On 21 December 2012, the Securities Association of China issued the Regulations of Securities Company’s Over-the-Counter Trading Business, opening up the OTC market to securities companies. These much anticipated rules are seen as a measure to strengthen the development of a multi-tier capital market and promote financial innovation. Seven firms will participate in the pilot program according to the SAC, including Haitong Securities, Guotai Junan Securities, Shenyin & Wanguo Securities and GF Securities.
- “OTC trading” is defined under the regulations as (i) trading carried out between a securities company and its trading counterparty on a market other than a centralised exchange, or (ii) services provided by a securities company to an investor who trades on a market other than a centralised exchange.
- Securities companies conducting OTC trading with trading counterparties are required to obtain a proprietary trading licence. A securities brokerage licence is also required to provide investor trading services. Participating investors must be “qualified investors”.
- According to the SAC, the securities companies’ OTC market is designed to be a platform for issuance, transfer and trading of privately offered products. To start with, it will mainly focus on wealth management and financial products.
Securities companies are required to (i) set up an OTC trading management system, imposing specific requirements with respect to, for example, selection of trading products and investors, trading decisions and execution, trading registration and settlement, and recording and disclosure of trading information, (ii) improve their compliance management systems to prevent trading on the basis of non-public information and to avoid any conflict of interest between OTC trading and securities companies’ other businesses, (iii) improve their risk management systems to continuously assess market risk of financial products and investor credit and to adopt effective risk management measures to control risk, and (iv) establish an “investor suitability management system” in accordance with relevant SAC investor suitability rules.
Regulating securities companies’ OTC trading activities
- For OTC trading of financial derivative products, investors who are not financial institutions must be provided with full details of trades, the risks and returns and status of relevant underlying financial assets and other specified information that may have an impact on an investor’s decision making, including as to the existence of any affiliate relationship between the securities company and the party involved (including the issuer of the underlying financial assets).
- A securities company carrying out OTC trading must enter into an OTC trading contract with the trading counterparty or investor either in writing or electronically.
- Information in relation to OTC trading must be recorded and kept by a securities company in accordance with PRC Securities Law. Securities companies must take effective measures to ensure that investors can check the contents of their OTC trading contract and the status of their portfolios during business hours.
- A securities company must submit a monthly report to the SAC within 5 working days of each month end. An annual report is required within 1 month of each year end.
- A securities company must promptly report to the SAC any material event which may have an effect on OTC trading, impact investors’ interests or cause any risk to the company, specifying the cause, steps to address and the impact of the issue.
Reference: Regulations of Securities Company’s Over-the-Counter Trading Business (《证券公司柜台交易业务规范》)
Issuing institution: Securities Association of China (the “SAC”)
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