervision department or position, and establish mechanisms for risk management, internal control and custody of futures margins. - The Regulations on the Administration of Futures Trading provide that managers and other persons directly liable are accountable for misconduct (for example, see Articles 67 and 68). - Measures and Provisions on the Administration of Chief Risk Officers of Futures Companies (Tentative): - require establishment of the position of chief risk officer who supervises compliance of business operations and risk management; - require the chief risk officer to submit quarterly working reports to the relevant CSRC regional office within ten working days from the end of each quarter; and a comprehensive annual working report for the preceding year before January 20 of each year; - require reports to describe compliance operations, risk management and internal control; work carried out; any due diligence conducted; corrective actions proposed; and results of these corrective actions. ### Protection of clients — securities, funds and futures - Securities companies — client funds and assets: - Clients’ funds for the settlement of transactions must be deposited with a commercial bank prior to trade execution and an individual account opened in the name of each client. - Securities companies must not calculate or include their clients’ transaction settlement funds or securities as part of their own assets. Funds held in this way are protected in the event of the security company’s bankruptcy or liquidation (see Article 139 of the Securities Law). - The designated commercial bank must ensure that a client can enquire at any time about the balance of and changes in the transaction settlement funds. - The SIPF is able to also see balances in customers’ accounts as further described below. - Measures for the Administration of Client Asset Management Business of Securities Companies: - Directed asset management business: separate customer assets from company assets; separate assets of different customers; different accounts for different customers; transfer entrusted assets to a custodian recognized for custody by the CSRC (a commercial bank, CSDC, or a securities company authorized to provide custody). - Collective asset management business: ensure independence of assets of the collective asset management plan, company assets, other customers’ assets and different plans; set up accounts accounted for and managed separately; transfer plan assets to an asset custodian qualified to operate fund custody. - Companies must establish a fair trading system and abnormal trading daily monitoring mechanism, treat different assets fairly, monitor transactions of same direction and reverse direction between different investment portfolios, and regularly report transactions to the CSRC and to SAC. - Securities companies — investor complaints: - Must establish an effective and efficient mechanism for resolving investor complaints; designate a special department responsible for communicating with clients and handling complaints. - Client information, know your client and suitability rules (securities): - A client opening an account must obtain an identification number from the CSDC for all dealings; CSRC staff indicated a universal identification number for both securities and futures accounts is in the process of being implemented. - Article 166 of the Securities Law requires the investor to present documentation to CSDC to establish identity or qualifications; in practice the CSDC delegates this to the broker. - Article 29 of the Regulations on the Supervision and Administration of Securities Companies requires firms engaging in asset management, margin trading and securities financing, or distribution of securities-related financial products to acquire sufficient knowledge of client identity, property and income status, securities investment experience and risk appetite, and to recommend only suitable products or services. - Regulations require that clients of asset management services are informed of the level of risks categorized according to their risk appetite and recommended products and services commensurate with their risk profiles. - Measures for the Administration of the Suitability of Securities and Futures Investors (December 2016) establish single suitability requirements for securities and futures markets and require institutions to perform duties diligently, disclose risks, make matching opinions and bear legal liability for violations. - Conflicts of interest (securities): - Article 136 of the Securities Law requires comprehensive internal controls and partitioning measures against conflicts between the company and clients and between different clients, including separation of business lines such as brokerage, proprietary trading and underwriting. - CSRC Guidelines and SAC rules require use of Chinese walls to fully separate brokerage from other activities. - Records and disclosure (securities): - Client account opening materials, order records, transaction records and all materials relating to internal management and business operations must be kept for not less than 20 years (Article 147 of the Securities Law). - Transaction services to be provided must be set out in a contract; before signing, firms must explain business rules and contractual terms and give a risk disclosure statement for signature; SAC developed model terms and a standard risk disclosure format. - Firms engaging in securities asset management, margin trading and securities financing must send statements of account to clients on a monthly basis (parties may agree alternative timing and means). - Firms must establish an information inquiry system to ensure clients have access, during business hours, to entrustment and trading records and the balance of securities and funds and other information, including names and professional certificates of brokers (Article 32). - Transaction fees must comply with national regulations with maximum and minimum fees for brokerage transactions and fees must be posted prominently (Article 40). - Fund management companies — client protections: - Fund Law and Trial Measures for Asset Management Services for Specific Clients require client assets to be held by a custodian and protected in event of bankruptcy of the fund management company. - CSRC’s Guidelines on Internal Control of Distributors require a fund distributor to establish an adequate mechanism for handling and resolving client complaints. - Guiding Opinions on Investor Suitability in the Sales of Securities Investment Funds require distributors to verify identity and eligibility, establish an investor survey system, formulate survey methodologies, and evaluate risk tolerance. - Measures for the Administration of Securities Investment Fund Management Companies require prioritizing interests of fund unit holders where conflicts arise. - Measures for the Administration of the Sales Activities of Securities Investment Funds require client identity information to be kept for no less than 15 years from the termination of business relations, and other sales materials retained for no less than 15 years from the beginning of business relations. - Futures companies — client protections: - Margins collected from clients belong to the clients and must not be misappropriated; client margin and entrusted assets belong to the client and must be segregated and managed separately from proprietary assets and may only be used to meet client obligations or as provided by laws or administrative regulations. - Client assets may not become subject to sealing-up, freezing, deduction or enforcement, and are protected in bankruptcy or liquidation. - Client margins need to be deposited in individual accounts in designated banks; CFMMC responsible for monitoring futures margins and carrying out daily verifications and must report irregularities to the CSRC; clients can consult their account balances directly. - Futures companies must develop a sound system for handling client complaints and publish the process. - Provisions for account opening require clients to open accounts using real names and create a unique account opening code linked to trading codes at each futures exchange; a universal identification number for securities and futures accounts is in the process of being implemented. - Firms must disclose risks of futures trading, implement investor suitability principles and educate clients on laws, rules, products and services. - Measures for the Administration of Futures Practitioners require disclosure of conflicts and prioritizing client interests. - Trial Measures for Futures Investment Consulting Services require fair, independent and impartial treatment of clients, prevention of conflicts between consulting and other businesses, information segregation, and precedence of client interests. - Records: Article 51 of the Measures for the Supervision and Administration of Futures Companies requires retention of client materials for a minimum of 20 years. - Disclosure and reporting: firms must provide a risk disclosure statement and enter into a written contract before accepting brokerage clients; Article 57 requires provision of a report on transaction settlement to clients following the closing of each trading day and advise them that the report can be accessed through the CFMMC. - Service contracts for futures investment consulting must specify contents, fee rate and terms; templates for service contracts and risk disclosure statements are provided by the CFA. ### Direct Electronic Access and pre-trade controls - Pre-trade controls on stock and futures exchanges (see Principle 33) require, before entering an order, verification that cash/securities are in clients’ accounts, the order is within price limits established, and in futures markets, within position limits established by the market. - These arrangements mean client orders do not have uncontrolled access to market trading systems. ### Supervision — classification, reporting and inspections for securities and futures firms - CSRC classified evaluations of securities companies (since 2007): - five categories and 11 levels including category A (AAA, AA, A), category B (BBB, BB, B), category C (CCC, CC, C), category D and category E. - Risk rating is based primarily on: - market competitiveness (quantitative measures such as size and complexity of operations); - compliance record, including regulatory or disciplinary action by the CSRC or an SRO; - risk management capability, capturing risk control indicators (including capital position); - social responsibility, which is a new measure the contents of which are still under discussion. - The ratings process takes place once a year. Companies prepare a self-evaluation verified by the relevant CSRC regional office. The CSRC consults with experts and decides the rating for the year. Ratings are published. - Differentiated regulatory policies based on category include different contributions to the investor protection fund, compliance with different risk control indicators, impact on prudential standards and intensity of supervision, adjustments to standards for risk control indicators and risk reserve levels, and use of rating as a key element in determining on-site inspection selection. - Reporting: - Securities and futures companies must provide regular reports to the CSRC, including monthly reports on compliance with capital and risk control indicators, an annual report and ad hoc reports; these are reviewed by CSRC regional staff. - The CSRC’s Futures Intermediary Supervision System holds consolidated information on futures companies relating primarily to risk control standards including capital. - The CFMMC provides daily reports to the CSRC on the status of futures clients’ funds and assets. - On-site inspections — planning and practice: - Planning carried out centrally and regionally. The CSRC central office plans national inspections focusing on common market problems; themes discussed with CSRC regions in nationwide annual meetings. - Central-themed inspections are usually carried out by staff in regional offices; central staff may participate. - Since 2012 CSRC has implemented targeted inspections on a range of businesses (financing, asset management, underwriting and sponsorship and bond businesses) based on hot issues and risk points. - Regional inspection plans incorporate: - risk oriented inspections using various information sources (risk rating, time gap since last inspection, complaints or negative media coverage, business model); - inspections selected on a random basis to ensure any company may be inspected in a given year. - Regions are expected to inspect all companies in their jurisdiction over a reasonable amount of time; random inspections ensure coverage of companies not covered by national or risk-driven inspections. - Typical inspection process: request company to carry out a “self-inspection” and report results to the CSRC as baseline information. - SAC and securities exchanges carry out on-site inspections of members to monitor SRO rule compliance; CSRC and SROs coordinate timing though focus areas differ and inspections are not normally joint. - Thematic inspections and examples: - Targeted inspections have covered financing, asset management, underwriting and sponsorship and bond businesses. - Inspections have included topics such as internal controls, conflict of interest and suitability. ### Key statistics on inspections and supervisory activity (selected figures reported) - Example regional office inspection activity (2015-16): - one large regional office carried out a total of 315 inspections encompassing both securities companies and futures companies, of which 274 were part of the nationally mandated inspection programs. - another large regional office conducted a total of 267 inspections encompassing securities companies, futures companies and fund management companies, out of which 202 were at the request of the CSRC. - SAC and exchanges inspection activity: - SAC cooperated with the CSRC in six inspection programs covering a total of 129 members in 2014; in 2015 it supported six CSRC on-site inspection programs covering 106 members and carried out three independent inspections covering 53 members; in 2016 it supported two CSRC inspection programs covering 39 members and carried out three independent inspections covering 20 members. - SSE carried out 161 on-site inspections of members in 2014; 46 in 2015; and 18 in 2016. - SZSE supported the CSRC in 20 on-site inspections, and carried out 43 on-site inspections in 2015 and 23 in 2016. - Futures exchanges on-site inspections: - Shanghai Futures Exchange: on-site inspections of 4 members in 2014, 8 members in 2015 and 17 members in 2016. - Zhengzhou Commodity Exchange: 9 members in 2014, 13 in 2015 and 15 in 2016. - Dalian Commodity Exchange: 50 members in 2014, 51 members in 2015 and 50 members in 2016. - CFFEX: 92 members in 2014, 100 in 2015 and 169 in 2016. - Number of on-site inspections conducted by the CSRC (table excerpt): - Securities companies: 105 (2013); 33 (2014); 11 (2015) 14 45 46 1 targeted on a firm - Futures companies: 50 (2013); 20 (2014); 152 (themed on IT security) (2015) 40 (including subsidiaries) - Consultancy firms: 89 (2013) 86 (2014) 19 (2015) - Source: CSRC. *Source: cr17404 - Chapter IV of these Regulations sets out requirements for risk management and internal* ### 1. On-site inspection on asset management businesses ### 1. On-site inspection on asset management businesses ### Thematic inspection on asset management business (August 2014) - Conducted by the Department of Fund and Intermediaries Supervision. - Scope: six securities companies and eight subsidiaries of fund management companies. - Focus: asset management business. ### Themed inspection on information security (August–September 2014) - Led by the Office of Credit Supervision with support from CSRC General Office, DFIS, Department of Futures Supervision, and Department of Market Supervision. - Scope: security safeguards and the use of digital certificates in the IT systems of core market institutions and business entities. - Coverage: - Core market institutions: CSRC head office and exchanges. - Approximately 350 business entities including relevant subsidiaries, securities companies, futures companies, and fund management companies. - Inspection phases: self-inspection and on-site inspection. - On-site inspection particulars: - CSRC conducted on-site inspection on the core institutions and their 22 subsidiaries and 3 business entities. - Each CSRC regional office formed a working group for the themed inspection on information security and carried out on-site inspection of 114 business entities. ### On-site inspection “Two Reinforcements and Two Preventions” (January–May 2015) - Launched by the Enforcement Bureau with support from DFIS, the Department of Private Fund Supervision, SAC, CFA and AMAC. - Title of campaign: “Two Reinforcements and Two Preventions”. - Targeted entities: securities and futures companies, fund management companies and private investment funds. - Inspection phases: self-check, random check, and rectification. - Self-check coverage: - Effectiveness of corporate governance, internal control, and risk management. - Businesses relating to investment banking, asset management, bond trading, and public and private investment funds. - Compliance with securities and futures laws and regulations. - Mandatory self-check population: - All securities companies, fund management companies, futures companies, securities investment consultancy firms. - Private investment funds with AUM of more than RMB 500 million. - Some private investment funds with AUM of less than RMB 500 million but funded by a single institution. - Random check sample: 203 institutions, comprising: - 35 securities companies, - 20 fund management companies or subsidiaries, - 30 futures companies or subsidiaries, - 17 securities investment consultancy firms, - 101 private investment funds. ### Thematic inspection on information technologies (August 2015) - Conducted by DFIS. - Scope: IT systems of 25 business entities in 7 jurisdictions including Beijing. - Coverage by entity type: - 11 securities companies, - 10 fund management companies or subsidiaries, - 4 futures companies or subsidiaries. - Inspection focus: - External access of the IT systems of business entities, - Unlicensed margin trading, - Illegal participation in unlicensed margin trading by asset management products, - IT security. *Source: cr17404 - 1. On-site inspection on asset management businesses* ### 3. On-site inspection on investor protection ### 3. On-site inspection on investor protection ### Thematic on-site inspection (December 2015) - DFIS conducted a thematic inspection on 25 securities and futures companies with emphasis on investor protection. - Covered entities: 7 securities companies, 1 asset management subsidiary of a securities company, 1 independent fund distributor, 3 futures companies, 3 risk management subsidiaries of futures companies, and 2 securities investment consultancy firms. - Focus: problem-driven and risk-oriented inspection of risk management for innovative offerings and management of customer suitability. - Outcomes: CSRC imposed regulatory measures and administrative sanctions on intermediaries. - In 2013-15, CSRC imposed a total of 445 regulatory measures on all intermediaries, and 34 administrative sanctions on firms and individuals, including 13 market bars. ### Regime applicable to banks providing wealth management services - Banks provide WMPs that are CIS and also securities intermediary (wealth management) services: distribution of investment products including WMPs, individual portfolio management, financial advisory including investment advice. - Single regulatory regime for all wealth management services (including WMP business) that overlaps with regime for WMPs that are CIS. ### Management, supervision and organizational requirements - Banks must establish an internal control and risk management system (Article 2 of the Notice on Investment Managements (CBRC [2009] No 65)); implement measures for supervision and independent verification; provide services in an orderly fashion; protect customers (Article 6 of the Risk Management Guidelines). - Article 35 of the Interim Measures: banks must establish an appropriate risk management system for wealth management business. - Risk Management Guidelines (Yin Jian Fa [2005] No 63) detail: - internal supervision (compliance) and internal audit (Article 12); - monitoring and auditing of internal risks (Article 33); - risk limitation management rules (Articles 40-45); - segregation of duties (Articles 47-49). - Internal supervision and audit departments must be independent from operational departments and report findings directly to the board of directors and senior management (Article 49). - Directors and senior managers obligations: - Article 11: guarantee that internal management rules and risk control measures embody principles of understanding customers and benefiting customers to the maximum extent. - Article 32: fully understand risks of WMP activities and establish internal management and supervision system. - Board and senior management must examine and decide on whether and what types of WMPs the bank sells (Article 36). - Article 33 of the Risk Management Guidelines and Article 2 of the Notice on Investment Management (CBRC [2009] No 65): banks must regularly test independence, adequacy and validity of procedures for monitoring and auditing internal risks and effectiveness of internal control and risk management system. ### Protection of clients - General obligation of due care and diligence; must observe principle of meeting clients’ interests (Article 4 of the Interim Rules). - Must follow principle of integrity, diligence and honest disclosure (Article 5 of the Sales Rules). ### Client funds and assets - Assets of individual investors held in custody on similar terms as WMPs. - Banks must keep separate accounts for each portfolio they manage. - Custody function undertaken by a separate department (see Principle 25). ### Investor complaints - Banks must establish a customer complaint handling mechanism, promptly handle complaints, and ensure customers understand how to make a complaint and the procedures (Article 5 of the Notice on Relevant Issues Concerning Personal Financial Services (CBRC [2008] No 47); Article 63 of the Sales Rules). ### Client information, know your client and suitability rules - Banks must establish a customer evaluation mechanism and collect information to understand clients’ financial status, investment objectives, investment experience, risk tolerance and investment expectations before selling financial products (Article 2 of the Notice on Issues Relating to Personal Financial Services (CBRC [2008] No 47)). - Selling WMPs: suitability obligations and risk matching principle (“sell suitable products to suitable customers”). - Banks may only sell a client a WMP with a risk rating equal to or lower than the client’s risk tolerance and are prohibited from misleading customers into buying products not matching their risk tolerance. - Sales Rules (Articles 24, 25 and 27) require banks to: - adopt appropriate methods to rate the risk of WMPs they intend to sell; ratings must be categorized into at least 5 levels in terms of risk severity; - assess clients’ risk tolerance and assign risk tolerance ratings to clients, including at least 5 grades in ascending order; - map the risk ratings of WMPs into clients’ risk tolerance ratings; sales documentation must clearly state scope of suitable customers and restriction measures must be built into the sales system. - Minimum subscription amounts by risk level (Article 38 of the Sales Rules): - lower risk products (risk level 1 or 2): RMB 50,000; - medium risk products (level 3 or 4): RMB 100,000; - higher risk products (level 5): RMB 200,000. - Banks must ensure clients acknowledge understanding of risks by signing corresponding risk statement letter when signing a contract. - Article 31 of the Sales Rules: banks must evaluate risk tolerance of private banking clients and high-net-worth individuals when providing services in connection with WMPs. ### Conflicts of interest - Article 47 of the Risk Management Guidelines requires measures to segregate departments to avoid conflicts of interest damaging customers. - Specific segregation requirements: - wealth management activity must be segregated from proprietary banking business; - WMP activity must be segregated from other asset management business; - each WMP must be segregated from other WMPs; - assets of WMP clients must be segregated from banking assets. ### Records - Article 10 of the Risk Management Guidelines: banks must keep complete records of wealth management services activity. - Article 37 of the Interim Rules: keep records of customer information and assessments and their consultancy services. - Article 65 of the Sales Rules: keep records (including documents and sound recordings) relating to the sales process of WMPs. ### Disclosure to clients - Article 21 of the Interim Measures: banks must sign a contract with a wealth management client setting out rights and obligations of both parties. - Article 8 of the Risk Management Guidelines: banks must guarantee contract fully authorized by the customer and reconfirm contracts at least annually. ### Reports to clients - Banks must prepare and make available to investors quarterly financial statements containing information about market performance and other relevant material where a client holds financial products issued by the bank (Article 29 of the Interim Measures). - During the life of the product, banks must provide customers with statements of account including asset holdings, income and expenses and value of assets at end of the period at least monthly (Article 28 of the Interim Rules). - On termination of a WMP, or upon payment of investment proceeds, banks must provide detailed information on WMP investments and corresponding proceeds, including types of assets invested in, investment portfolio, proportion thereof, sales fees, custodian fees, investment management fees, and proceeds attributable to customers (Article 30 of the Interim Rules; Article 22 of the Sales Rules). ### Information about remuneration - Sales documents must set out fees to be charged where a client purchases a WMP. - If the bank changes fees, the investor has the right to early redemption of his or her interest (Article 21 of the Sales Rules). ### Direct Electronic Access - Not relevant to banks’ wealth management services. ### Supervision - Off-site review: reporting obligations described under Principle 24 for WMPs that are CIS also apply to other WMP activity. - On-site inspections: - CBRC conducts on-site inspections of banks’ WMP activities. - Thematic inspections: - 2014: focus on WMPs’ risk ratings, liquidity management, corporate bond management, statistics; - 2015: focus on internal controls and supervision to prevent non-compliant and illegal conduct; - 2016: focus on checking implementation of changes required as a result of 2014 examinations. - Market participants commented inspections were thorough and CBRC required changes to business operations, including sales and marketing practices. ### Assessment - Overall grade: Broadly Implemented. - Comments: Grade factors in challenges in both regimes as detailed below. ### Regime for securities intermediaries under the CSRC (assessment comments) - Legal framework robust; obligation of auditors to opine on companies’ assessment of internal controls and risk management enhances supervision. - Robust systems to protect investors’ assets in cash and futures markets. - Unified system for suitability obligations now applies to both cash and securities markets. - Supervision program: combination of off-site monitoring and on-site inspections, including centrally mandated and regional office initiatives (risk-driven, random and for-cause), resulting in significant number of inspections. - SRO and exchange on-site inspections add to supervision intensity. - Recommendation: consider more intense program of monitoring, particularly on-site inspections, for securities firms due to complex business models. - Options: put a segment of population (based on risk assessment) on schedule of regular reviews; strengthen thematic inspections to address clusters of small risks. - Consider more structured approach to identification of themes, potentially linked to emerging risk identification. - Distribution agents (including fund managers acting as distributors) should be closely monitored, particularly via implementation of suitability requirements. - As futures markets develop, CSRC should consider a more systematic process for risk assessment of futures companies. - Key concern: effectiveness of enforcement and whether enforcement measures are sufficiently vigorous to affect behavior of securities intermediaries (further discussed in Principle 12). ### Regime for provision of asset management services by banks under CBRC (assessment comments) - Strong internal controls and risk management requirements for banks providing intermediary services (asset management). - Suitability obligations robust; compliance system obligations in place. - CBRC has supervisory program for WMP activities and on-site inspections have become stricter in recent years. - Key question: whether intensity of supervisory program is sufficient. - High-level regulatory framework relies heavily on effectiveness of banks’ systems and processes and evolving private and public enforcement practice. - This context appears to require higher use of on-site inspections than currently conducted. ### Principle 32 — Procedure for dealing with failure of a market intermediary - Principle: procedure should minimize damage and loss to investors and contain systemic risk. Description and arrangements Plans for dealing with failure of regulated firm - CSRC has plans and procedures for dealing with failure of securities companies and futures companies. - Framework: Regulations on Handling of Risks of Securities Companies and Measures for the Administration of Risk Control Indicators of Futures Companies. Early warning Securities companies - Early warning mechanisms (Principle 30) require reporting to CSRC if net capital or other risk control indicators fall below or are above prescribed thresholds. - Securities company must report to CSRC if net capital or other risk control indicators change by more than 20 per cent compared with the previous month. - CSRC information systems receive monthly reports on net capital, risk capital reserves and monitoring of risk control indicators; system issues an early warning if requirements are not met. Futures companies - CSRC set early warning thresholds for net capital of futures companies (as under Principle 30). - If risk control indicators fail to meet requirements or exceed early warning thresholds, the company must report to CSRC. - If ratio of net capital to risk capital reserves changes by more than 20 per cent compared with the previous month, futures company must submit a written report to CSRC. - CFMMC carries out daily verifications of customers’ margins; any irregularity must be promptly reported to CSRC (see Principle 31). Regulator’s powers to intervene Securities companies - CSRC powers: - Article 150 of the Securities Law: power to restrict or suspend activities. - Article 70 of the Regulations on the Supervision and Administration of Securities Companies: power to replace directors, supervisors or senior managers; temporarily take over the securities company and conduct an investigation; suspend part or all of company’s business or branches; order closing-down of a branch. - Article 153 of the Securities Law: where illegal operation or any major risk seriously disturbs market order or injures investors’ interests, CSRC can suspend company’s business for rectification, designate another institution to assume trusteeship or take it over, or cancel the company. - Article 6 of the Regulations on Handling of Risks of Securities Companies: on detection of any major risk, CSRC can dispatch on-site working group for targeted inspection, monitor business operations and management activities relating to transfer of funds, disposal of assets, deployment of personnel, use of seals, and contracts. - Where company is ordered to suspend brokerage business for rectification, company can entrust business to a securities company recognized by CSRC or transfer clients to other securities companies within prescribed time; if company fails, CSRC can transfer clients to designated securities companies. - Regulations provide rules for takeover: requirement for a takeover group of professionals to operate and manage the process. - Where company is to be cancelled, a liquidation group of specialized intermediaries (law firms and accounting firms) must be formed to carry out administrative settlement. Futures companies - CSRC can take compulsory measures against futures companies experiencing material risks: - Article 56 of the Regulations on the Administration of Futures Trading: if a futures company violates law or causes material risk that severely disrupts markets or jeopardizes clients’ interests, CSRC can order suspension of business for rectification, appoint another institution to exercise guardianship or take over the company; measures may be taken against responsible directors, supervisors and senior managers. - Article 21 of the Regulations on the Administration of Futures Trading: before business license revocation, a futures company must settle relevant futures business and return margins and other assets to clients; branches must terminate business operations and properly handle clients’ assets before license revocation. ### Use of powers - CSRC made extensive use of powers to manage failure of securities companies from 2003 onward: - 31 high-risk companies were subject to CSRC measures: suspend business operations, place under trusteeship, order takeovers, cancel companies or put into liquidation. - 26 companies went into bankruptcy and liquidation. - Other companies continued operations after government fund injections. - Process results: 11.53 million accounts were sorted out, more than seven million clients were transferred, and RMB 12.1 billion of individual debt claims were compensated for. - There have not been major failures since 2008. ### Investor compensation — securities companies - SIPF was established with SC approval in September 2005. - Initial funding from SC through the MoF; now funded through fees based on transactions on SSE and SZE, and fees paid by securities companies (content ends mid-sentence). *Source: cr17404 - 3. On-site inspection on investor protection (IMF).* ### 0.5 to 5 percent, with the amount varying according to the relative risk of a company), ### cr17404 - 0.5 to 5 percent, with the amount varying according to the relative risk of a company), ### Securities Investor Protection Fund (SIPF) and investor compensation - SIPF funded by: statutory contributions (0.5 to 5 percent, with the amount varying according to the relative risk of a company), interest earnings on escrow accounts of issuers of equities and bonds and recoveries from the liquidation of failed securities companies. - SIPF role (Measures for the Administration of Securities Investor Protection Fund): - indemnify creditors of a securities company if the company is cancelled, closed, goes into bankruptcy, or is subject to compulsory regulatory measures of CSRC including administrative takeover or management by an administrator. - Two types of compensation via SIPF: - losses in the settlement account of the failed company (loss of margin): paid in full to all investors (individuals and institutions). - losses incurred by individuals as a result of the company’s failure (other than investment losses from an individual portfolio management account): paid in full up to a limit of RMB 100,000; a discount is applied to compensation for any losses above that amount. - Operational principle: “compensation first and recourse later” — SIPF acquires claims from individual investors, pays compensation and then becomes a creditor in bankruptcy proceedings. - Assessment: Fully implemented. ### Futures Investor Protection Fund and futures investor compensation - Futures companies required to contribute to clearing guarantee funds and maintain minimum balances in special purpose funds (including settlement reserve). - Futures Investor Protection Fund: - funded by futures exchanges and futures companies; CFMMC operates the Fund. - Funding rules prior to December 2016: futures exchanges contributed 3 per cent of their commission; futures companies contributed five to ten ten-millionths of the value of their brokerage transactions. - Funding rules after December 2016 (amended Interim Measures): futures exchanges contribute 2 per cent; futures companies contribute five to ten hundred-millionths. - Compensation rules (Interim Measures): - individual investor: 100 per cent of portion of margin loss at or below RMB 100,000 and 90 per cent of the portion above RMB 100,000. - institutional investor: 100 per cent and 80 per cent, respectively. - Compensation excludes losses due to market fluctuations or changes in value of investment products. - Assessment: Fully implemented. ### Communication and coordination among regulators - Regulations on Handling of Risks of Securities Companies: CSRC must establish coordination and quick response mechanisms with PBoC, MoF, public security department, other financial regulatory authorities under the SC, and provincial governments. - Policy rules relating to SIPF formulated jointly by CSRC, MoF, and PBoC. - Assessment: Fully implemented. Comments note established processes for dealing with intermediary failures and early warning systems; retail clients have claim rights via SIPF or Futures Investor Protection Fund. ### Authorization, organization and oversight of trading systems (Principle 33) - Authorization: - Establishment/dissolution of stock exchanges decided by State Council (Securities Law Article 102; Measures for the Administration of Stock Exchanges Articles 6 and 9); CSRC examines and verifies applications before SC decision. - Futures trading only on legally established futures exchanges or other venues authorized by the CSRC (Regulations on the Administration of Futures Trading Article 4); CSRC examines and approves futures exchanges (Article 6). - CSRC powers over exchanges and NEEQ: - Approval required for constitutions/rules; CSRC can require amendments (Measures for the Administration of Stock Exchanges Section 89). - Appointment/dismissal of exchange general managers and key NEEQ officers by CSRC (Securities Law Article 107; NEEQ Interim Measures Articles 15–19). - Prudential & clearing arrangements: - CSDC provides clearing/settlement/registration; acts as CCP for SSE and SZSE cash markets. - Pre-order deposit requirements; CSDC “see through” holdings for securities; current cash verification not yet extended to proprietary or institutional clients (extension rules under preparation). - CSDC risk management mechanisms include strict access criteria, settlement reserve fund mechanisms (minimum ratios updated monthly and adjustable by CSDC for high-risk participants), settlement collateral powers (Measures Article 56), monitoring of large holdings, mutual guarantee fund, and general risk reserve fund (Securities Law articles 163 and 164). - Brokers’ capital requirements include concentration ratios requiring additional capital if concentrated positions exceed 10 percent for equity or 20 percent for non-equity. - Futures exchange CCP arrangements: - Access criteria for clearing members; offsite reporting and on-site inspections. - Margin requirements with “pre-margin”; ability to impose intraday margins and individualized margins; mark to market; position limits; mutual guarantee and general risk reserve funds (20 per cent of exchange income accrual). - Assessment highlights: robust authorization and oversight framework; CCP assessment noted as PFMI domain. ### Market surveillance, supervision, dispute resolution (Principle 34) - Market surveillance obligations: - Stock exchanges and NEEQ required to establish IT systems for real-time monitoring, set up market supervision departments, and report irregularities to CSRC (Securities Law Articles 84, 115; Measures for the Administration of Stock Exchanges Article 39; NEEQ Interim Measures Article 27). - Examples: SZSE surveillance team of 38 staff; SSE and SZSE real-time alerts and post-trade analysis (SZSE reported 232 cases in 2014 and 197 in 2015). - Futures exchanges have surveillance departments (example: Shanghai Futures Exchange surveillance department with 30 staff); CFMMC receives direct feeds from all futures exchanges’ monitoring systems and monitors nationwide daily trading. - CSRC supervision of exchanges: - Rule approval: constitutions and main rules require CSRC approval; CSRC can mandate changes. - Reporting: weekly/monthly/quarterly/annual and ad hoc reporting requirements; access to pre-trade and post-trade data enabling full reconstruction of trading activity. - Inspections: CSRC carried out first on-site inspections of stock exchanges in 2016; regular NEEQ inspections since 2013 with 2015 comprehensive inspection resulting in regulatory measures to 144 companies and administrative cases on 20 companies. - Enforcement powers: - CSRC measures for exchanges include notices of criticism, orders to rectify, suspension, or dissolution (Measures Article 94; Securities Law Article 102). - Futures exchanges penalized for specified acts; CSRC may order corrective action, warnings, confiscation of gains, suspension for rectification (Regulations and Measures cited). - Assessment: Fully Implemented. Comments encourage continued on-site programs and focused supervision of NEEQ and regional trading platforms. ### Technical system standards, disaster recovery, and system incident handling - Reporting obligations: stock and futures exchanges and CSRC-affiliated institutions must report 15 working days before core system launches, major upgrades, or equipment migration (CSRC General Office Announcement [2014] No. 44; Regulations and Measures cited). - Fault reporting: immediate reporting required if faults prevent real-time data or normal trading (Provisions on the Reporting System of Stock Exchanges Article 13 (Tentative)). - IT reviews: annual independent IT assessments required for exchanges. - Disaster recovery: SSE implemented remote data-level disaster recovery; remote application-level disaster recovery under planning; SZSE remote recovery in access testing; NEEQ data recovery system in place with local recovery proposal under review. - Contingency Plan: Contingency Plan for the Resolution of Material Technical Failures in the Securities and Futures Information Systems (CSRC formulated and amended annually) governs material technical failures. - Assessment: Fully implemented. ### Ability to deal with disorderly trading and volatility management - Exchange powers: technical suspension, market suspension, trading restrictions on specified accounts (Securities Law Article 114; Measures for the Administration of Stock Exchanges). - Price limits: daily price limits present — single stocks +/- 10 percent; “special treatment” stocks +/- 5 percent; not applicable to IPOs or stocks resuming after suspension. - No circuit breakers currently in place; review of 2015–early 2016 events ongoing. - Stock exchange tools allow voiding/cancelling orders, adjusting margins, imposing contract price limits, mandating contract settlement prices, adjusting position limits for options, restricting options trading, ordering closures, cancelling transactions. - Futures market emergency powers: trade suspension, price limit adjustments, margin adjustments, postponement of market opening, early closing (Regulations Article 12; Measures Articles 104–105). - Assessment comments: - 2015–2016 equity market volatility linked to high leverage (reported bank lending peak RMB 2.3 trillion; total leverage may have reached RMB 5 trillion due to unofficial lending according to market participant statement). - CSRC actions to curb leverage: new leverage ratios accounting for on- and off-balance sheet leverage; changed margin financing rules raising limit from 30 per cent to 50 per cent; enforcement against unofficial lending channels. - Concerns about voluntary trading suspensions by listed companies during price falls; CSRC examining trading suspension rules. - Recommendation: promote greater institutional investor participation and consider additional measures for futures markets to increase end-user participation (differentiated initial margins/fees and credit line considerations). ### Record-keeping, delegation, and admission of products and participants - Record retention: - Stock exchanges, CSDC and securities companies must keep trading, clearing and agency records and important documents for no less than 20 years (Securities Law Articles 44, 140, 147, 162; Measures for the Administration of Stock Exchanges Article 37). - NEEQ rules require backup data preservation for 20 years (CSRC Announcement [2014] No. 58). - Futures exchanges must preserve trading, clearing and delivery records for not less than 20 years (Regulations Article 38; Measures for the Administration of Futures Exchanges Article 92). - Delegation/outsourcing: - Measures require suppliers of software/technical services to submit to CSRC information security inspections (Measures for the Administration of Information Security Protection in Securities and Futures Industry Article 37). - Key institutions and suppliers must cooperate with CSRC in investigation/resolution of information security incidents (Measures for the Reporting, Investigation and Resolution of Information Security Incidents Article 8). - Admission of products and participants: - Exchanges must develop business rules and submit for CSRC approval before listing new products; exchanges assess market demand, feasibility and risk prevention and control. - Suitability requirements applied: equity open to retail investors; bond products often have minimum quantitative and experience thresholds. - Futures exchanges need CSRC approval to list, suspend, cancel or resume trading of a futures product (Regulations Article 13); futures product design guidance requires serving national economy, assisting spot market development, and underlying spot market sophistication. - Membership rules and requirements emphasize openness, fairness, equitability and protection for all investors (Measures and NEEQ Interim Measures cited). ### Transparency of trading (Principle 35) - Legal requirements: pre-trade and post-trade information obligations for securities and futures exchanges (Securities Law Article 113; Measures Articles 31–32; NEEQ Trading Rules; Regulations on Administration of Futures Trading Article 27). - Pre-trade transparency: - Stock exchanges display previous closing price, last executed price, highest, lowest, accumulated trading volume and value, and five best bids and offers and volumes (SSE and SZE Trading Rules Article 5.2.2). - No hidden or partially disclosed orders permitted; all bids/offers fully displayed. - NEEQ transfer-by-agreement quoting and market-maker quote requirements (market-makers must maintain quotes for at least 75 per cent of market-making time). - Futures exchanges: full details of trading and orders; some exchanges display five best bids/offers and volumes; Shanghai Futures Exchange displays only best bid and offer. - Post-trade transparency: - Exchanges publish real-time and daily/weekly/monthly/annual trading reports; futures exchanges must publish trading volume, execution price, open interest, price limits and opening/closing prices (Regulations and Measures cited). - Derogations: no authorized derogations from real-time transparency for stock exchanges; block trades must be reported and confirmed by exchanges; futures exchanges do not permit dark trading. - Assessment: Broadly Implemented. Comment: pre-trade transparency deficiency on Shanghai Futures Exchange that displays only one level (not five) should be reviewed by CSRC. ### Detecting and deterring market manipulation and unfair trading (Principle 36) - Legal prohibitions: - Securities Law Articles 63 and 73–84 prohibit market manipulation, misrepresentation, insider trading and fraudulent practices. Article 77 defines market manipulation and prohibits specific conduct (market ramping, wash trading) and general manipulative means. - Regulations on the Administration of Futures Trading Article 70 and Article 69 define manipulation and insider trading prohibitions for futures. - Criminal Law Amendments VI and VII set definitions for criminal insider trading and market manipulation. - Specific prohibitions and internal controls: - Detailed prohibitions on fraudulent practices (Securities Law Articles 78–82) and illegal use of others’ accounts (Article 80). - Proprietary trading segregation requirements (Securities Law Article 136); guidance and internal control measures require Chinese walls and separate trading seats for own-account and client trading. - Surveillance and prevention tools: - Exchanges’ automated surveillance systems for real-time alerts and post-trade analysis; referral of serious cases to CSRC. - Futures exchanges use position limits, large position reporting (report when speculative position exceeds 80 per cent of position limit), and VWAP-based settlement mechanisms to reduce settlement price manipulation. - Sanctions: - CSRC penalties for market manipulation (Securities Law Article 203): divestment orders; confiscation of illegal gains; fines not less than one time and not more than five times illegal gains; if no illegal gains or gains < 300,000 yuan, fines between 300,000 yuan and 3,000,000 yuan; where a unit engages in insider trading, warnings and fines between 100,000 yuan and 600,000 yuan on responsible persons. - CSRC penalties for insider trading (Securities Law Article 202): divestment; confiscation; fines 1x–5x illegal gains; if no illegal gains or illegal gains < 30,000 yuan, fines between 30,000 yuan and 600,000 yuan; fines of between 30,000 yuan and 300,000 yuan on responsible persons when unit engages in insider trading. - Futures market penalties (Regulations Article 70): orders for correction; confiscation; fines 1x–5x illegal gains; if no illegal gains or illegal gains < 200,000 yuan, fines between 200,000 and 1 million yuan; disciplinary sanctions and fines 10,000–100,000 yuan on responsible persons. - Futures insider trading penalties (Regulations Article 69): confiscation; fines 1x–5x illegal gains; if no illegal gains or illegal gains < 100,000 yuan, fines between 100,000 yuan and 500,000 yuan; warnings and fines 30,000–300,000 yuan on responsible persons for units. - Enforcement activity and statistics: - CSRC market manipulation and insider trading enforcement actions (CSRC source): - Market manipulation: Year 2013 = 8; 2014 = 15; 2015 = 18. - Insider trading: Year 2013 = 51; 2014 = 69; 2015 = 64. - Criminal cases (2015–2016): out of 23 criminal cases with judgments, 3 involved market manipulation and 9 involved insider trading. Sentencing examples: market manipulation fixed term 2.5 years in one case; insider trading fixed sentences of 6 and 5.5 years in two cases; probation in several others. January 2017 judgment: market manipulation conviction with fixed term of 5.5 years and court-imposed fine of RMB 11 billion. - Cross-market surveillance and international cooperation: - Intraday green channel data exchange among CSRC, SSE, SZE, CFFEX and CSDC for cross-market surveillance. - Shanghai-Hong Kong Stock Connect MOU with Hong Kong SFC for investigatory cooperation; December 2016 Shenzhen-Hong Kong Connect uses same arrangements. - Example: early 2017 CSRC fine totaling more than $173 million for market manipulation via Shanghai-Hong Kong Stock Connect — first cross-border case involving the scheme. - Assessment: Fully implemented. Comments note need to review sanction differentials between cash and futures markets and ongoing challenges in criminal enforcement; recent strengthening of criminal prosecution and larger imprisonment penalties acknowledged. ### Management of large exposures, default risk and market disruption (Principle 37) - Securities market clearing/settlement: - CSDC operates as CCP; settlement cycle for A shares T+1, for B shares T+3. - Settlement on gross basis for securities and multilateral net basis for cash; securities transferred on night of T, cash transferred on T+1. - Cash settlement via settlement banks (not central bank money). - Bond settlement options include T+1, T+0, or intraday real-time depending on transaction type and netting scope. - Risk management mechanisms (CSDC and exchanges): - ex-ante verification of securities/cash (cash verification for retail investors); access criteria for clearing members; settlement reserve fund requirements updated monthly and adjustable for high-risk participants; settlement collateral mechanisms; multiple settlement banks; mutual guarantee fund; general risk reserve fund. - Broker capital concentration ratios: additional capital required if concentrated positions > 10 percent (equity) or > 20 percent (non-equity). - Consideration of joint rule imposing a maximum cap on trading activity for brokers based on net capital. - Large exposures and position limits: - No reporting obligations for large “positions” in cash markets, but CSRC requires exchanges to closely monitor large holdings by market value. - Real name system gives CSDC and CSRC direct, centralized access to investor positions. - Futures exchanges: position limits, large position reporting (report once speculative position exceeds 80 per cent of the position limit), exchange power to adjust position limits and to liquidate excess positions; dedicated departments for real-time monitoring of large positions. - Preventative measures for violations creating adverse market effects: - Futures exchange measures: restrict deposit/withdrawal of funds; restrict opening of positions; raise margins; liquidate positions (Measures for the Administration of Futures Exchanges Article 85). - Information sharing: - CSRC, CBRC and CIRC information sharing and joint conference mechanism includes large position information sharing. - CSRC headquarters, CSRC regional offices, CSDC, stock exchanges and CFFEX share large position data for surveillance and cross-market assessment. - Default procedures: description continues beyond provided excerpt. - Assessment: (context within Principle 37) mechanisms in place for management of clearing, settlement, position limits and large exposure monitoring; centralized investor identification supports surveillance. *Source: cr17404 - 0.5 to 5 percent, with the amount varying according to the relative risk of a company),* ### Chapter VII of the Measures for the Administration of Securities Registration, Clearing and ### Chapter VII of the Measures for the Administration of Securities Registration, Clearing and Settlement ### Default procedures for clearing participant defaults - The Measures define circumstances in which the CSDC can adopt default procedures, the assets of a clearing participant that can be subject to these procedures and the detailed resolution measures that can be taken. - In case of default, the CSDC can withhold the member’s securities and require the clearing participant to: - make up for shortfalls in funds, or - submit a settlement guarantee within a designated time limit. - If a clearing participant fails to make up for shortfalls in capital or securities within the time limit, the CSDC can: - dispose of collateral or sell securities. - If this is not sufficient, the cascading order of resources is: - (i) the portion of the clearing member in the guarantee fund can be used, - (i) then the whole fund (ii), - and if all this is not sufficient then liquidation procedures are followed. - In liquidation procedures: - the securities held by the clearing member in its proprietary account can be used to cover shortfalls, - any loss incurred is covered through the general risk reserve fund. ### Futures markets: default handling and waterfall - Futures exchanges have developed and disclose measures for handling defaults, including: - detailed procedures for handling defaults, - definitions of when default procedures can be taken, who may take them and the scope of procedures. - Under Article 36 of the Regulations on the Administration of Futures Trading: - margins are to be used to cover trading defaults by exchange members. - If margins are insufficient, the exchange must use in cascading order: - (i) the clearing members’ portion of the guarantee fund, - (ii) the remaining part of the fund; - (iii) the risk reserve and its own funds to meet the liabilities on the member’s account, with a right to claim repayment from the member. ### Client protection - Securities markets: - Mechanisms exist to protect clients’ assets from a default of a member. - Securities are protected due to the “see through” system. - For cash, the SIPF protection applies as described in Principle 32. - Futures markets: - Article 59 of the Provisions of the Supreme People’s Court on Issues Concerning the Settlement of Futures Disputes: - where a futures exchange or futures company is in debt, the people's court is not permitted to freeze or transfer the funds in the margin accounts, whether those margin accounts are held by futures companies at the exchange, or by clients at the futures companies. - This protects clients’ funds and assets from the default of a market intermediary or the exchange. - The Futures Industry Protection Fund is available to compensate clients for losses of margins (see under Principle 32). ### Short selling and securities financing regulation - In China, “short selling” falls under securities financing because a short seller must first borrow the stock before executing the trade. - CSRC and relevant SROs have developed rules including: - Measures for the Administration of the Margin Trading and Securities Financing Business of Securities Companies, - Detailed Implementation Rules for Margin Trading and Securities Financing of SSSE and SZE, - Statistical and Monitoring Rules for Margin Trading and Securities Financing (Tentative) of China Securities Finance Co., Ltd. (CSF). - Roles and reporting: - CSF is responsible for establishing risk control indicators and dynamic monitoring system, - CSF periodically reports transaction information from margin trading and securities financing to CSRC, - CSF must, in the event of major emergencies, promptly report relevant situations to CSRC, - CSF publishes the balance and trading data of margin trading and securities financing on a daily basis. - Strict compliance and enforcement rules include: - a prohibition on “naked short selling”; - implementation of an uptick rule for securities financing; - strict control over business size by requiring that the quantity of any single underlying stock available for securities financing must not be more than 25% of the free-float market cap of the stock; - giving CSF exclusivity on the provision of centralized margin trading and securities financing services. - SSE and SZE perform real-time monitoring of each securities financing transaction. - Market-making transfers and NEEQ: - In China’s stock market, share transfers through market-makers are only possible with NEEQ. - NEEQ has special institutional arrangements for market-making transfers: - market makers are exempt from the general rule that investors are not allowed to transfer the shares they have purchased on the day of purchase (Article 37 of the Detailed Rules for Stock Transfers on the National Equities Exchange and Quotations System). - Articles 64 and 66 of the Detailed Rules provide the method and time that market-makers may adjust their stock inventories. ### Settlement failures - Ex-ante controls: - Clients in both securities and futures markets are required to post cash or securities (depending on position as buyer or seller) in the cash markets and post margins in the futures markets. - Clearing member mechanisms aim to minimize settlement failure risk. - Outcome: - Settlement failures are not material. ### Assessment - Overall assessment: Fully implemented - Comments: - Monitoring of large positions takes place on both securities and futures markets, and futures exchanges have in place large position limits that they enforce robustly. - China’s real-name system means the identity of those who hold positions is directly available to market authorities. - Arrangements exist for relevant authorities to share information. - If an intermediary is at risk of failing, market authorities can take decisive action. - Default “waterfall” procedures are in place for both securities and futures markets. - These mechanisms are sufficient to manage the default of a market participant without significant flow through effects to the markets. ### CCPs treatment - The assessment of CCPs is not covered under the IOSCO assessment, but under the PFMI-IOSCO. - During the process the CSRC assesses the CCPs against such Principles and it is recommended to: - review whether intraday margin should be required, and if so whether a recalibration of initial margins is needed, - consider the benefits of constituting the CCPs for the futures markets as separate legal entities. *Source: Chapter VII of the Measures for the Administration of Securities Registration, Clearing and Settlement (excerpt).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17404.pdf_